Electronic board at Sao Paulo’s stock exchange
Hashdex already has another ETF listed in Brazil: the $350m Hashdex Nasdaq Crypto Index ETF © AFP via Getty Images

The world’s first exchange traded fund dedicated to decentralised finance networks is due to launch in Brazil next month, deepening the $10tn ETF industry’s foray into virtual assets.

The move will allow investors to track a basket of projects betting on decentralised finance, trading and lending networks whose standards are automated and often decided by consensus.

The fund, called the Hashdex DeFi Index ETF, marks a departure for an industry that hitherto has encompassed funds investing in listed crypto businesses, or popular cryptocurrencies such as bitcoin and ether — where permitted by regulators. It will list on the Brazilian stock exchange on February 17.

“By offering the first DeFi ETF in the world, we are providing our global investors with the ability to play a part in the next evolution of the crypto ecosystem,” said Marcelo Sampaio, chief executive of Hashdex, a Brazilian crypto asset manager.

Decentralised finance aims to do away with a centralised intermediary — like a bank or an exchange — to provide financial services such as lending and trading through an algorithm. Supporters say it offers greater transparency, resistance to censorship and faster settlement times than traditional finance.

It was one of the fastest-growing areas of the crypto asset industry although interest has cooled in the past two months as crypto prices have fallen. Decentralised applications (Dapps) hold about $107bn of customers’ funds, down from a November peak of $180bn, according to data from DappRadar.

The Hashdex DeFi Index ETF will invest in the tokens developed by Dapps, networks built on blockchain technology and use preprogrammed algorithms to execute cryptocurrency trades. Dapp tokens can be traded on other crypto markets but also allow owners to vote on governance proposals and developments for the network.

The ETF will invest in eight Dapps, as well as related service providers such as oracles, which gather data on asset prices from the outside world and send it to a blockchain or distributed ledger.

The Dapps it has targeted include Uniswap, used to exchange cryptocurrencies and tokens; lender Aave; Polygon, a service designed to speed up transactions on blockchains; and Chainlink, an oracle. The ETF will track the CF DeFi Composite Index-Brazil.

The launch highlights a divide between global financial centres that have thus far permitted little innovation in the growing field of digital assets, and relatively laissez-faire secondary financial hubs.

While Canada, Sweden, Germany, Switzerland, Jersey and Liechtenstein all boast spot cryptocurrency ETPs, and Australia and India are poised to join them, US regulators have only approved futures-based versions, while those in the UK, Hong Kong and Singapore have not even permitted these vehicles.

Not everyone is convinced by the more liberal approach, however.

“This strikes me as an artefact of a race to the bottom with respect to crypto asset regulation in general and the regulation of registered funds that invest in such assets more generally,” Ben Johnson, director of global ETF research at Morningstar, said of the Hashdex fund.

A rival issuer described the ETF as “cool”, but said it was “more iterative, rather than highly innovative”, building on the network of crypto basket exchange traded products already available.

Bruno Sousa, head of global operations at Hashdex, said Dapp tokens are “structurally very different” from cryptocurrencies. Many use the ethereum blockchain, which can hold financial assets and allows programmers to code functions for buying and selling into smart contracts. That allows them to be used for lending, insurance, trading and staking assets.

“These are similar to start-ups. They have solutions for given sections of the market. If they do well they will grow, if they don’t they will diminish and the token will dwindle in value,” Sousa said.

Formed in 2018, Hashdex at present has one ETF in Brazil, the $350m Hashdex Nasdaq Crypto Index ETF (HASH11), which it claims is the largest crypto basket ETF in the world, attracting investors ranging from retail to macro hedge funds. It also runs a similar US-based private fund in conjunction with Victory Capital.

Hashdex hopes to launch similar products elsewhere but is reliant on the speed of regulatory change. “Other places are moving with different rhythms. Given the current regulatory landscape in the US, there is no clear pathway for a spot ETF,” said Sousa.

“Our expectation, in general, is that the regulators will become ever more comfortable with structures like this and acknowledge that this is a way to buy into the market that the regulator can see and touch, and can engage with the issuers,” he said.

In the meantime, launching in Brazil gives Hashdex “the ability to test new products and see how the public react”.

DEFI11 will charge an annual fee of 1.3 per cent, high for an ETF but competitive for digital asset funds, particularly multi-asset baskets.

With smaller market capitalisations than cryptocurrencies such as bitcoin and ether, the underlying tokens may be even more volatile. Amid a global market sell-off, the CF DeFi Composite Index-Brazil has fallen 44 per cent since its launch on December 1 last year.

“That is a consequence of assets that are seen as risk assets in general, from stocks to crypto,” Sousa said. “Crypto does respond to the regular market. Over longer periods there is less correlation but in times of high stress, that does affect investors [as] they will have hands in different pots.

“This is normal. A 40 per cent dip is something that happens with some frequency in crypto, but what happens is that it continues to grow,” Sousa argued.

“Look at this with intellectual humility. This is a phenomenon that is based on a technological advance that is massive. This is a major advance like the internet in the 1990s.”

Additional reporting by Philip Stafford

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