Is crypto about to break into the financial mainstream?

Bitcoin ETF crypto regulation
Bank of England deputy governor Jon Cunliffe says cryptocurrencies have potential but need “regulatory clarity’’ as a “matter of urgency”.

Cryptocurrencies such as Bitcoin are at an interesting juncture at the moment – seemingly on the cusp of breaking into the financial mainstream or suffering a slow death due to a lack of regulation.

Even central banks are beginning to realise the attractions and benefits of cryptocurrencies and their underlying blockchain technology, but they are also reluctant to step up to the plate and do anything about it.

At the same time the arrival of a crypto-based exchange traded fund in Australia – and similar funds appearing on overseas markets – is quickly pushing towards cryptocurrencies and related companies becoming a mainstream – albeit higher risk – investment for individuals and superannuation funds.

Bank of England admits potential but wants regulation

The Bank of England deputy governor Jon Cunliffe is the latest central banker to admit that cryptocurrencies are interesting but desperately need some “regulatory clarity’’.

He said a crash in the cryptocurrency markets is a “plausible scenario”, citing a lack of intrinsic value, the possibility of contagion between crypto assets, operational vulnerabilities and “the power of herd behaviour.’’

However, you could say the same thing about the value of the pound or any other currency in a free trading environment – the difference is that globally, so far, no regulators have stood up to provide a suitable regulatory platform for the $3 trillion cryptocurrency market.

The only real action has come from China, which banned crypto mining and transactions in September with its usual heavy-handed, totalitarian approach – whacking video gamers at the same time.

That might have caused some temporary crypto price falls but it is as unlikely to dim ongoing global enthusiasm for cryptocurrencies.

‘Large benefits’ from regulation

Even with his bleak assessment of cryptocurrency volatility, even Jon Cunliffe admits they have enormous potential, should some regulation arrive soon.

“Indeed, bringing the crypto world effectively within the regulatory perimeter will help ensure that the potentially very large benefits of the application of this technology to finance can flourish in a sustainable way,” he said. “It needs to be pursued as a matter of urgency.”

Despite the lack of official enthusiasm for cryptocurrencies, the popularity of Bitcoin, Ethereum and other digital assets has exploded as the COVID-19 pandemic and ballooning government stimulus programs have drawn a flood of younger investors into the area.

Strong interest from younger investors

The interest of these younger investors has been so strong that major investors and superannuation funds are paying much more attention to the investment opportunity at a time when record-low interest rates are damping down returns in many asset classes.

Financial planners are also showing interest, given that many of their clients are peppering them with questions about how to safely invest in crypto.

In Australia there is a parliamentary inquiry into cryptocurrency regulation, spearheaded by Senator Andrew Bragg, which is set to hand down its recommendations by the end of the month.

Senator Bragg has said he would like to see Australia keeping up with countries such as Canada, UK, Singapore and Switzerland in regulating digital assets.

Even stock exchanges have taken a cautious approach to cryptocurrencies, with not all exchanges willing to list companies which have holdings in coins such as Bitcoin or Ethereum as their prime asset.

Australian ETF set to arrive soon

Betashares is set to launch a Crypto Innovators Exchange Traded Fund soon but it will not give direct exposure to cryptocurrencies or crypto markets.

Instead, it offers exposure to global digital asset businesses, from mining to exchanges, and aims to track the Bitwise Crypto Industry Innovators Index, which underpins another ETF listed on the New York Stock Exchange.

The ASX has been hesitant to allow crypto-related businesses on the exchange, saying it is assessing the suitability of bitcoin-related ETFs under the AQUA rules, which cover the underlying investments, experience and qualifications of the issuer, and price transparency and liquidity requirements.

BetaShares chief executive Alex Vynokur has said the protracted process of getting the Crypto Innovators ETF (set to trade under CRYP) approved for trading would be worth it, due to “the genuine investor demand’’ to the “most important development since the launch of the internet.”

He said the ETF would offer more investor protection, transparency and accountability compared to buying cryptocurrencies in unregulated venues.

ASIC finalising trading rules for crypto

BetaShares said 85% of the Bitwise Crypto Industry Innovators Index is focused on companies that either derive at least 75% of their revenue from directly serving crypto markets or have at 75% of their net assets in direct liquid crypto-asset holdings.

The arrival of the first Australian crypto ETFs, with VanEck also planning an offering, should turbocharge the march of crypto into the mainstream investment scene.

The Australian Securities and Investments Commission is also finalising a consultation process to explore the potential for cryptocurrency ETFs to trade on the local exchange, with those findings set to help the ASX and Chi-X decide which sort of cryptoassets they will allow to list.

Countries that lag international developments risk seeing innovative local companies flee to list elsewhere – something that has already happened in the US and Britain.

US readies for Bitcoin ETF’s

That fear of missing out may be what has prompted US regulators to belatedly consider allowing trading of ETFs based on Bitcoin futures contracts.

Bitcoin rallied hard last Friday to hit US$61,358.40 (A$82,675.95) as traders became increasingly confident that US regulators would approve the launch of an exchange-traded fund based on its futures contracts.

Bloomberg News has reported that the US Securities and Exchange Commission (SEC) was poised to allow the first US bitcoin futures ETFs to begin trading this week, with providers including the VanEck Bitcoin Trust, ProShares, Invesco, Valkyrie and Galaxy Digital Funds all having active applications for such ETFs.

ProShares and Invesco are thought to be closest to approval and would gain a significant first mover advantage if they became the first to market.

If such ETFs are allowed, they could go a long way to legitimising the use of Bitcoin and could facilitate investment from a range of mainstream investors including superannuation funds and individuals.

The SEC has already approved Volt Equity’s ETF, which tracks stocks with significant exposure to bitcoin – similar to the Australian BetaShares model.

Crypto ETFs are already trading in Canada and Europe.

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