Crypto EFTs Betashares and ETF Securities set to launch

Leading players, Betashares and ETF Securities, think they have found the perfect formula for those wanting to buy cryptocurrency without the usual hassles.

Final details on each company’s direct crypto ETFs are being kept secret until release day. Picture: Anthony Kwan/Getty Images

It is not hard to understand why more people trust exchange-traded funds than cryptocurrency.

Large swings of 50 per cent in the space of a few weeks imply it requires a strong stomach and a long-term investment time frame to be a crypto owner.

Another roadblock has been the reluctance of people to set up a new account, known as an exchange account, which is required when trading cryptocurrencies.

But two local ETF providers – BetaShares and ETF Securities – think they have found the perfect formula for those wanting to buy cryptocurrency without the usual hassles and cybersecurity risks ­associated with cryptocurrency exchange accounts.

The race is on to see who will be first to market with this new, convenient method for purchasing cryptocurrency over the next few weeks. Of course, we already have some crypto-related ETFs in the local market, but they are focused on crypto technology rather than coins, which is where most investors want to play.

Moreover, unlike many crypto ETFs that are listed on US markets, this new breed of Australian crypto ETFs will provide investors with a direct exposure to an underlying coin, rather than a synthetic exposure.

Synthetic ETFs use financial derivatives to artificially replicate the price of the tracked investment, usually a commodity such as oil, or more recently different crypto coins. However, BetaShares and ETF Securities will use direct holdings via the use of fund managers, exchange-based crypto wallets and custodians.

Needless to say, these structures are not being implemented by choice. After a lot of consideration, the Australian Securities & Investments Commission has announced strict protocols that must be followed for anyone wanting to release a crypto ETF.

ASIC is comfortable with ETFs over only the two biggest cryptocurrency coins at this stage – bitcoin and ethereum.

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

These obligations include strict requirements around custody of the coins and the security of the private key (akin to a master password). The bitcoin and ethereum coins in each ETF must be stored in “cold storage”, which means the master password for the ETF is kept offline.

The “wallet” used to hold the coins must also adhere to strenuous security protocols given the many instances over the years of cryptocurrency wallets being hacked and investors losing all their investment.

Final details on each company’s direct crypto ETFs are being kept secret until release day. Given the high regulatory controls in place by ASIC for crypto ETFs, it is likely that the differences between the BetaShares and ETF ­Securities offerings will be minimal, though it will be interesting to see the underlying mechanics of each.

Will they use Australian-based wallets, and what will be the fees for each?

Stay tuned as both ETF providers rush to be the first to market. What we have seen overseas is that the manager who launches the cryptocurrency ETF first gets the majority of investor flows and it has been difficult for the second manager to catch up and bridge the gap.

The same goes for most “thematic” ETFs where the fund manager creates a product based on a “hot” theme such as robotics or ­cybersecurity.

And while it will be only bitcoin and ethereum available to buy on stockmarkets for now, it is likely that as cryptocurrency as an asset class matures, we will see regulatory approval for further crypto ETFs on coins such as solana and cardano.

James Gerrard is principal and director of planning firm www.financialadvisor.com.au