Australian retail investors can already get access to bitcoin via exchanges based offshore, such as Binance, which was banned from operating in Britain this week. These create risks given custody is based offshore and legal protections are unclear. Retail investors can also access other crypto assets via decentralised exchanges, such as Uniswap or Sushiswap, which are not licensed by ASIC or operating with any regulator oversight.
Those seeking to create bitcoin-backed exchange-traded funds welcomed ASIC’s consultation.
“In our view, this is a forward step in legitimising digital assets as a mainstream asset class and we believe that the ETF vehicle is by far the most superior investment vehicle,” said Arian Neiron, managing director of VanEck in the Asia-Pacific region.
Race to list
Martin Rogers, chief investment officer of KTM Ventures, said: “Every day a bitcoin ETF is denied to Australian investors they are lacking consumer protections. Canada has moved on this, and billions of dollars have moved into bitcoin ETFs providing safe access for investors to get access to bitcoin.
“Most Australian trade in bitcoin is on an unregulated Chinese exchange. The sooner we have a bitcoin ETF for customers in Australia, the sooner we can create protections to provide exposure to bitcoin in a safe and effective manner.”
BetaShares managing director Alex Vynokur said a regulated managed fund structure would be in the best interests of cryptocurrency investors.
“We agree with ASIC’s view that there is real risk of harm to consumers if these products are not developed and operated properly,” he said.
“There is a significant risk of harm to Australian consumers who may be obtaining access to crypto-assets directly through exchanges that are not a licensed market operator.”
VanEck and BetaShares have each lodged submissions with the ASX in a race to list a cryptocurrency-backed exchange-traded fund. Chi-X is also considering listing bitcoin ETFs.
The consideration of appropriate rules for bitcoin and other crypto products comes after ASIC late last year formed a policy to refuse a bitcoin ETF listing on an Australian exchange. But it was then forced to adopt a more open mindset earlier this year. Much of ASIC’s focus on crypto has been on consumer scams.
Interest in bitcoin surged in December and the new year, as its price hit new highs on the back of more institutional interest in the asset as a commodity that could hedge against the impact of inflation. However, in the past few months, cryptocurrency prices have fallen heavily and remain highly volatile.
ASX, which has adopted a cautious approach to crypto listings, has been waiting for this ASIC consultation process before making a decision on whether to approve ETFs linked to bitcoin to come onto the exchange.
“What ASIC is proposing is net good for operators, and more importantly, protects consumers in the long run,” said Jeff Yew, founder of Monochrome Asset Management.
“ASIC understands that demand for a digital asset ETF isn’t going away and it’s time to shift operational and custody risks to professional managers. The demand for a well-managed, well-regulated digital asset ETF makes it an inevitability.”
Cosmos Capital had an application to list an ETF linked to the bitcoin price on the National Stock Exchange of Australia blocked by ASIC last year, which ASIC said was due to NSX not having appropriate rules to protect investors.
ASIC said the way in which crypto-assets themselves are classified and regulated is a matter for government. The Senate Select Committee on Australia as a Technology and Financial Centre is considering this issue and due to report in October.
Broader than bitcoin
Lawyers say there is confusion in the market about whether cryptocurrency tokens should be considered securities. Britain has issued detailed guidance on the classification of the new assets.
Despite confusion over defining new digital assets, ASIC said trading products on regulated exchanges would trigger the Corporations Act and it wants to establish “good practice in respect of pricing, custody, risk management, and disclosure”.
ASIC said it was important to develop a “robust and transparent pricing mechanism” for crypto ETFs and “responsible entities” needed to think about their duties.
Suggesting it is thinking more broadly than bitcoin, ASIC also said it would consult with market operators and issuers on “identifying crypto-assets that are appropriate underlying assets” to link to listed funds. An ETF could be created over other cryptocurrencies, such as ether, which powers the ethereum blockchain.
ASIC commissioner Cathie Armour said the regulator’s proposals “set out good practices” for market operators and issuers, who “need to be mindful of meeting their existing regulatory obligations when creating, operating and allowing such products, so they can be facilitated in a way that maintains investor protections and Australia’s fair, orderly and transparent markets”.
A wide consultation is necessary ”given the unique, evolving characteristics and risks involved with crypto-assets”, and ASIC has asked for submissions by July 27.
ASIC’s Cathie Armour will appear at The Australian Financial Review Cryptocurrency Summit on July 21.