Commentators believe that exchange-traded funds may be crypto’s most direct way into traditional financial markets. Syed Rahman assess the situation.
Opinion is growing that exchange-traded funds (ETFs) are what will lead to widespread adoption of cryptocurrencies by the mainstream financial markets.
ETFs are a form of investment fund that are also bought and sold on stock exchanges. They offer a greater level of diversification than the traditional practice of owning an individual stock, as they can include assets ranging from stocks, bonds, currencies and futures contracts through to commodities – and crypto.
According to some commentators, ETFs are looking the most likely way that institutional investors and wealth managers will come to recognise and adopt crypto assets as a legitimate form of wealth.
Forbes magazine has reported that major investment firms are considering launching tokenised ETFs, which are versions of an ETF that exist as tokens on a blockchain, such as Ethereum.
Research by London-based Nickel Digital Asset Management, a leading digital assets hedge fund manager, found that 97% of institutional investors (such as pension funds, insurance asset managers and family offices) and major wealth managers believe the launch of tokenised ETFs will be important for the expansion of crypto. Almost 70% of those surveyed expected an increase in the number of fund managers looking to tokenise investment funds and asset classes in the next three years.
Nickel’s research involved firms in the US, UK, Germany, Switzerland, Singapore, Brazil and the United Arab Emirates. It found increasing understanding of the benefits of tokenisation. This, arguably, reflects the shift in the perception of crypto from being an unreliable, untested asset to something of genuine lasting value. This perception may have been boosted by the likes of BlackRock moving wholeheartedly into tokenised ETFs.
Risk
Adoption of crypto, however, is still not without risk. Any modest individual investor or huge financial institution offering ETFs has to be aware that moving crypto assets is something that criminals have been doing as long as crypto has been in existence.
There is no shortage of reports of crypto being the preferred asset of those carrying out ransomware attacks, fraud and money laundering. The degree of anonymity, at least in the short term, that crypto can offer those looking to commit crime and the ease with which it can be moved between blockchains make it unlikely that the bad actors will move on simply because the asset has become more respectable and popular in the financial mainstream.
Recent years have seen an explosion in blockchain transactions. There is little reason to believe this is likely to slow down, particularly if tokenised ETFs take off in the way many expect.
While there is no reduction in volatility or investment risks when investing through ETFs rather than directly with the underlying asset, it is possible that some consumers may find the ETF space easier to navigate. They may prefer an institution to take care of their cryptocurrency rather than having to hold it themselves. There may also be tax benefits if consumers trade these ETFs in their ISA accounts.
