beyond the past Over the past decade, blockchain-based digital assets like Bitcoin have evolved into a multi-billion dollar asset class, available to individuals and businesses for a variety of purposes.
Although Bitcoin was originally designed as a peer-to-peer payment method, it has significantly evolved into an asset held for investment purposes. This evolution has led to the integration of these blockchain-based assets into the traditional financial services industry, increasing the need to develop regulatory frameworks.
As the asset class matured, custody methods also evolved, and early adopters applied self-custody to their digital assets as custody services were not readily available.
However, as the industry evolved, new business models such as dedicated custodians and hybrid custodians emerged.
The latter is also known as a cryptocurrency or digital asset exchange. By comparison, these digital asset exchanges offer a self-custody alternative and also act as markets where blockchain-based digital assets are traded, similar to stock exchanges such as the JSE.
However, it is important to understand that unlike traditional stock exchanges, which only provide a trading environment with an independent party providing custodial services, these platforms act as custodians and trading venues.
Digital asset exchanges are much like commercial banks where individuals can hold and exchange currencies.
strict regulations
Nevertheless, unlike these exchanges, commercial banks are subject to strict regulations regarding segregation of customer assets, liquidity and capital requirements, and deposit guarantee regimes to protect customers and depositors.
Regulation of the digital asset sector has also begun to evolve as investor demand for exposure to digital assets through regulated investment options has increased. This change reflects a global trend toward tighter regulation of the financial environment.
South Africa followed this change, moving from an unregulated region to a more regulated region. Amid this evolution, there is a growing need for exposure to digital assets through exchange-traded funds (ETFs), which are highly regulated investment vehicles.
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While a major shift away from dedicated or hybrid custodians to regulated ETFs has yet to occur, there is a visible increase in demand for such products, primarily by commercial investors in South Africa and other countries.
Earlier this year, the U.S. Securities and Exchange Commission made a historic decision to grant approval to several Bitcoin spot ETFs. This is not the first approval of its kind in the world, as countries such as Canada, Germany, Brazil, and Australia have already launched similar ETFs that track the spot price of the world's largest cryptocurrency by market capitalization. There is no doubt that it was a turning point. asset class.
When considering these Bitcoin spot ETFs, you need to consider the associated fees, which typically range from 0.25% to 1.5% per year based on assets under management (AUM). While seemingly in line with similar non-Bitcoin ETFs, these fees are relatively high compared to those of the digital asset exchanges that act as custodians. These hybrid custodians often charge a commission or spread of 0.3% to 1.5% on the first trade, with no annual custody fee.
However, for investors making this comparison, AUM fees are important because they cover the operating costs necessary to ensure that the fund operates within a regulated environment and facilitates the production of audited financial statements. It is essential to recognize that you are playing a role. These financial statements are publicly available to current and potential investors, setting ETFs apart from other custodians whose financials remain private due to their corporate structure.
You should also consider how the ETF handles custody of the underlying assets. They often rely on existing dedicated custodians as well as hybrid custodians like Coinbase, which currently serves as the custodian for 80% of Bitcoin spot ETFs authorized in the US. .
Whether you invest in ETFs or hold assets directly on Coinbase, counterparty risk remains relatively constant, highlighting the importance of due diligence. Additionally, commercial banks, not only in South Africa but around the world, are using hybrid custody solutions to disrupt the existing business model of digital asset exchanges, such as the approach taken by UK-based Revolut. We may also see examples of its implementation.
From a South African perspective, holding digital assets through listed ETFs can have tax advantages. The South African Revenue Service does not provide comprehensive and authoritative guidance on classifying the disposal of digital assets as capital or income. But Sars said the onus is on the taxpayer to prove that the asset is actually capital.
tax
It is noteworthy that blockchain-based digital assets such as Bitcoin lack the traditional “fruit and tree” principle that distinguishes between profits, which are essentially capital and income. Therefore, they may qualify for higher tax rates on their income.
However, there can be significant benefits to seeking exposure through a regulated vehicle like the Bitcoin Spot ETF. Section 9C of the South African Income Tax Act applies to listed securities such as the Bitcoin Spot ETF, but does not apply when an individual holds Bitcoin on-chain or through a hybrid custodian of his or hers, such as a digital asset exchange. yeah. Therefore, under Article 9C, if you hold his shares (including the right to participate in a portfolio of collective investment schemes such as ETFs) for a period of more than three years, it will be considered capital in nature. , the following conditions may be met: Situational considerations. This may result in a lower tax rate than if it were effectively treated as income.
Read: Bitcoin: Now just a boring asset class
The question remains as to when South African exchanges like the JSE and the Cape Town Stock Exchange will introduce Bitcoin Spot ETFs. Over the past decade, many fund managers have sought to list these innovative investment vehicles, but both South African platforms have taken a cautious stance and withheld approval.
However, recent global developments, such as the emergence of Bitcoin spot ETFs in various regions such as the US, indicate that the situation is changing. These developments demonstrate growing acceptance and demand for such investment options. This global trend could force the JSE and the Cape Town Stock Exchange to consider approving South Africa's first Bitcoin spot ETF in 2024.
