Crypto-assets

 

Licensed exchanges may determine that crypto-assets can be permissible underlying assets for ETPs admitted to their market. Given the unique characteristics and risks of crypto-assets, we expect market operators to carefully assess, on an individual basis, whether it is appropriate for a particular crypto-asset to be a permissible underlying asset for ETPs admitted to their market. In conducting this assessment for crypto-assets that are not financial products, we expect market operators to be satisfied that:

• there is a high level of institutional support and acceptance of the crypto-asset being used for investment purposes
• reputable and experienced service providers (including custodians, fund administrators, market makers and index providers) are available and willing to support ETPs that invest in, or provide exposure to, the crypto-asset
• there is a mature spot market for the crypto-asset
• there is a regulated futures market for trading derivatives linked to the crypto-asset, and
• robust and transparent pricing mechanisms for the crypto-asset are available, both throughout the trading day and to strike a NAV price (see Pricing below).

These factors are intended to help support the maintenance of a fair, orderly and transparent market by ensuring that only crypto-assets that are sufficiently well regarded, capable of being supported within the ETP structure, and less susceptible to price manipulation may be permissible underlying assets.

 

In relation to assessing a high level of institutional support and acceptance, we suggest that the presence of the following may be relevant considerations for market operators:

 

• ETPs that hold the crypto-asset in comparable jurisdictions
• listed companies that deal in, or provide services in connection to, that crypto-asset in Australia or comparable jurisdictions
• large and well-regarded traditional financial institutions, in Australia or comparable jurisdictions, that provide services in relation to that crypto-asset to institutional clients, and
• unlisted investment products available to retail investors in Australia (e.g. registered managed investment schemes) that hold the crypto-asset and have a proven track record of operations consistent with the crypto-asset being able to meet the requirements for being held by an ETP.

In relation to assessing a mature spot market, we suggest a holistic assessment of the state of the spot market for the crypto-asset and its ability to support ETPs, considering factors such as:

• the number of major platforms dealing in the crypto-asset
• the value and frequency of trading activity across platforms
• the level of trading fees and bid–offer spreads
• the diversity of buyers and sellers
• the extent to which trading activity takes place on platforms that have policies and procedures to promote fair, orderly and transparent trading activity and address manipulation and other market integrity risks, and
• the effectiveness of arbitrage activity between major platforms and consistency of pricing across major platforms.

In relation to the presence of a regulated futures market, the standard of regulation we refer to is that of a licensed derivatives market which is required to maintain a fair, orderly and transparent market for trading in crypto-asset futures. For overseas markets in comparable jurisdictions, there should be standards that achieve equivalent regulatory outcomes. The futures market should be subject to oversight by a body empowered by law to supervise it.

 

Note 1: As at October 2021, bitcoin (BTC) and ether (ETH) appear likely to satisfy all five factors identified above to determine appropriate underlying assets for an ETP. We expect the range of non-financial product crypto-assets that can satisfy these factors will expand over time.

 

Note 2: The crypto-asset, bitcoin, and the network it trades on are both referred to by the same term. For clarity we use the term ‘bitcoin’ with a lower case ‘b’ to refer to the crypto-asset.

 

For crypto-assets that are also financial products, licensed exchanges may determine that a particular crypto-asset is a permissible underlying asset on the basis that the relevant class of financial product is a permissible underlying asset. The licensed exchange must still be satisfied that the crypto-asset is an acceptable underlying asset for ETPs admitted to its market and is consistent with maintaining a fair, orderly and transparent market.

 

Categorisation

 

For crypto-assets that are not financial products, it is good practice for licensed exchanges to establish a separate category of permissible underlying asset for these crypto-assets and use this as the basis to assess the ETP for admission – for example, by way of an ‘eligible crypto-asset’ category. This category could be defined by reference to the five factors above, or it could set out the specific crypto-assets which are considered to satisfy the factors.

 

In respect of crypto-assets that are also financial products, licensed exchanges should rely on the relevant class of financial product being a permissible underlying asset as the basis to assess the ETP for admission.

 

Pricing

 

There are unique challenges when pricing crypto-assets. To achieve a robust and transparent pricing mechanism for non-financial product crypto-assets, we consider it is good practice for market operators to verify that:

 

the basis of the pricing mechanism for crypto-assets held by an ETP is a benchmark price or index published by a widely regarded provider that:

 

reflects a substantial proportion of trading activity in the relevant pair(s), in a representative and unbiased manner

is designed to be resistant to manipulation

complies with recognised benchmark selection principles such as the IOSCO Principles for financial benchmarks (PDF 388 KB), the EU Benchmarks Regulation, or other internationally recognised benchmark selection principles

pricing mechanisms which rely on a single crypto-asset spot market are avoided.

 

For crypto-assets that are also financial products, market operators should be satisfied that there is a pricing mechanism for those crypto-assets which is as robust and transparent as those used by non-crypto-assets of that class of financial product.

 

Admission and monitoring standards

 

For all crypto-asset ETPs, we expect market operators to be satisfied that the structure and operation of the product appropriately account for the unique characteristics and risks of crypto-assets.

 

We expect market operators to consider the good practices for crypto-asset investment products set out in Information Sheet 225 Crypto-assets (INFO 225) and verify, as part of the admission process, that the structure and operation of the product seeking admission are consistent with the good practices outlined in INFO 225. It is also good practice that market operators periodically assess whether admitted crypto-asset ETPs are maintaining an appropriate structure and operation.