Holon may shut down retail crypto funds after surprise ASIC trick

“If ASIC had the intention to really sow some fear and put the industry on notice that its position was very hardline, it has probably worked. Anyone looking to work with the regulator on how their digital asset business can be compliant is going to think twice on it now.”

The first real test

Many saw the Holon funds as the first real test of how digital assets might fit under existing financial regulations, with Holon receiving an Australian Financial Services License in May, before launching the three funds in June.

Holon, whose investment manager Heath Behncke will speak at The Australian Financial Review’s Super & Wealth Summit on Tuesday, had hoped a Managed Investment Scheme would not only attract insurance cover that would protect investors, but it would also give financial advisers a way to offer exposure. to digital assets.

But it is this access that ASIC largely took issue with. It outlined in its stop orders that Holon had not properly defined the risks of the funds and that those risks did not match the target market Holon had proposed.

The two parties met for a hearing, where Holon claimed that they had disclosed the risk that assets in the funds could suffer a total loss of value. It also added the provisions of “medium”, “high” and “very high” risk profiles which could comfortably apply within a portfolio allocation of 5 percent.

ASIC focused on volatility

But ASIC has made it clear that volatility in cryptoassets remains its primary concern.

In its letter to Holon, the regulator described digital assets as “highly volatile and complex, making concentrated investments in individual cryptoassets highly risky and speculative.”

“Investors are likely to experience significant price volatility and deep negative returns during periods of price decline,” the regulator said.

ASIC pointed out that the extreme volatility of Bitcoin prices over the past eight years meant that there were four times when annual returns were negative. The price drop was sometimes so severe that the value was eroded by as much as 75 percent between December 2017 and December 2018.

ASIC said these wild swings were incompatible with an investor having a “medium” risk profile, nor a “high” risk profile.

According to ASIC’s definitions, a medium-risk investor can bear up to four negative returns over a 20-year period, and a “high” risk investor can bear up to six negative returns over a 20-year period.

ASIC did not comment over the weekend.

In its application to ASIC, Holon used the templates the Financial Services Council sets up for those wishing to launch investment funds. The templates suggested that a “satellite” allocation should be around 25 percent of a portfolio or less.

Acknowledging the risk inherent in digital assets, Holon changed the definition of “satellite” to be less than 5 percent or less.

“We have never suggested that anyone invest 100 percent of everything they own in one of these funds,” Behncke said.

“The innovation here was to have an insured, regulated product that gave financial advisors a way to integrate digital assets into a broader portfolio strategy.”

Holon admitted there was an error in its filings to ASIC which suggested these funds would be appropriate for retail investors looking to allocate between 75 per cent and 100 per cent of their investable assets, and has amended that point.

Compliance unclear for the industry

But whether Holon has done enough to comply with ASIC’s demands remains unclear, and given ASIC’s new product intervention powers, which can be used regardless of whether there has been a breach of the law, has cut short Holon’s chances of getting insurance for its funds.

Liam Hennessy, solicitor at Gadens in Brisbane, said ASIC’s determination that “any crypto-related business is dealing in anything resembling kryptonite is disturbing”.

“This is a very smart, targeted use of regulation,” Hennessy said. “It is designed for maximum impact and to send a message to the market that anything to do with crypto is very dangerous.”

Despite its tough approach to regulating digital asset businesses, ASIC has published findings showing that 44 per cent of Australians had exposure to digital assets, usually through unregulated exchanges.

Holon’s problems with ASIC are not unique to crypto businesses trying to operate within the existing financial regulation, and in the legislative vacuum regarding digital assets.

“What we know now is that the insurance companies won’t touch us because of these stop orders,” Behkcke said.

“The industry has been looking for direction from the regulator and in recent years it has been quite encouraging, but these orders will keep many other businesses on the sidelines now.”