Digital Assets - A Growing Force

Author: Philip Hanan, Research Executive

Editor: Tavisha Jain, Research Director

SEC approves Ethereum ETPs and ETFs  

On May 23, 2024, the US Securities and Exchange Commission (SEC) approved the combined proposals from Nasdaq, NYSE, and CBOE exchanges to allow the sale of Ethereum Exchange-Traded Products (ETPs) and spot Ether Exchange-Traded Funds (ETFs) from companies like BlackRock, VanEck, and Fidelity in the United States. ETPs are pooled investments that trade on stock exchanges while ETFs are an example of ETPs.  Trading of Ether ETPs and ETFs have not yet commenced; ETF issues still need approval for the investment products to launch on the aforementioned exchanges.   

This decision follows the SEC’s watershed approval of Bitcoin ETFs and ETPs earlier this year. Following intense court debates regarding the soundness and security of crypto-linked investment products, the SEC could finally guarantee sufficient surveillance to detect and deter fraud and manipulation. These are critical in maintaining apt investor protection and market integrity. Outside of the United States, cryptocurrency ETFs are also traded on regulated financial markets in Europe, Asia, and Australia.  

  

Investors’ Growing Confidence in Digital Assets   

ETPs and ETFs offer mainstream investors a regulated way to invest and speculate on cryptocurrencies. Unsurprisingly, both retail and institutional investors have seemed to respond positively to the emerging asset class. At the end of March, Morgan Stanley had roughly $270 million worth of Grayscale’s Bitcoin ETF from its clients. In April, Bitcoin ETF’s cumulative trading volumes surpassed $200 billion. Recently, international bank Standard Chartered announced that their trading desk is preparing to enter the spot crypto trading market.   

Ultimately, these decisions manifest the growing confidence in the digital assets market—a significant step for an industry slowly but surely integrating into the existing fabric of traditional financial markets.   

  

A Place for Digital Assets in Our Economies: Stablecoins and CBDCs  

With that said, the SEC’s approval of spot cryptocurrency ETFs is just one example of the changing regulatory landscape surrounding cryptocurrency. Countries worldwide are tightening digital asset regulation in all aspects. Close to home, the Monetary Authority of Singapore recently introduced new crypto regulations delineating guidelines for digital asset custody.  

Furthermore, some economic authorities are even considering digital assets as a means to promote greater financial inclusion and achieve greater economic efficiencies. A prime example is the use of stablecoins for payments. Stablecoins are a type of digital asset minted on the blockchain with value pegged to a stable asset such as fiat currency. Advantages of using stablecoins for payments over traditional payment services like Mastercard include faster real-time settlements, no jurisdiction restrictions to facilitate cross-border payments and lower costs.   

Even governments are experimenting with a special type of stablecoin called Central Bank Digital Currencies (CBDCs), essentially a form of digital currency issued by a country’s central bank. Central banks hope that CBDCs can address the existing financial system's inefficiencies and shortcomings. CBDCs are already in use in Nigeria, the Bahamas, and Jamaica, and are in development or being piloted in countries around the world.   

  

Potential Hurdles to Be Overcome  

Nonetheless, while the economic upside of the digital assets industry seems boundless, there are still a long list of questions that go beyond the pre-existing issues surrounding digital assets. If cryptocurrencies and stablecoins continue to grow in use, regulators are concerned that it could 'replace’ the country’s local currencies, thus leading to the inability for the government to conduct effective monetary policy. Such a scenario mirrors instances in which foreign currencies like the US Dollar replace the local currency with a failed financial system. Moreover, a potential broader digital financial system cannot benefit from modern safeguards during times of distress.   

There is no doubt that the digital assets industry will continue to grow. The onus is on regulators to ensure the asset class is sound for both retail and institutional use.   

 

References

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Braun, H. (2024, May 17). Morgan Stanley Latest Bank to disclose Spot Bitcoin ETF Holdings for clients. CoinDesk Latest Headlines RSS. https://www.coindesk.com/business/2024/05/17/morgan-stanley-latest-bank-to-disclose-spot-bitcoin-etf-holdings-for-clients/  

Catalini, C., de Gortari, A., & Shah, N. (2022). Some simple economics of stablecoins. Annual Review of Financial Economics, 14(1), 117–135. https://doi.org/10.1146/annurev-financial-111621-101151  

Elinson, S., & Kher, P. (2023, May). How institutions are investing in Digital assets. EY. https://www.ey.com/en_us/insights/financial-services/how-institutions-are-investing-in-digital-assets  

Hayes, A. (2024). Exchange-traded product (ETP) vs. Exchange-Traded Fund (ETF): What’s the difference? Investopedia. https://www.investopedia.com/etp-vs-etf-what-is-the-difference-8557256#:~:text=Exchange%2Dtraded%20products%20(ETPs)%20are%20accessible%20investments%20offering%20diversification,exchange%20throughout%20the%20trading%20day.  

Jackson, L. (2024). Bitcoin ETF launches on Australia’s Main Stock Exchange . Reuters. https://www.reuters.com/markets/bitcoin-etf-launches-australias-main-stock-exchange-first-time-2024-06-20/  

Jafar, B. (2024, June). Standard Chartered to start Spot Bitcoin, ether trading from ... Financial News. https://www.fnlondon.com/articles/standard-chartered-to-start-spot-bitcoin-ether-trading-from-london-a1812ca7  

KPMG. (2022). Crypto and Digital assets: Regulatory challenges. https://kpmg.com/us/en/articles/2022/ten-key-regulatory-challenges-2022-crypto-digital-assets.html  

Lang, H., & McGee, S. (2024, May). US SEC approves exchange applications to list spot Ether ETFs. Reuters. https://www.reuters.com/technology/us-sec-approves-exchange-applications-list-spot-ether-etfs-2024-05-23/  

MAS. (2024, April). MAS Expands Scope of Regulated Payment Services; Introduces User Protection Requirements for Digital Payment Token Service Providers. Monetary Authority of Singapore. https://www.mas.gov.sg/news/media-releases/2024/mas-expands-scope-of-regulated-payment-services  

Sen, V. (2024, April). $200 billion: US Bitcoin spot ETFs top $200 billion in trading volume. Nasdaq. https://www.nasdaq.com/articles/$200-billion:-us-bitcoin-spot-etfs-top-$200-billion-in-trading-volume  

Waliczek, S., & Nili, C. (2024, February). CBDCs come in two forms: Retail and wholesale. What’s the difference? World Economic Forum. https://www.weforum.org/agenda/2024/02/wholesale-retail-cbdcs-difference/  

World Economic Forum. (2021). What Is the Value Proposition of Stablecoins for Financial Inclusion? 

Market Matters, 2024 June EditionNUS Economics SocietySEC, ethereum, ETPs, ETFs, digital assetsComment