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Watchdogs divide over opening up retail risk of crypto funds

Watchdogs divide over opening up retail risk of crypto funds

Global financial hubs, judging on the rapidity with which they responded to the use of Bitcoin, adhere to the biblical idea that “the last shall be first, and the first last.” Industry authorities in the world’s most important financial centers — which were once hotbeds of all types of risk-taking innovation — are proving reluctant to approve risky cryptocurrency funds. While this has been happening, more and more laissez-faire secondary financial hubs have seized the chance to leap ahead. And these later trading platforms for cryptocurrency exchange-traded funds (ETFs) are carving out a space for themselves in a still-developing monetary arena. 

As a consequence, investors in various parts of the world are able to access a patchwork of cryptocurrency exchange-traded funds (ETFs). Brazil has perhaps gone the farthest in this regard. The Brazilian Securities Commission has not only approved the first bitcoin and ether exchange-traded funds (ETFs) in Latin America, but it has also approved the world’s first two decentralized finance exchange-traded funds (ETFs). 

Uniswap, a cryptocurrency exchange, and Polygon, a service aimed to speed up blockchain transactions are examples of decentralized applications (Dapps) that invest in a basket of tokens created by decentralized applications (Dapps). Other countries, including Canada, Sweden, Germany, Switzerland, the United Kingdom, the Isle of Man, and Liechtenstein have approved products that invest in individual cryptocurrencies or baskets of such securities, despite the fact that the United States, the United Kingdom, and Asia have not done so. For regulatory reasons, these products are referred to as exchange-traded products or notes in Europe rather than mutual funds in Australia and India, and these nations are likely to be the next to adopt this terminology. 

However, the Securities and Exchange Commission of the United States has rejected more than a dozen applications for funds of a similar kind in the United States. However, private trusts may hold bitcoin directly, but ETFs that invest in bitcoin futures have only been allowed so far. 

However, ETFs that invest in bitcoin futures have already been approved. There are a number of other significant financial hubs, like the United Kingdom, Singapore, and Hong Kong (in addition to mainland China), which have not yet reached that level of development. Instead, they are attempting to maintain a strict distinction between the $10tn ETF business and the virtual asset world, which has a market value of around $2tn and is growing rapidly. For investors in these countries, funds investing in the shares of publicly traded firms dealing in digital assets are the closest they can go to being on the leading edge of technological advancement.

According to the Securities and Exchange Commission, “spot” ETFs — i.e., those that are tied directly to the actual trading price of the underlying cryptocurrency — are prohibited because of worries about “fraudulent and manipulative activities and practices” in the markets where bitcoin is traded. Some of these concerns include the possibility of “wash trading,” in which the same institution is on both sides of a trade, generating additional fees for minimal risk; price manipulation by “whales,” who dominate bitcoin trading; and “manipulative activity” in the case of the cryptocurrency tether, which is designed to always be worth $1.

The Securities and Exchange Commission (SEC) claims it is necessary “to safeguard investors and the public interest” because cryptocurrency marketplaces are “the Wild West… replete with fraud, frauds, and abuse,” in the words of the regulator’s chairman Gary Gensler. Nonetheless, the regulator seems to feel that ETFs focusing on bitcoin futures contracts, which trade on the Chicago Mercantile Exchange, a regulated venue, have mostly resolved these issues to their satisfaction.

Not everyone is in agreement. “Adding one more level of disintermediation doesn’t make much of a difference,” says Jason Guthrie, head of digital assets for Europe at WisdomTree, a supplier of exchange-traded funds. WisdomTree manages five European cryptocurrency funds with a total asset value of $334 million. In light of the fact that ordinary investors may purchase cryptocurrencies directly via licensed exchanges and brokerages, such as Coinbase and Robinhood, he criticizes the SEC’s approach to cryptocurrency as “disjointed… sluggish… and possibly inefficient.” Singapore is interested in becoming a center for blockchain and cryptocurrency businesses. 

However, the Monetary Authority of Singapore, the country’s financial regulator, has determined that enterprises should not promote or advertise cryptocurrency services to the local population, in an effort to protect individual investors from the potential hazards associated with this volatile asset class.

“Singapore is positive on the cryptocurrency sector as a whole, but the government has said that they do not want its citizens participating,” reveals one industry insider who likes to remain anonymous. Hong Kong, Singapore’s regional competitor, has gained a reputation as a hub for digital enterprises, particularly in the financial services sector. However, in accordance with Beijing, which prohibited all cryptocurrency transactions in September because to worries about fraud, money laundering, and the environmental effect, it has also taken steps to protect its own citizens from cryptocurrency trading and trading platforms. Professional investors with $1 million or more in liquid assets are only authorized to trade on licensed exchanges.

While any retail investor in the United Kingdom may trade cryptocurrencies directly, the Financial Conduct Authority has prohibited the selling of cryptocurrency-related “derivatives” — such as exchange-traded products — in the United Kingdom. The Financial Conduct Authority of the United Kingdom has also advised that anybody investing in cryptocurrency assets “should be prepared to lose all of their money.” In the words of the unnamed CEO of an investing business, 

“Different nations have tremendously different ways of thinking.” The FCA was quite critical. The company was originally going to be launched out of London, but we have relocated to Europe for the time being.” According to Guthrie at WisdomTree, the FCA’s instruction “was particularly focused on CFDs [contracts for difference], leveraged instruments, and other similar products.” There have been persons who have offered 100 times leverage on bitcoin in the past. That is not required. “It’s definitely something that the FCA should take into consideration.”

In spite of this, he believes that the definition of a derivative “was a little too broad,” because it included unleveraged products such as plain vanilla exchange-traded funds (ETPs) and futures contracts. Chris Mellor, head of Emea ETF equity and commodities product management at Invesco, believes that since bitcoin is a new asset class, regulators would unavoidably “need to ask new sets of questions” about it. According to him,

“Cryptocurrency investments are not for everyone, and given the asset class’s newness and volatility, it is understandable why some authorities have adopted a cautious stance.” Cryptocurrency is unquestionably volatile, [but it is] comparable to small-cap stocks or single-stock investment in terms of risk. It’s a high-risk investing opportunity. WisdomTree CEO, Jason Guthrie “A comprehensive, institutional-grade product should be more appealing to regulators and anybody who is able to make long-term investments,” he continues, adding that Guthrie acknowledges that anybody considering making a cryptocurrency investment should be aware of the hazards involved. 

“There is a changeable level of liquidity,” he claims. “There are hazards associated with it, such as concentration problems and the possibility of huge players in it.” He does, however, point out that such risks are not exclusive to digital assets. 

“Cryptocurrency is unquestionably volatile, [but] it is comparable to small-cap stocks or single-stock investment in terms of risk.” It’s a high-risk investment, to say the least. People’s portfolios should not include 100 percent of this asset, but it may very simply be included in a portfolio as part of the risk bucket.” 

“We often see 1-3 percent [portfolio allocation], with the riskier end of the spectrum reaching up to 10 percent,” he explains. “At these kinds of levels, we believe it to be rather typical.” The stock of Tesla was more volatile than bitcoin for a long time, and it is now secure in the S&P500.”

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