Thread by @VNumeris

June 30, 2021: ASIC has just released a consultation paper titled "Crypto-assets as underlying assets for ETPs and other
investment products"

Below is a thread to summarise some interesting highlights from the paper.

Read full here:
asic.gov.au/media/yhbgvq02…

It covers how exchange traded products (ETPs) that
invest in, or provide exposure to, #digitalassets can meet existing regulatory expectations for ETPs.

The paper sets out our proposals on good practices on related products.

ASIC also noted that the proposals are preliminary.

ASIC acknowledges the interest in Australia for digital asset ETPs, in particular ETFs.

While also raising the unique features and risks which need to be recognised by operators and issuers, and they should meet and stay consistent with existing
regulatory obligations.

Today, digital assets are available to retail investors in Australia through local DCEs and overseas trading platforms.

However, ASIC highlights that they do not fall within the existing regulatory perimeter of financial products and services are generally unregulated by ASIC.

ASIC sees demand for crypto-asset ETPs originating from investors who:

- are unfamiliar with the processes for investing, trading, custody; and

- prefer to gain exposure through a regulated financial market/investment vehicle.

@MonochromeAsset shares the same observations.

In Australia, the three broad categories of ETP are:

(a) Exchange traded funds (ETFs)

(b) Managed funds (MFs):

(c) Structured products (SPs):

Today, these financial products are regulated by ASIC under the Corporations Act.

ASIC reiterates that how crypto-assets are classified and regulated in Australia is a matter for government decision.

Citing the ongoing Senate Select Committee review on considering these questions.

Factors on whether a crypto-asset is ready for an ETP:

(a) Institutional support;

(b) Availability/willingness of service providers;

(c) Mature spot market;

(d) Regulated futures market;

(e) Robust & transparent pricing mechanism

ASIC: Only $BTC & $ETH likely to satisfy.

On Responsible Entities (RE):

ASIC: "REs must consider when investing the funds of their investors into crypto-assets, particularly in relation to custody, risk management and disclosure."

That applies to any investment product that is operated by a RE, including LITs and MISs.

On Custody:

ASIC highlights obligations that apply to REs in relation to custody of crypto-asset schemes:

(a) RG 133, and Class Order [CO 13/1409].

(b) RG 166 Licensing, and Class Order [CO 13/760] - Custodian is required to hold minimum net tangible assets of $10 million.

ASIC's suggested good custody practices:

- No co-mingling with other crypto-asset holdings.

- Private keys generated and stored offline.

- Multi-sig signing approaches.

- Custodian's organisational controls are independently verified.

etc.

On Risk Management:

- Trading activities should be done on legally compliant and regulated crypto-asset trading platforms.

At a minimum, trading platforms used should be:

(a) based in jurisdictions with KYC and AML/CTF laws; and

(b) comply with those obligations.

On AFS Licensing:

ASIC: Crypto-assets do not fall within any existing asset kind that can be selected by an applicant.

"We are seeking feedback on proposals to establish a new asset kind that will cover crypto-assets."

ASIC may restrict asset types, currently only $BTC & $ETH.

By elevating the standard of services and robustness of the sector, it is net good for operators, and also protects consumers long-term.

ASIC understands that demand for isn't going away and it's time to shift operational & custody risks to professional managers.

End.

-Jeff