The outlook for crypto funds in Asia-Pacific

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When it comes to listed funds, regulators across the region have continued to voice concerns about the pricing of crypto assets, which has yet to be standardized. Additionally, some markets do not yet have clear rules in place to facilitate this. Another concern that complicates the approval of ETFs is the high volatility of the underlying assets. While crypto ETFs would trade on exchanges and be subject to trading hour restrictions, cryptocurrencies can be traded 24/7, raising concerns that investors may be negatively affected. without real-time output option.

While regulators in the Asia-Pacific remain undecided on whether to approve the issuance of ETFs, a number of them are granting Recognized Market Operator (RMO) licenses to new stock exchanges. digital assets. These can function as private exchanges to begin with and will limit membership to accredited and institutional investors.

These exchanges could play a central role in the development of the ETF and ETP market in the region. As with private fund structures, asset managers may seek to use private exchanges with their institutional members as a testing ground / sandbox for crypto products. Success in this environment can once again help build trust between regulators and traditional exchanges.

Preparing for launch: tackling operational complexity

Asset managers who plan to launch crypto ETFs and ETPs will also need to think about how to meet some of the unique operational requirements of these products.

A key consideration relates to the child care setting. There are now hundreds of digital asset wallet providers in the market, from which managers can choose to store crypto assets. However, these portfolio providers do not have standardized platforms to connect with other market players like a normal central securities depository (CSD) would. Instead, each digital wallet provider has a tailored approach to connectivity. A flexible technology architecture based on an application programming interface (API) is essential for working with these vendors. At State Street, we’ve implemented connectivity to wallet providers to facilitate digital fund administration services. We are also looking to further streamline the technical infrastructure in this space and enable greater interoperability.

There are many attributes that need to be considered when developing a fund structure that invests in digital assets. As we navigate this process with our clients, we ask the key questions below:

1. Does the fund invest in a single cryptocurrency or a single crypto basket? What is the fiat currency of the fund / how many share classes will be taken into account? 3. Which authorized participants / market makers will you engage to trade your crypto product? 4. For existing asset management relationships, what is the impact on current service models like middle office? 5. Is it a synthetic or a physical product? 6. Which portfolio provider will support the issuer / fund with the custody? 7. What is the jurisdiction of the issuer and the asset manager? 8. Is there a price source available for the underlying crypto? 9. Is this a regulated or unregulated fund structure? 10. What reporting features are currently available from affected vendors?

Another consideration is that crypto assets themselves have their own peculiarities which must be taken into account in the process of administering funds. For example, bitcoin amounts are expressed using eight decimal places, while Ethereum uses 18. This creates additional complexity for the systems for calculating and reporting asset valuations.

There is also a general lack of standardization on how asset managers should determine benchmark prices for crypto assets. Today, many rely on bespoke models and may use average prices or prices adjusted for trade volume. What is crucial, whatever approach is used, is that benchmark prices can be solidly supported, as regulators expect a clear explanation of how they were calculated.

Asset managers will need to be prepared to learn as they seek to create a market for crypto products traded in Asia Pacific. Engaging with partners experienced in supporting these products in other regions will facilitate time-to-market and operational resilience.

State Street Your partner in crypto

State Street DigitalSM is poised to fully support asset managers in the emerging digital product space. We have engaged with several companies around the world to support the launch of cryptocurrency-based ETFs and ETNs. Today we serve a large number of issuers in the cryptocurrency market and actively work with issuers in Canada, Germany, Luxembourg, Australia and Singapore.

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