On 30 June 2021, ASIC released its consultation paper 343: Crypto-assets as underlying assets for ETPs and other investment products (CP343). The consultation has a broad remit and potentially significant consequences for trading in and investment exposure to crypto-assets.
ASIC is seeking feedback on proposals about exchange-traded products (ETPs) and other investment products that provide retail investors with exposure to crypto-assets. Other investment products covered by CP343 are listed investment companies, listed investment trusts and unlisted registered managed investment schemes.
The release of the consultation paper is driven in part by increasing market interest and demand for crypto-asset investment opportunities fuelled by the rise in value of crypto-assets, particularly bitcoin. This includes a number of applications reported as having been made to ASX for listing of funds which invest in this asset class. At the same time concerns have arisen in relation to crypto investment scams, which has created further demand from retail investors seeking exposure to crypto-assets through a regulated financial market.
ASIC has expressed concern that ETPs linked to crypto-assets such as bitcoin could create a ‘real risk of harm to consumers and markets’ and as such must be developed, operated and regulated carefully to maintain market integrity. ASIC considers that crypto-asset ETPs have novel and unique features that require consideration of whether such products can support fair, orderly and transparent markets.
Accordingly, the main areas for consideration in CP343 are:
- existing expectations for ETPs, including whether crypto-assets are appropriate underlying assets, whether crypto-assets can be reliably priced, and how crypto-assets should be classified with respect to underlying asset rules; and
- how product issuers can ensure crypto-asset ETPs are compliant with the Australian regulatory framework, including with respect to custody, risk management and disclosure.
The paper has been prepared on the basis that crypto-asset ETPs are financial products, which are regulated under the Corporations Act. However, ASIC makes it clear that how crypto-assets are classified and regulated in Australia is a matter for government decision and is currently being considered by the Senate Select Committee on Australia as a Technology and Financial Centre.
Importantly, ASIC proposes to establish the following factors as the basis to identify whether particular crypto-assets are appropriate underlying assets for an ETP:
- a high level of institutional support and acceptance of the crypto-asset being used for investment purposes;
- the availability and willingness of service providers (including custodians, fund administrators, market makers and index providers) to support ETPs that invest in, or provide exposure to, the crypto-asset;
- a mature spot market for the crypto-asset;
- a regulated futures market for trading derivatives linked to the crypto-asset; and
- the availability of robust and transparent pricing mechanisms for the crypto-asset, both throughout the trading day and to strike a daily net asset valuation (NAV) price.
ASIC notes that it currently only considers bitcoin and ether as crypto-assets that are likely to satisfy these factors. ASIC also proposes to establish a new category of permissible underlying asset for crypto-assets that is consistent with the above factors.
ASIC has also commented on the role of responsible entities and how they are regulated in this context. In particular, CP343 notes there are certain key matters that responsible entities must consider when investing the funds of their investors into crypto-assets. ASIC is seeking feedback on proposed good practices for responsible entities about how they can meet certain existing obligations when investing in, or providing exposure to, crypto-assets.
ASIC proposes additional disclosure obligations, risk management practices and custodial safeguards, indicating it believes these are necessary to mitigate the inherent risks to retail investors in managed funds that ASIC considers surround crypto-assets. Similar expectations are set out for other types of listed entities (such as listed investment companies and listed investment trusts), to avoid regulatory arbitrage.
In addition, ASIC notes that responsible entities must also consider their obligations under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (DDO obligations), particularly in creating a target market determination (TMD) and taking reasonable steps that will or are reasonably likely to result in distribution being consistent with this TMD. Issuers and distributors of crypto-asset-related investment products will need to comply with the DDO obligations from 5 October 2021.
While ASIC has noted that it expects issuers to carefully consider the DDO regime when designing new crypto-asset-related products, ASIC does not propose to issue any further guidance about how the DDO can be met for investment products that invest in, or provide exposure to, crypto-assets. For the time being, ASIC considers that existing guidance is suitable and applicable.
One of the other key takeaways from CP343 is that ASIC proposes to establish a new asset kind covering crypto-assets that can be selected when applying for a new AFS licence or variation to an AFS licence. ASIC considers crypto-assets do not fall within any existing asset kind for the purposes of AFS licensing and does not consider it appropriate to modify existing financial product type authorisations to include crypto-assets.
We are directly involved in ongoing discussions with ASIC and the ASX in relation to the matters addressed in CP343 and are advising clients on significant proposals to create crypto-asset investment opportunities. ASIC’s public consultation on crypto-asset issues comes after regulated trading in crypto-assets has already been facilitated in several international markets. That ASIC has now developed and explained its position will be a welcomed by the handful of issuers currently in the race to list the first crypto ETF in Australia.
A link to the media release and consultation paper can be found here. Feedback on CP343 will close on 27 July 2021.