Increasingly, clients are coming to us for regulatory advice surrounding the mining of cryptocurrency tokens, operating digital currency exchanges, raising funds through Initial Coin Offerings, and investments involving cryptocurrencies.
On the heels of such heightened interest in investing in cryptocurrencies, the Australian Securities Exchange (ASX) has released their guidance with respect to Listed Investment Companies (LICs), Listed Investment Trusts (LITs) and Exchange Traded Funds (ETFs) that wish to invest in and hold cryptocurrencies as underlying assets.
In its Compliance Update released on 16 February 2018, the ASX advised that:
“an applicant seeking to list a cryptocurrency-related business will need to satisfy ASX not only that it has a structure and operations appropriate for a listed entity, but also that its business is bona fide, that it will comply with all applicable legal requirements in Australia and in all jurisdictions where it is proposes to carry on business, and that proper disclosure has been made to investors of the risks (including emerging regulatory risks) involved.”
The ASX’s guidance comes in the wake of a letter from the US Securities and Exchange Commission (SEC) in January 2018 to industry stakeholders seeking consultation on identified issues and questions surrounding cryptocurrency-related holdings by ETFs and listed fund entities. In this letter, the SEC considers matters of valuation, liquidity, custody, arbitrage, potential market manipulation and other risks. This suggests that the US regulator is turning its mind to the need for a formal regulatory approach. We anticipate the Australian Securities and Investments Commission (ASIC) and ASX following the US regulator and importing many of the US developments into the Australian jurisdiction.
In the meantime, Australian LICs, LITs and managed ETFs that wish to invest in cryptocurrencies or cryptocurrency derivatives will need to satisfy the ASX that they comply with ASX Listing Rules, have dealt with the legal and regulatory issues outlined in ASIC Information Sheet 225 and have addressed the following:
- their proposed investment strategy, including how and when they will provide a return to investors and, if applicable, how they will hedge the risks in the underlying investments and any related cryptocurrency risks;
- if they intend to invest in cryptocurrencies directly, their understanding of the market volatility and liquidity risks associated with cryptocurrencies and how they will manage those risks;
- if they intend to invest in, or hedge using, cryptocurrency derivatives, their understanding of the margin risks associated with cryptocurrency derivatives and how they will manage those risks (including in particular what liquidity lines they will have available to meet margin calls);
- specific details and experiences of the individual fund managers who will be making investment decisions and otherwise managing portfolios that involve cryptocurrencies; and
- why they consider their LIC, LIT or ETF is a suitable investment for retail investors.