Judging by their rapid reaction to the use of cryptocurrency, global financial centers believe in the biblical principle: “The last shall be first and the first last.”
Industry regulators in major financial hubs around the world – which were once home to all sorts of adventurous innovation – are proving reluctant to license forward-thinking crypto funds. But, at the same time, more secondary laissez-faire financial centers have seized the opportunity to get ahead. And these latest trading venues for crypto ETFs are carving out a place for themselves in a nascent monetary realm.
This has resulted in a patchwork of crypto ETFs being made available to investors in different locations.
Brazil has probably gone the furthest. Not content with authorizing the first Bitcoin and Ether ETFs in Latin America, the Brazilian Securities Commission also opened the door to the world’s first two decentralized finance ETFs. These invest in a basket of tokens issued by decentralized applications (Dapps), like crypto exchange Uniswap, and Polygon, a service designed to speed up blockchain transactions.
Meanwhile, a range of other jurisdictions outside of the US, UK and Asia – such as Canada, Sweden, Germany, Switzerland, Jersey and Liechtenstein – have approved products investing in individual cryptocurrencies or baskets of such securities. In Europe, these products are referred to as exchange-traded products or notes, rather than funds, for regulatory reasons.
Australia and India will likely be the next countries to follow suit.
However, the United States Securities and Exchange Commission has rejected more than a dozen similar fund applications in the United States. So far, it has only approved ETFs investing in bitcoin futures, rather than the underlying cryptocurrency itself – although private trusts can hold bitcoins directly.
Several other top financial hubs, such as the UK, Singapore and Hong Kong (alongside mainland China), haven’t even gone that far yet. Instead, they are doing their best to rigidly maintain a separation between the $10 billion ETF industry and the universe of virtual assets, which now has an estimated market capitalization of around $2 billion.
The closest ETF investors in these jurisdictions that can access the cutting edge of innovation are funds investing in shares of listed companies involved in digital assets.
The SEC’s opposition to “spot” ETFs — meaning those tied directly to the live trading price in the underlying cryptocurrency — stems from concerns about “fraudulent and manipulative acts and practices.” ” in the markets where bitcoin is traded.
These concerns include the potential for “shadow trading” – when the same institution is on both sides of the trade, generating additional fees for minimal risk; price manipulation by the “whales” that dominate the bitcoin trade; and “manipulative activity” involving tether, a so-called “stablecoin” designed to always be worth $1.
The SEC says it must “protect investors and the public interest,” given that crypto markets are the “Wild West.” . . plagued by fraud, scams and abuse” — in the words of the regulator’s chairman, Gary Gensler.
Yet the regulator seems to believe that these issues are largely resolved with bitcoin futures-focused ETFs, which trade on the regulated Chicago Mercantile Exchange.
Not everyone agrees. “Adding an extra layer of disintermediation really doesn’t change anything,” says Jason Guthrie, head of digital assets, Europe, at WisdomTree, an ETF provider. WisdomTree owns five European crypto funds, with combined assets of $334 million.
He describes the SEC’s approach to crypto as “disjointed. . . slow and potentially inefficient,” given that retail investors can purchase cryptocurrencies directly through regulated exchanges and brokerages, such as Coinbase and Robinhood.
Singapore aims to become a hub for blockchain and crypto companies. But the Monetary Authority of Singapore, the country’s regulator, has ruled that companies should not market or advertise crypto services to the domestic population, in an effort to protect retail investors from potential class risks. of volatile assets.
“Singapore is bullish on crypto as a sector, but the government has said ‘we don’t want our employees involved’,” says one industry figure, who prefers to speak anonymously.
Hong Kong – Singapore’s regional rival – has developed a reputation as a hotbed for digital businesses, but, in line with Beijing – which banned all cryptocurrency transactions in September citing concerns about fraud, money laundering money and environmental impact – he also moved to protect his own population from crypto trading. Licensed exchanges are only allowed to serve professional investors with $1 million in liquid assets.
While all UK retail investors can trade cryptocurrencies directly, the Financial Conduct Authority has banned the sale of “derivatives” related to cryptocurrencies, including exchange-traded products. The UK regulator also warned that anyone investing in crypto assets “should be prepared to lose all their money”.
According to the head of the anonymous investment company: “Different countries are incredibly diverse in their way of thinking. FCA was very negative. We were originally going to start the business in London, but now we’re in Europe.
WisdomTree’s Guthrie says the FCA directive ‘was primarily focused on CFDs [contracts for difference], leveraged products, etc. There were people who offered 100x leverage on bitcoin before. Nobody needs that. This is absolutely something the FCA should look into. »
Still, he thinks the definition of a derivative “was a bit too broad,” in that it also included non-leveraged products such as ETPs and vanilla futures.
Chris Mellor, head of Emea ETF equity and commodity product management at Invesco, suggests that because cryptocurrency is a new asset class, it’s inevitable that regulators “have to put new series of questions”.
“Cryptocurrency investing is not for everyone, and given the newness and volatility of the asset class, you can understand why some regulators have taken a cautious approach,” he observes. .
“A robust, institutional-grade product should be more attractive to regulators and anyone able to invest in the future,” he adds.
Guthrie agrees that anyone investing in cryptocurrencies is aware of the risks. “There is variable liquidity,” he argues. “It has risks, concentration risks, potentially large players.”
However, he adds that these concerns are not unique to digital assets: “Crypto is undoubtedly volatile, [but it is] similar to small cap stocks or investing in a single stock. It is a high risk investment. It shouldn’t make up 100% of people’s portfolios, but it can very easily fit into a portfolio under the risk category.
“We typically see 1-3% [portfolio allocation], up to 10 percent at the risky end,” he says. “At these sorts of levels, we think it’s pretty normal. For a long time, Tesla has been more volatile than bitcoin and that’s [now] an S&P500 stock.
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