ETF will bring a revolution to Bitcoin and other cryptocurrencies.

Author: CALVIN SHEN, COINTELEGRAPH; Translator: Song Xue, LianGuai

ETF is more than just talk. The potential of these investment tools has already been realized in markets such as Canada. For example, the Purpose Bitcoin ETF attracted over $400 million in assets under management within just two days of its launch. It is no longer a question of whether cryptocurrency is an asset class.

It’s like the starting gun has been fired, and institutional investors have started to join the race, laying the foundation for a massive shift in the financial landscape, with cryptocurrency ETFs as the starting point.

Cryptocurrency ETFs Trigger Domino Effect

ETFs are a massive business. As of the end of March 2023, BlackRock alone manages around $30 trillion in ETF client assets, covering a range of stocks, bonds, and commodities.

The approval of cryptocurrency ETFs not only demonstrates mainstream acceptance, but it can also drive market maturity, maintain price stability, and promote innovation, thereby creating ETFs for a wider range of digital assets and decentralized finance (DeFi) tokens, similar to how the approval of the first ETF in 1993 gave rise to today’s diverse ETFs.

However, not everyone agrees with the cryptocurrency ETF train. Critics argue that ETFs tied to Bitcoin may be worse than centralized cryptocurrency exchanges. Holders will never be able to take advantage of Bitcoin’s most important feature: the ability to control their funds without trusting anyone.

Cryptocurrency ETFs have the potential to become mainstream like stocks or bonds, hence they may attract diversified investors. But what is the truly disruptive factor? It’s institutional-grade custody.

The competition for cryptocurrency ETFs is driving the development of institutional custody.

It is important to note that not only does custody technology have disruptive potential, but the investor protection standards imposed on licensed custodians are also disruptive. As traditional financial institutions venture into launching cryptocurrency-related trading products in the United States, the demand for institutional custody solutions is skyrocketing. In early August alone, six large asset management companies submitted applications to launch Ethereum futures ETFs for US clients.

BlackRock’s expansion into the cryptocurrency space last year benefited from its partnership with Coinbase, with Coinbase responsible for custodianship of Bitcoin in BlackRock’s ETF and providing market surveillance to reduce fraud and market manipulation.

The cryptocurrency custody market itself is expanding rapidly. According to data from Markets and Markets, the value of the cryptocurrency custody market is estimated to be $223 billion by January 2022, up from $32 billion in January 2019. And it’s not slowing down anytime soon, with a projected compound annual growth rate of 26.7% by 2028.

The complexity and risks associated with a broader range of digital assets require robust custody services. As we transition to custody 3.0, an era characterized by active participation in decentralized economies, these services are evolving to include connectivity with on-chain services and DeFi applications. The key for digital asset custody providers is to offer comprehensive digital asset monetization services within a high-standard operational framework built on existing infrastructure.

In this context, obtaining a fully licensed digital asset custodian becomes a trusted partner that enables financial institutions to integrate digital assets into their business operations securely, scalably, and compliantly.

Regulatory obstacles and victories

Since the market peak at the end of 2021, the crypto industry has experienced a harsh period, but the flurry of crypto ETF filings submitted by Wall Street giants suggests that this corner of the market is gaining attention.

Regulation remains the biggest obstacle in the United States. For years, multiple fund companies have attempted to get crypto ETFs approved but have been rejected due to concerns about fraud and market manipulation.

However, regulatory progress is not all gloomy. Outside the United States, we see a global trend of establishing clearer regulatory frameworks for digital assets. This domino effect of regulation paves the way for the creation of strategic digital asset hubs in places like Singapore, Hong Kong, the United Arab Emirates, and Europe. The implementation of these frameworks will not only accommodate the growth and diversity of the cryptocurrency market but also enhance transparency and investor protection, benefiting the industry and its participants. As these frameworks gain strength, they are laying the foundation for investment tools like crypto ETFs, further stimulating institutional demand.

With Hong Kong recently launching retail cryptocurrency trading through licensed exchanges, we will soon see Asia’s first physical cryptocurrency ETF.

Gradually, then suddenly

The domino effect triggered by crypto ETFs is not just a transition; it is a revolution. It is an imminent transformation that will redefine the financial landscape. It is not just about money. It relates to the potential of building a more inclusive, transparent, and efficient financial system and paving the way for broader market access.

Therefore, the question is not whether to embrace the crypto revolution to stay ahead but how to do it effectively, or else there is a risk of being left behind. The dominoes are falling. It is time to take action.

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