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Australia Has Given The Green Light To A Range Of Cryptocurrency-Related ETFs

Australia’s corporate regulator has given the green light to a range of cryptocurrency-related ETFs, which could result in Bitcoin and Ethereum-backed investment funds trading on the ASX in the coming months.

After a series of discussions since June, the Australian Securities and Investments Commission (ASIC) announced a set of guidelines and regulations relating to crypto exchange-traded products, or ETPs, on Friday.

The new rules would allow funds to form exchange-traded funds (ETFs) that invest directly in cryptocurrencies or in crypto-related assets such as cryptocurrency miners and coin exchanges. A number of Australian funds have lately expressed an interest in creating similar services.

ETFs enable investors to invest in a variety of stocks, commodities, or indices without having a direct exposure to the asset. Traditional investors have been clamouring for an ETF that tracks the price of major cryptocurrencies as a means for them to obtain exposure to the sector. Following permission from America’s corporate regulator, the first Bitcoin futures ETF was launched in the United States last week.

ASIC has been considering approving comparable funds for some time, with today’s news coming less than two weeks after Liberal Senator Andrew Bragg introduced a large new package of crypto legislation in parliament.

Investment firms interested in establishing a Bitcoin ETF will be required to follow a set of best practise guidelines, most notably strict asset custody rules, with ASIC stating that the protection and storage of cryptocurrency private keys – the “master password” that allows access to the assets on the blockchain – is of “critical importance.”

These best practises include storing private keys in ‘cold’ storage that is not linked to the internet, as well as ensuring that the wallets in which the keys are held follow “strong physical security procedures.” Numerous backups must be created and kept in geographically distinct locations.

Crypto asset custodians will also be expected to have enhanced cybersecurity processes, and ASIC stated that it expects funds that offer crypto ETFs to account for some kind of recompense for investors if their crypto-assets are lost or stolen.

Funds will also need to apply for an extended financial services licence that allows for the safekeeping of cryptocurrency assets.

“Crypto assets have unique characteristics and risks that must be considered by product issuers and market operators in meeting their existing regulatory obligations,” ASIC Commissioner Cathie Armour said.

“The good practices we published provide practical examples of how these obligations may be met, in a way that maintains investor protections and Australia’s fair, orderly and transparent markets.”

ASIC’s guidelines will also place a significant onus on market operators such as the ASX, who will be required to assess which cryptocurrencies are acceptable for an ETF. This assessment includes if there is a high level of institutional support for the asset and if there’s a number of reputable service providers for the asset, a mature spot market, a regulated futures market and transparent pricing mechanisms.

Currently, only the two largest cryptocurrencies, Bitcoin and Ethereum, fit these criteria, though ASIC says it expects the number of cryptos that can satisfy these requirements to expand over time.

A spokesperson for the ASX told The Age and The Sydney Morning Herald the exchange operator welcomed the regulatory guidance, saying it was a “positive development”.

“We have been working with a range of issuers interested in launching ETPs that invest in crypto-assets and are very aware of the high level of interest amongst investors for products that provide access to these assets,” they said.

The bourse said it would now assess modifications it would have to make to its rules supporting ETP trading, “as well as those that might be required to other systems, processes and compliance functions that ensure ASX maintains a fair, orderly and transparent market”.