Australian regulator asks for public input on crypto ETFs

The Australian Securities & Investments Commission (ASIC), which is Australia’s securities regulator, is asking for public submissions on how exchange traded products (ETPs) that invest in crypto assets can meet existing regulatory expectations for ETPs. The public consultation paper can be downloaded online, and anyone wishing to make a submission, must do so by July the 27th.

An Australian crypto ETF

Australia is in a bit of a quandary over crypto markets and their regulation, especially ETFs. ASIC tends to follow other jurisdictions such as the US, UK and EU when it comes to major market reforms and new securities regulation – not always, and not slavishly, but certainly with an eye to what is going on in other key markets.

However, Canada and Switzerland are leading the way with crypto ETFs and crypto ETPs respectively. It’s true the terms are not interchangeable, and the former is a subset of the latter, but from a product perspective these are the Canadian and Swiss choices to date.

While the SEC continues to defer any decision on a Bitcoin ETF, the UK’s FCA is maintaining an active role in consumer protection, by banning retail investors from accessing crypto derivatives such as CFDs.

Until now, ASIC has confined its role to regulated financial products (such as securities and managed investment schemes), which does not include cryptocurrencies or utility tokens. While Australia maintains a fairly broad definition of financial products and financial advice under its existing Corporations Law, crypto exchanges and crypto trading are implicitly excluded; instead they are covered by wider laws such as consumer credit provisions, KYC/AML/CTF measures, and the oversight of regulated markets such as derivatives exchanges.

In fact, ASIC has taken a fairly benign approach to crypto assets – “buyer beware” – and a previous Commissioner once commented that ICOs were akin to some crowd-funding projects, except you got a token rather than a t-shirt at the end of it. Indeed, it has been the tax authorities who have been more proactive when it comes to crypto trading and crypto holdings.Australia’s Minister for Superannuation, Financial Services and The Digital Economy, Jane Hume, says the government takes “no issue with consumers investing in cryptocurrencies.” Photo Source: Twitter

Australia has a well-established ETF market, mostly in equities, as well as markets for managed funds, real estate investment trusts, listed investment companies, structured products and derivatives. So you could be forgiven for thinking that the path to market for a crypto ETF would be quite simple.

However, the absence of specific definitions and regulations as they relate to crypto assets and utility tokens is hampering the development of crypto ETPs. ASIC remains adamant that it does not want to legislate, only apply the relevant regulations, hence the latest consultation and the related Australian Senate Committee looking at the risks and opportunities for digital assets and cryptocurrencies.

So you want to be a crypto ETF provider?

One of the key issues that ASIC has identified in approving a crypto ETF (in addition to investor protection, market stability and an established spot market) is the use of appropriate indices and pricing data in support of benchmarking and NAV calculation. In particular, the Consultation Paper refers to robust indexing and NAV processes that can withstand market manipulation, that are not reliant upon a single pricing source, and which comply with recognised standards such as the IOSCO Principles for Financial Benchmarks.

Further, ASIC notes the need for institutional support for crypto assets, as well as suitable custody solutions (the potential challenge of managing private keys) and the presence of a futures market (for hedging purposes).

To launch an ETF usually requires three main parties: an ETF provider (usually an asset manager), a regulated exchange (to list the ETF), and an independent index provider (to provide the performance benchmark and to calculate the NAV of the underlying assets). Plus, of course, Authorised Participants (market makers), Distributors (brokers from whom retail investors buy the ETF), and possibly a Custodian/Trustee (to hold the assets in separate accounts).

Several years ago, Brave New Coin spoke to two regulated Australian exchanges about launching a local crypto ETF. They were both enthusiastic, but said it depended on whether an existing ETF provider would come on board. So, we spoke to some asset managers, and they were also broadly in favour, but as long as there was an exchange willing to list it (and market makers willing to come on board). You can imagine what the response was from the market makers.

Since then, Brave New Coin has become a leading provider of crypto asset indices. We have aligned our index governance, methodologies and processes to the IOSCO principles. We work with regulated futures and derivatives exchanges who use our indices to price and settle derivatives traded on their venues. We have also been engaged by a number of crypto fund and asset managers to provide market data for their NAV calculations. We’ve also connected with key market makers and custodians who are active in the crypto industry. And we have connections with institutional investors who are looking for suitable crypto opportunities, including ETFs.

In conclusion, if you are interested in making an ETF happen in Australia, we can probably help you join the dots – come and have a conversation with us: [email protected]