EU, US, Asia: crypto ETPs are taking over

Crypto’s status as an asset class took a giant leap forward following the launch of spot bitcoin exchange-traded funds in the US earlier this year. Instead of buying crypto on an exchange and taking the risk of storing it in a wallet, investors in the world’s biggest economy can purchase a product on the stock market that provides exposure to bitcoin and hold it in a portfolio alongside mainstream assets. However, crypto products trade all over the world, so this article explores the regulatory landscape in three major financial hubs and compares the assets under management (AUM) in each.   

EU

The primary legislation in Europe is the Markets in Crypto Assets regulation (MiCA). Under MiCA, companies delivering services, such as custodians, exchanges and advisors need to be licensed by the financial authorities of a member state, while providers issuing digital assets to the public have to publish a whitepaper, the crypto equivalent of a prospectus. MiCA also states that tokens, backed by fiat currency (i.e. stablecoins) or other assets, must hold sufficient reserves and implement sound governance. 

Exchange-traded product (ETP) is an umbrella term covering various investment products that track the performance of an underlying asset, including exchange-traded funds (ETF), exchange-traded commodities and exchange-traded notes. Only ETFs are subject to the EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) regulatory framework because they typically hold a broad range of assets, unlike the other products, which usually track single assets. 

Most crypto ETPs trading on the EU markets are backed by the underlying assets. This means that the provider buys the ‘physical’ crypto and holds it on behalf of the investors. CoinShares issues a range of physical ETPs tracking coins like bitcoin and ether, and it stores the underlying assets with Komainu, a digital custodian regulated by the Jersey Financial Services Commission and the Dubai Virtual Assets Regulatory Authority. The other type of ETPs available in Europe are synthetic, which use financial instruments called derivatives to track the performance of the underlying asset, so they’re less transparent and more complex than the physical products. 

According to data analyst ETFbook, European ETPs have $13.2 billion AUM as of July 2024. As the chart below demonstrates, the increase since autumn 2023 has mirrored bitcoin’s latest bull market, even though these products also offer exposure to altcoins such as ether and Solana’s SOL. 

United States

In contrast to the EU, the regulatory landscape in the US is fragmented. The lack of legislation means that two government agencies, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), have to apply laws designed for traditional investments to digital assets. For instance, in June 2023, the SEC brought charges against two of the biggest crypto exchanges:

• Coinbase for allowing the trading of tokens, such as SOL and Cardano’s ADA, that the SEC claims should be classified as securities.

• Binance and its CEO and founder Changpeng Zha for several offences, including inflating trading volumes and mismanaging customer funds.

Various crypto entities have sued the SEC itself, most recently Ethereum developer Consensys which claims it doesn’t have the authority to regulate ether. But one piece of legislation is making its way through the US political system: the Clarity for Payment Stablecoins Act introduces reserve requirements for stablecoins tracking the US dollar and ensures the supervision of issuers.

Despite its actions against individual participants in the crypto industry, the SEC approved 11 spot bitcoin ETFs in January 2024 issued by some of the largest players in global finance, including BlackRock and Fidelity. The applications in summer 2023 and the eventual approval earlier this year served as major catalysts in the bitcoin bull market, alongside the latest halving. These products attracted inflows of nearly $2 billion within three days of launching, and AUM stands at $59.21 billion as of July 2024.

While spot bitcoin ETFs serve the same purpose as physical ETPs, some differences are worth noting. Spot ETFs only trade in the US as they were approved by the SEC, and they settle trades for the underlying asset in cash, whereas ETPs settle in bitcoin, which reduces counterparty risk and lowers fees. 

Asia

Asia is one of the most crypto-friendly global regions, apart from China where the government has banned trading and bitcoin mining. That said, each country enforces its own regulatory regime. Japan recognises crypto as a medium of exchange and a legal property, and the country’s Financial Services Agency supervises transactions. Japan’s Virtual Currency Exchange Association, a self-regulatory body, also recently introduced a new directive requiring exchanges to share customer information to combat money laundering, known as ‘travel rules’. Elsewhere, South Korea passed the Virtual Asset Users Protection Act in 2023, which protects investors by preventing unfair trading practices like fixing prices.

Perhaps the most important recent development in the region has been the approval of bitcoin and ether spot ETFs in Hong Kong. Six products, issued by providers China Asset Management, Harvest Global, Bosera and HashKey, started trading on the Hong Kong Stock Exchange at the end of April. These products differ from their American counterparts in one major way- investors can purchase Hong Kong ETFs in bitcoin or ether and redeem them for fiat currency, and vice versa. They’re also available to international investors who meet local compliance requirements.

Inflows have been slower than the US to date, with AUM of $376.1 million as of July 2024. But to put this lag in perspective, the total value of the Asia Pacific ETF market is much smaller than the US.

Conclusion

The global crypto regulatory landscape is inconsistent and evolving. The EU’s MiCA is one of the most progressive regimes, and while Asia also supports crypto, each country in the region has its own regulations. The US is a laggard in terms of legislation, with the SEC and CFTC applying rules designed for traditional asset classes.

However, the US products have attracted the highest AUM by some distance.

Learn more about physical ETPs.