Australia is generally a ‘fast follower’ rather than an innovator in fintech, but for a moment it looked like it was in the vanguard, with Australia Stock Exchange planning to replace its post-trade processes with blockchain technology.
The collapse of that project, along with the FTX scandal and other blowups in the retail space, has set back institutional adoption in Australia.
Banks that were gung-ho two years ago about issuing their own stablecoins and driving real-world asset tokenization, such as ANZ and National Bank of Australia, have put those projects on pause. Those driving retail-focused projects, such as Commonwealth Bank, have also had to slow down following reproachments by securities regulators.
With the leading stock exchange and the top banks calling time-out, however, fintechs have ratcheted up their activity and are now finding commercial opportunities.
Regulatory rarity
One is another ‘fast follower’ play: the bitcoin spot exchange-traded fund. US regulators approved these (reluctantly) in January and the sector has attracted some $11 billion of inflows.
There are futures ETFs in Australia, as there are in other markets, but so far the only other market that has approved spot bitcoin and ethereum ETFs is Hong Kong.
The scene was set by the Australian Securities and Investment Commission back in 2021, when it declared any investment products with a substantial crypto exposure that are marketed to retail investors must be licensed, and it spelled out the basics for consumer protection.
That was a rare moment of clarity in a market that is otherwise unregulated when it comes to anything crypto.
That lack of regulation is the biggest impediment to superannuation funds or other institutions engaging in the space. “Regulation in Australia is still a ways off,” said Kate Cooper, head of Asia Pacific and CEO of Australia for Zodia Custody.
Local story
She has taken on the role at Zodia, whose shareholders include NAB, Northern Trust and Standard Chartered, in part because the banks where she previous worked have stepped back from blockchain-focused innovation.
But she notes that Australia’s homegrown crypto exchanges and other players have succeeded by providing a local offering. Despite crypto’s global, 24/7 nature, Australian users have flocked to local exchanges such as BTC Market and Independent Reserve rather than trade on global ones.
That localization story is now playing itself out in the ETF space. Monochrome Asset Management’s founder and CEO, Jeff Yew, says his firm is about to launch Australia’s first bitcoin spot ETF, which is targeted to go live before the end of June.
Yew was previously CEO of Binance’s Australia business but he left to set up Monochrome, in Brisbane, in 2021.
ASIC regulations stipulate that only retail funds need to adhere to its licensing regime for crypto. Those that cater to professional investors do not. This has led other firms to offer futures ETFs based on retail exchange-traded funds that invest in wholesale feeder funds. The retail ETF doesn’t actually hold bitcoin or other crypto assets, it just has exposure to wholesale funds that do.
“Monochrome condemns wholesale-retail feeders marketed as spot bitcoin ETFs, especially when ASIC has already approved spot bitcoin ETFs in Australia,” Yew said. Holders of these structured products are only directly holding bitcoin, which may be what those investors want, but Yew contends this is not a spot ETF.
Aussie ETF oi oi oi
Following ASIC rules, a spot bitcoin ETF issuer’s license can be approved for the specific category of ‘crypto assets’.
To meet ASIC requirements, the spot ETF must be able to redeem in kind. This means if investors want out, they can take their money in Australian dollar equivalent, or directly in bitcoin. (Regulations prohibit this for subscriptions.)
Therefore, while there are the usual market makers and other ‘authorized participants’ who use hedging tools to keep the ETF’s net asset value in line with the underlying exposure, there is a parallel facility to enable in-kind redemption directly to investors. This is unique to Australia, as it doesn’t exist in the US or in Hong Kong.
Yew believes the introduction of licensed ETFs will shift the market more toward the regulated side.
“The emergence of regulated products like our bitcoin ETF will chase out the unregulated actors and bring in new products, such as lending,” he said.
He reckons initial investor demand will come from family offices; there could be demand from individuals via a particular branch of the domestic pensions industry called self-managed superannuation funds.
Yew doesn’t expect actual superannuation fund managers to take an interest for a few years, although he hopes large wealth-management businesses and financial advisors will get on the bandwagon.
“Many people can’t deal with self-custody, even if they have a crypto wallet,” Yew said. “They still fear losing their keys. And under Australian regulation, bitcoin is not a financial product, so investors can’t claim legal ownership of it.” These are some reasons why local investors might opt for an ETF version of crypto assets.
Listing venue
But ASX is not listing any of these products. Instead, Monochrome is listing its ETFs on Cboe, the local arm of Cboe Global Markets, formerly known as the Chicago Board of Exchange.
ASX will still have influence on how this market develops, however: it presently holds a monopoly on all exchange-based clearing and settlement in Australia, which means ASX’s post-trade system – the one it has failed to upgrade – will also handle ETFs trading on Cboe.
That monopoly is now likely to end: that seems to be the political price that ASX must pay for its bungled post-trade replacement. Which leads us to new opportunities in blockchain-based finance that will emerge from the loss of that monopoly…
To be continued!
