A number of new spot cryptocurrency ETFs are soon expected to list on Australian exchanges. This follows regulators in the US and Hong Kong giving the go ahead for these instruments to start trading in their markets for the first time earlier this year.
Regulators have been reluctant to approve cryptocurrency-based financial products for a number of reasons. For instance, the underlying assets are only loosely regulated and there is a number of ways to price them. This could lead to inconsistencies in net asset values, complicating fair value.
Two spot crypto ETFs already trade on the Cboe Australia exchange, the Global X 21Shares Bitcoin ETF and Global X 21Shares Ethereum ETF. Earlier spot crypto ETFs issued by Cosmos Asset Management were delisted in late 2022 after desultory investor interest.
Fast forward two years and Cboe Australia president Emma Quinn says there is interest from a number of ETF issuers who want to list spot crypto ETFs on her bourse.
“We aim to change the face of the ETF marketplace both here in Australia and globally,” says Quinn. 
Specialist crypto investment manager Monochrome Asset Management’s CEO Jeff Yew says the Monochrome Bitcoin ETF stands to be the first bitcoin ETF in Australia authorised to hold bitcoin directly. It will list on Cboe.
“The Monochrome Bitcoin ETF is structured as a bare trust, which allows for in-kind redemptions for investors, not just restricted for authorised participants like the ones in Hong Kong,” he says.
ETF issuers such as Van Eck continue to negotiate with ASX about listing spot crypto ETFs on the exchange.
“We're going through a full due diligence for a bitcoin ETF proposal with the ASX now,” says Jamie Hannah, deputy head - investments and capital markets with ETF specialists Van Eck Australia.
“ASX is doing an extraordinarily deep dive into every aspect of the product, including custody, security, marketing and pricing,” says Hannah.
BetaShares’ head of digital assets, Justin Arzadon confirms the ETF specialist is hoping to launch a spot crypto ETF in the not too distant future.
“We've always taken the view this is a marathon, not a sprint. It seems like ASX is taking that same view. Everyone just wants to get things right the first time,” says Arzadon.
ASX and the Australian Securities and Investments Commission have taken a cautious approach to crypto ETFs due to their unique characteristics and risks and an evolving global regulatory stance.
In 2021, ASIC released updated regulatory guidance to licensed exchanges (INFO 230) and issuers (INFO 225) regarding crypto-asset exchange-traded products (ETPs). ASX subsequently amended the AQUA rules to establish a new category of permissible underlying assets for crypto assets.
An ASX spokesperson said the exchange has developed a conservative framework to implement ASIC’s guidance on crypto.
“Key parts of this framework were in the areas of core crypto-asset custody capabilities and private key infrastructure. We consulted with industry experts in setting policy parameters in these areas,” the spokesperson said.
ASX has specific requirements around the segregation of assets on the blockchain, use of hot versus cold storage of private keys, hardware devices used to hold private key material, signing protocols and separation of client assets and monies.
Cold storage refers to a method of storing crypto assets that disconnects the assets from the internet, to help safeguard them.
The ASX spokesperson noted to date, applicants with whom the exchange has had discussions around spot crypto ETFs propose to use the same custody providers as the largest crypto ETPs in the US. Blackrock is an example.
A barrier to spot crypto ETFs’ widespread adoption is reluctance by financial advisers to recommend crypto-based assets. Phil Anderson, general manager policy, advocacy and standards with the Financial Advice Association Australia notes cryptocurrency investments, which are not regulated by ASIC, carry specific risks.
“Most financial advisers would see these types of assets as speculation rather than investments, at this stage. At the moment, very few [advisers] would be willing to make a recommendation to a client to invest in them,” says Anderson.
“However, an ETF that invested in crypto would be a regulated product. Advisers might be able to advise on it, this would depend on whether it was approved by their Australian Financial Services License and if it was covered by their professional indemnity insurance. At this stage I think that is quite unlikely,” he says.
Anderson urges investor caution with spot crypto ETFs. “It is very difficult to assess underlying value, which will make it difficult for research houses to provide coverage. In the absence of research house coverage, AFSLs are unlikely to approve these products to go on approved product lists,” he says.
As for the future, as crypto assets continue to become increasingly mainstream, they are likely to become a regular part of many investors’ portfolios. More issuers launching spot bitcoin ETFs, with different structures or ways to gain access to the spot bitcoin price, will emerge over time.
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