The Securities and Exchange Commission’s approval of bitcoin exchange traded funds (ETFs) is a crucial stage in cryptocurrency growth, ushering digital assets from the fringes into the financial mainstream.
QUICK TAKE
- The green light for bitcoin ETFs in the US paves the way for cryptocurrencies, highlighting a significant shift towards their acceptance and integration into mainstream financial markets.
- Increased institutional adoption and regulatory frameworks signal cryptocurrency maturation, with bitcoin leading as a potential legitimate investment asset class.
- Challenges remain, including volatility and regulatory scrutiny, but recent advancements suggest cryptocurrencies are moving closer to widespread acceptance and understanding.
By Francesco Solfrini
The short, colourful history of cryptocurrency resembles a coming-of-age story. It started with an infancy full of curiosity and great expectations, sparking a range of reactions from idealistic enthusiasm to iron-clad scepticism.
Then came the turbulent years, navigating price fluctuations and regulatory scrutiny, similar to a teenager grappling with hormonal storms. Until recently, when the narrative began to shift. With regulatory frameworks taking shape and institutional adoption increasing, the crypto ecosystem seems to be maturing, much like a young person finally finding their path in the world.
Fifteen years after the launch of the first cryptocurrency, are these digital currencies ready to become a legitimate investment asset class? And, if so, which one will prevail?
Seal of approval
The recent approval of bitcoin exchange traded funds (ETFs) by the US Securities and Exchange Commission (SEC) is a significant milestone in the cryptocurrency’s journey into mainstream finance.
A bitcoin ETF allows investors to engage with bitcoin’s price movements, without the complexities of directly buying, storing and securing the cryptocurrency themselves.
According to Dr Elizabeth Morton CA, senior lecturer and research fellow at RMIT University’s Blockchain Innovation Hub: “The novel jargon and complexity of the technology has been a barrier to many investors. Investors may see the familiarity of ETFs as an opportunity to delve into the crypto economy.”
While ETFs democratise access to bitcoin by placing trust, once again, in centralised entities, they sidestep one of its core tenets: true decentralisation.
“These indirect approaches can transfer some risks of owning crypto assets to a fund, but individuals lose some control or access over the underlying crypto assets,” says Adrian Przelozny, founder and CEO of Independent Reserve, a leading Australian cryptocurrency exchange. “The SEC’s decision to approve 11 spot bitcoin ETFs has given the crypto sector a huge shot in the arm. The spot bitcoin ETFs have also had a positive impact on local investors.”
A recent survey by Independent Reserve of more than 2100 Australians showed that the ETFs’ approval has improved Australia’s perception of cryptocurrencies.
ETFs also pose a barrier to any potential ban on bitcoin. Beyond retail investors, governments need to consider the interests of financial institutions like BlackRock, Fidelity, Invesco and Franklin Templeton, which hold billions of dollars in bitcoin.
While the SEC’s decision was on bitcoin it boosts confidence in other digital assets.
“The approval of BlackRock- and Fidelity-issued bitcoin ETFs killed the idea of crypto going away. Regulation will bury it,” says Jason Titman CA, Swyftx CEO.
Regulatory winds ahead
This regulatory nod in the US has added a layer of legitimacy to cryptocurrency investments, offering protection through established financial mechanisms due to the influence of the world’s largest economy.
Danny Talwar, head of tax at Koinly says, “Monochrome Asset Management has applied for an ASX listing of its bitcoin spot ETF which is yet to be approved. So far, Australia has adopted a cautious approach to regulation for cryptocurrencies, with the Treasury proposing a licensing regime for crypto brokers.”
Simon Callaghan, CEO of Blockchain Australia, adds: “Treasury has undertaken consultation on regulating digital asset platforms at the end of 2023. This will likely lead to some draft legislation later in 2024.
“The expectation is that AFSL [Australian Finance Services licence] requirements will allow the banks to enter this space. At a retail level, they might offer a handful of tokens, similar to CBA’s [CommBank Australia] trial in 2021.”
The largest Australian institutions are not spared from cryptocurrency enthusiasm. In November 2021, CBA announced customers could buy and sell up to 10 cryptocurrencies through its app, a first for an Australian bank. The program was stopped six months later.
“While customer protection was assumed to be CBA’s intention, it’s clear that crypto prices can oftentimes weigh on public sentiment and decision-makers’ opinions of its relative maturity,” says Asher Tan, CEO of CoinJar.
The tax challenge
Despite the positive outlook and increased regulation, many challenges remain on the path to widespread adoption of, and investment in, cryptocurrencies.
Titman believes the industry’s user experience is still up to three years behind the technology. Once it catches up, financial advisors and businesses will start incorporating digital assets into portfolios. As an asset class, cryptocurrency lacks traditional valuation fundamentals seen in equities, like earnings or cash flow.
“However, depending on a crypto’s use case, there is often publicly available information on economic incentives, total supply and network utilisation. Crypto-native and traditional investment research firms regularly analyse major cryptocurrencies,” Tan notes.
A major barrier is unresolved digital assets tax issues. For tax purposes it’s important to distinguish between general cryptocurrency assets, bitcoin and ETFs.
Talwar sheds some light: “For tax purposes, the bitcoin ETF is treated similarly to direct holding, with capital gains tax applying. However, the more complex aspects of trading crypto, aside from spot trading, are currently debated, with the Board of Taxation review paper on crypto tax issues [submitted to government] at the end of February 2024.”
At a global level, the Organisation for Economic Co-operation and Development has developed the Crypto-Asset Reporting Framework (CARF). CARF is supported by a wide group of countries, including Australia. New Zealand is not currently a signatory, but IR is presently looking into implementation options. The CARF aims to standardise the exchange of information between tax authorities to address the challenges posed by the crypto market.
The goal is to enhance tax compliance and fight evasion by ensuring transparency in cryptocurrency transactions. The adhering countries commit to incorporating CARF into domestic laws and establishing agreements to begin exchanges by 2027.
One of the big challenges of the framework will be to provide clear guidelines on how to treat different cryptocurrencies, as not all assets share the same foundation or potential.
Not all cryptos were created equal
Bitcoin, the first cryptocurrency, is often seen as superior to others due to its first-mover advantage, wide adoption and robust security. It operates on a decentralised network, supported by extensive mining infrastructure, ensuring its integrity and reliability.
Bitcoin’s capped supply of 21 million coins also positions it as ‘digital gold’, a hedge against inflation. While altcoins introduce innovations like smart contracts and improved transaction speeds, bitcoin’s simplicity, security and established market make it the most adopted cryptocurrency in the world – at present.
Other cryptocurrencies are at different maturity stages. While some, like Ethereum, have achieved significant adoption and infrastructure development, others are still in their infancy, facing regulatory scrutiny and technological challenges.
Tan helps put things in perspective, noting that while investment pathways for bitcoin are better defined, most of the excitement around this asset class continues to come from its fringes.
“Features with acronyms such as DAO [decentralised autonomous organisation], DeFi [decentralised finance] and DEX [decentralised exchanges] may currently be dismissed as overly complex financial gadgets but so, too, was bitcoin in its early days,” he says.
He also adds that, “Adopters of bitcoin may see it as an inflationary hedge and praise its decentralised nature. However, two of the top 10 cryptocurrencies by market capitalisation are stablecoins, which track the US dollar price and are managed by companies with centralised management teams.”
Have cryptocurrencies reached adulthood?
The cryptocurrency industry is certainly on the path to coming of age. Certain aspects, such as bitcoin’s recognition as a store of value, the development of regulatory frameworks and infrastructure, and increasing institutional adoption, signal its growing acceptance.
However, volatility, regulatory scrutiny and technological hurdles continue to challenge its advancement. Yet, as the sector navigates these obstacles, further developments could accelerate its maturation.
For example, US rocket scientist, entrepreneur and bitcoin investor Michael Saylor advocates for accounting changes, ensuring that bitcoin is accounted for on the balance sheets of companies, further validating the first cryptocurrency’s status at a corporate level.
Legal actions following cryptocurrency frauds and scandals show a commitment to purging the ecosystem of bad actors, like FTX’s Sam Bankman-Fried. The narrative around cryptocurrency is also evolving, with stories about the increasing use of renewable energy by bitcoin miners altering perceptions of bitcoin as a nonenvironmental, social and governancefriendly asset.
Indeed, it’s a tumultuous journey. But this should come as no surprise; the road to adulthood is always filled with challenges. Why should cryptocurrencies be any different?
Cryptocurrency in numbers
US$61,520*
After another two years of cryptocurrency scandals and volatility, bitcoin has reclaimed lost ground and soared to new heights. (*Value of one bitcoin, as at time of writing.)
In Australia, about 31% of the population has held cryptocurrencies, particularly younger, tech-savvy demographics. Despite this, 50% are unaware they need to report holdings to the ATO, and 80% of those who are aware choose not to report their investments.
In New Zealand an estimated 6–10% of the population owns cryptocurrency.
