The rise of bitcoin spot ETFs: A South African perspective

Over the previous decade, blockchain-based digital property like bitcoin have developed right into a multi-billion-dollar asset class, serving people and companies for numerous functions. Initially designed as a peer-to-peer technique of fee, bitcoin has seen a big shift in the direction of being an asset held for funding functions.

This evolution prompted the mixing of those blockchain-based property into the normal monetary companies business, driving the necessity to develop a regulatory framework.

Learn: Is it higher to personal bitcoin shares than bitcoin itself?

Because the asset class matured, custody strategies additionally developed, with early adopters making use of self-custody to their digital asset holdings as a result of custodial companies weren’t available.

Nonetheless, new enterprise fashions emerged because the business developed, together with devoted and hybrid custodians. The latter are also called cryptocurrency or digital asset exchanges. These digital asset exchanges present a substitute for self-custody that additionally function a market the place blockchain-based digital property are traded equally to inventory exchanges such because the Johannesburg Inventory Alternate (JSE).

It’s essential to know that these platforms act as custodians and buying and selling venues – not like conventional inventory exchanges, which solely present a buying and selling setting with impartial events providing custody companies.

Digital asset exchanges bear a more in-depth resemblance to business banks, the place people can maintain and trade currencies. However, not like these exchanges, business banks are topic to strict rules relating to buyer asset segregation, liquidity and capital necessities, and deposit assure schemes to guard purchasers and depositors.

Rules

As investor demand for publicity to digital property by means of regulated funding choices elevated, digital asset sector rules started to evolve. This modification displays a worldwide pattern in the direction of extra regulated monetary environments.

South Africa has adopted this shift, transferring from a regulation-free zone to a extra regulated panorama.

Amid this evolution, a rising want emerged for publicity to digital property through exchange-traded funds (ETFs), that are closely regulated funding automobiles.

Whereas there has but to be a large departure from devoted or hybrid custodians in the direction of regulated ETFs, there was a discernible uptick in demand for such merchandise, pushed primarily by business buyers in South Africa and numerous different international locations.

Earlier this 12 months, the US Securities and Alternate Fee made a historic resolution by granting approval to a number of bitcoin spot ETFs.

Learn:

This approval wasn’t the primary of its form on the earth, with international locations like Canada, Germany, Brazil, and Australia having already launched comparable ETFs linked to the spot value of the world’s largest cryptocurrency by market capitalisation – but it surely was undeniably a watershed second for the asset class.

Charges

When contemplating these bitcoin spot ETFs, one should take into account the related charges, which usually vary from 0.25% to 1.5% every year based mostly on property below administration (AUM).

Whereas seemingly according to comparable non-bitcoin ETFs, these charges are comparatively excessive in comparison with these of digital asset exchanges that act as custodians. These hybrid custodians typically cost between 0.3% and 1.5% as a payment or unfold for preliminary transactions with out an annual custody payment.

Nonetheless, it’s important for buyers performing this comparability to recognise that the AUM payment performs a vital position, protecting the operational prices needed to make sure that the fund operates inside a regulated setting and facilitating the manufacturing of audited monetary statements.

These monetary statements are made publicly obtainable to present and potential buyers, setting ETFs aside from different custodians whose monetary affairs stay non-public on account of their company construction.

Custody

One additionally wants to think about how ETFs deal with custody of the underlying property. They typically depend on present devoted but in addition hybrid custodians, like Coinbase, which presently serves as a custodian to 80% of the authorized bitcoin spot ETFs within the US.

Whether or not investing in ETFs or holding property immediately with Coinbase, counterparty danger stays comparatively constant, emphasising the significance of due diligence.

We may witness cases the place business banks, each in SA and globally, introduce hybrid custody options into their present enterprise fashions to disrupt the enterprise fashions of digital asset exchanges, just like the method taken by UK-based fintech firm Revolut.

Tax classification

The South African Income Service (Sars) has not offered complete, authoritative steerage on classifying digital asset disposals as capital or earnings.

Sars has, nonetheless, said that the onus is on the taxpayer to show that the asset is in reality capital in nature.

Learn: Crypto tax classification – capital features or earnings?

It’s value noting that blockchain-based digital property, reminiscent of bitcoin, lack the normal ‘fruit and tree’ precept that sometimes differentiates between features which are capital and earnings in nature. Due to this fact, they might probably fall into the upper taxable charges of earnings.

Tax benefit

From a South African perspective, holding digital property by means of a listed ETF affords doable tax benefits.

There might, nonetheless, be a big benefit to searching for publicity by means of a regulated car like a bitcoin spot ETF.

Part 9C of the South African Earnings Tax Act will apply to listed securities reminiscent of a bitcoin spot ETF however not cases the place people maintain bitcoin on-chain or by means of a hybrid-custodian reminiscent of a digital asset trade.

Consequently, below Part 9C, when you maintain your fairness share (which features a participatory curiosity in a portfolio of a collective funding scheme in securities reminiscent of an ETF) for a interval exceeding three years, it could be deemed capital in nature, topic to circumstantial consideration.

This might lead to a decrease tax fee in comparison with when it’s deemed earnings in nature.

The query stays when South African exchanges just like the JSE and the Cape City Inventory Alternate will introduce bitcoin spot ETFs.

Up to now decade, many fund managers sought to listing these modern funding automobiles, however each South African platforms exercised warning and held again on approvals.

Nonetheless, current world developments, together with the emergence of bitcoin spot ETFs in numerous jurisdictions just like the US, sign a shift within the panorama. These developments showcase the growing acceptance and demand for such funding choices. This world pattern might compel the South African inventory exchanges to noticeably take into account approving the primary bitcoin spot ETFs in South Africa in 2024.

Wiehann Olivier is a accomplice and fintech and digital asset lead at Mazars in South Africa.