What the SEC’s Bitcoin ETF Decision Means for Australia
The celebrated travel writer Bill Bryson once remarked that Australians prefer talking about American politics to Australian politics. With the SEC’s greenlighting of bitcoin ETFs last week, we’re seeing something of a demonstration video of Bryson’s observation. Bitcoin ETFs have been available on Australian exchanges for almost two years, with muted fanfare. What’s driven headlines instead has been the launch of these ETFs in the United States.
While the launch of bitcoin ETFs is mostly of symbolic significance for Australia, the occasion does prompt an overdue discussion of where local bitcoin ETFs stand and why they matter.
Why Bitcoin ETFs Matter
Crypto Exchange Quality is Low
There are several key reasons why bitcoin ETFs matter. The first of which is that they can improve outcomes for consumers and investors. A major weakness of buying bitcoin directly is that crypto exchanges are often low quality and riddled with conflicts of interest. Often unknown to the general public, crypto exchanges usually have many conflicting functions. Importantly, they are often both the party that trades against you, and the exchange venue all at the same time. As the SEC notes:
“so-called “crypto exchanges” may offer a combination of services that are typically performed by separate firms that may each be required to be separately registered with the SEC… The commingling of these functions… creates conflicts of interest and risks for investors.”1
One example of a conflict this creates is best execution. When you buy an ETF in Australia, your broker is legally required to act in your best interests and get you the best price available in the market for your ETF. All online brokers like CommSec build best execution into their technology.
Yet when you buy bitcoin on a crypto exchange, you are not protected by these best interest laws. And as crypto exchanges can be both the exchange venue and party trading against you at the same time, there may be incentives for them not to give you best execution.2
Gold ETFs Created Structurally Higher Gold Prices. Could Bitcoin ETFs do the Same?
Another reason bitcoin ETFs are significant is the price of bitcoin itself.
Gold ETFs, which allowed investors to trade gold bullion on stock exchanges for the first time in 2003 (Global X Physical GOLD (ASX: GOLD) was the world’s first) led to an era of structurally higher gold prices.3 The reason for this was that daily trading volumes on stock exchanges greatly exceed the volumes on gold exchanges. And as such, gold ETFs became the price setters due to order book effects.4
An ongoing discussion in the market right now is whether bitcoin ETFs can do the same for bitcoin—as bitcoin is sometimes called “digital gold”. Indeed, some commentators have attributed the bitcoin rally in recent months to the market front-running this.5 Meanwhile, the ongoing Ethereum rally (up 9% in US dollars year-to-date as at 15 January)6 is possibly the market doing the same for the SEC’s forthcoming Ethereum decision in May.7
ETFs Open Crypto to Advisers
But the biggest reason bitcoin ETFs matter is that advisers – the most important players in the ETF market in Australia and the US alike – do not trade their clients’ money on crypto exchanges. Even if they wanted to, adviser platforms in Australia – such as Netwealth and Hub24 – do not connect to crypto exchanges or provide crypto trading. Bitcoin ETFs by contrast can be fed onto investment platforms and wrap accounts, as most of these platforms allow trading of ETFs.
State of the Market: Working things out
With all this in view, what is the state of crypto ETFs in Australia?
Bitcoin and Ethereum ETFs are still relatively new. Assets under management in the only crypto ETFs available in Australia, the Global X 21Shares Bitcoin ETF (Cboe: EBTC) and Global X 21Shares Ethereum ETF (Cboe: EETH) sat at $37 million and $10 million respectively as of 15 January 2024.8 And with anything new, it can take some time for details to get worked out. Some of the details still being worked through are:
#1 – ASX Clear Margin Requirements
For most ETFs, ASX Clear requires brokers to front up 10% or less of the value of the ETF at settlement. This means that, say, for every $100 of an ETF like Global X Physical Gold (ASX: GOLD) that a broker buys for their client, they have to front up a $10 margin. But for crypto ETFs, these requirements are far more stringent. When trading bitcoin ETFs, brokers must front up 40% margins and for Ethereum, they must provide 50%.9 This means some brokers won’t trade bitcoin ETFs even once they’re listed as they don’t want that strain on their balance sheet.
#2 – Valuation Framework and Research Houses
The fund reviews that research houses provide play an important role in the life a fund, as they often provide a form of outsourced quality control for advisers. Yet crypto ETFs are not so straightforward for research houses. An obvious challenge is that valuing cryptocurrency is very tricky. Yet a clear valuation process and framework is very helpful for being favourably rated.
#3 – Advisers’ Comfort Level With Crypto
Under Australian law, when advisers are providing personal financial advice, they must have demonstrable competence in what they’re giving advice on. Yet as cryptocurrency is new, and as there are relatively few professional courses on it (like Kaplan), demonstrating competence here is not straightforward either.
#4 – Is Crypto Covered by Professional Indemnity Insurance?
A volatile new asset class like crypto was never getting an easy run from insurers. And the insurance policies advisers take out to cover themselves – professional indemnity insurance – is no exception here. Most insurance policies advisers take out do not cover crypto.
In Europe and North America, bitcoin ETFs have taken off, and sit on billions in assets under management. Australia could be on its way there. The SEC decision is not, in and of itself, a game-changer. But it is helping mainstream an overdue discussion on where Australian bitcoin ETFs stand.