12 June 2024
Ian Simpson | 26 min read
One of the biggest developments in the institutional crypto and digital assets space has been the launch of exchange-traded products for investors. The recent launch of spot Bitcoin ETFs in the US was a milestone hailed around the world.
But how do operations work for exchange-traded products (ETPs) and exchange-traded funds (ETFs) – and what is the difference? What changes to crypto markets can be linked to the the growth of these products?
In this episode, RULEMATCH Spot On hosts Isabella Moessler, Global Head of Distribution at 21Shares, a leader in the crypto ETP/ETF space. Isabell has extensive experience in the financial industry from Goldman Sachs, iShares, ETF Securities and Euronext.
Episode show notes:
(00:58) – Intro and the view of a finance veteran
(3:03) – Explaining the difference between ETPs and ETFs
(6:24) – Managing operations for ETPs in a global crypto market
(9:05) – How a new ETP is born
(12:13) – The reason for Switzerland
(14:09) – All about spot Bitcoin ETFs in the US
(18:59) – Market integrity and US Bitcoin ETFs
(21:37) – The implications of a fragmented crypto market
(23:29) – The evolution beyond retail
(25:40) – “Centralization” of custody for ETPs and ETFs
(29:57) – Potential for lending markets
(31:56) – 2nd generation ETPs and ETFs (with tokenization)
(37:05) – Settlement, pre-funding and Delivery vs. Payment
(40:27) – The question of an Ether ETF
(45:41) – Education is (still) key
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Episode transcript:
Isabell:
Maybe one area where also the trading is more expensive than other asset classes is the pre-funding.
So, this is really something where, of course, if I send you the coins, but I haven’t received the shares yet, it could be sort of a counterparty risk, if you will.
But you know this then needs to be priced in. I think here we will see an evolution also towards Delivery versus Payment which is more the norm in for other asset classes.
Also, I think this is where you at RULEMATCH come into play and really facilitate this this next step and how can we make these markets more efficient.
BEGINNING OF FULL EPISODE
Ian:
Hello and welcome to another episode of RULEMATCH Spot On the only podcast dedicated exclusively to the institutional crypto and digital assets industry.
I’m your host Ian Simpson and if you want to know what banks securities firms, hedge funds, asset managers and others are doing in crypto and how they’re doing it, this is the place for you.
My guest today is Isabell Moessler. She is Global Head of Distribution at 21Shares, a pioneer in the ETP and ETF space Isabell started her career at Euronext and ETF Securities as well iShares and it all got started for her back at Goldman Sachs over 20 years ago.
Welcome to RULEMATCH Spot On, Isabell thank you so much.
Isabell:
A pleasure to be here. Thanks for having me.
Nice to have you. So let’s start – just following on your resume a little bit as a veteran of the space and also remembering probably a time when ETFs were also an innovation.
These kinds of products haven’t been around forever. Now things are moving forward and we’re focused on the crypto and digital assets space.
What excites you about how things have developed and how they’re developing right now?
The most exciting thing I think for me and why I also joined 21Shares three years ago is that you really have the advent of a new asset class to really you know be part of that journey very early on and definitely in the crypto ETP space.
You referenced all of my previous roles – sometimes there are many similarities because when I think back to 2005 working at iShares, we were the people in the corner. Nobody really knew what we were doing. What are these ETFs anyway?
I mean fast forward 20 years and here we are and it’s a 12 trillion market. So, you know, it really is little steps. It really is that innovation and especially the innovation that excites me in the crypto space.
Ian:
Let’s just set the stage a little bit. Since we mentioned 21Shares lists ETPs and you mentioned now these things that have come along and your background in ETFs.
Some people have a bit of confusion about these two things. Just define it for us – an exchange-traded product (ETP) an exchange traded fund (ETF). What is the difference; why exactly is there a difference. What’s the point there?
Isabell:
Yeah, we get this question all the time and it doesn’t get any easier um let me explain.
So the reason you have ETFs and these are funds in Europe probably the majority of products they are UCITS funds and adhering to that very specific set of guidelines set out under the UCITS regime, one of which includes a diversification requirement.
In order to be a fund, you need to have the 5/10/40 rule. You need to hit certain levels of diversification.
The problem is when you just have a single underlying and no diversification. This is why anything with a single underlying has to be classified as an ETP or ETC sometimes.
Just to add to the jumble of acronyms. Yeah so you have exchange-traded commodities and this is actually where it started out. So when you look back at the first spot gold ETP or ETC, this structure was introduced in order to facilitate having an exchange-traded instrument on a single underlying.
So this is really the main difference – the legal structure. So ETFs are fund, ETPs ETCs are debt securities.
You have a special purpose vehicle, bankruptcy remote and all of that. But from an investor’s point of view, it’s exactly the same experience.
You trade them the same, our market makers quote them the same. There are the same listing rules and the good thing is a lot of our investors, when we first started out with crypto ETPs, were already familiar and buying products in the commodity space and in the FX space.
So anything in there needs to be an ETP. The big confusion or even more confusion then happened because this is a structure for Europe.
In the US our products, the products we launched at the beginning of the year, the spot Bitcoin ETF is a fund. It can be called “F” ETF in the US…
Ian:
Even with one underlying…
Isabell:
Exactly, because it doesn’t need to adhere to the UCISTS rules and the regime.
But it just really created a lot of confusion which we need to explain. We always need to, of course, be transparent what our products are.
We don’t want to misrepresent our products and say it’s an “F” and then people assume it’s a UCITS fund. It’s UCITS eligible but it’s not a fund, right.
Ian:
Okay, so there is basically as you said no difference in the trading that you do of the underlying – exactly the same settlement.
So from an investor’s experience it’s the same thing. Of course, 21Shares is quite a global company – you have products in many different countries now also the US with the ETFs.
Looking at it from that geographic perspective and also thinking about crypto as a global market – what are some of the considerations that you have to take into account for your operations, for the trading for the underlying, of these different products around the world?
How do you manage that?
Isabell:
Yeah, so here we work very closely with the relevant regulators, with the exchanges as well, where we would like to list. It’s all about education in certain terms, but then also transparency – really demonstrating this is what it is, this is the investment case, this is the risk profile.
I think one of the benefits we have to bring to these conversations is also that we have a track record.
So we have five years of live data. We know exactly how our products have performed through various marco-cycles, big booms and busts and I think that also sets us apart from other issues that are entering this space. Because it’s first of all, it is all we do at 21Shares. And then also the company has grown in this space.
Some of the things, some of the infrastructure we had to build specifically for these products. And in our discussions, whether this is the same in Europe or in the Middle East where we listed on Nasdaq Dubai – or course in the US with the SEC, where it’s been many years in the making.
There’s been many applications by many of our competitors, ourselves. There’s been several rounds of iterations and engagement…
Ian:
With that geographic consideration – and then there’s the other element of a 24/7 market for crypto – is that a challenge for you, thinking again just about your trading operations to support the products?
Isabell:
Yeah, I mean the ETPs or the ETF adhere to normal market hours, they are on the regulated exchanges, of course, you have the underlying just going 247 – but this doesn’t pose any challenges.
Even when you look at the traditional space, sometimes you have discrepancies due to time zones or I don’t know, bank holidays is always a classic one where you have to make sure everything kind of lines up.
It’s actually almost a benefit having such a liquid 24/7 underlying market and then the products provide access via the regulated routes during normal market hours.
Ian:
You have, of course, Bitcoin, Ether and certain products but then also for some tokens that are a little bit more exotic, shall we say, but different, I’m sure you go through a whole evaluation of which ones to list and the liquidity behind those tokens and those different things.
What is that process?
Isabell:
Number one is always liquidity as you mention it because the nature of the ETPs really is daily creation/redemption.
So on a daily basis you need to have access to that liquidity. The first hurdle when we look at new underlyings – we get many ideas internally/externally… Clients come to us and really ask us can you launch an ETP on you know token X.
Ian:
Dogecoin and Shibu Inu.. No, just kidding.
Isabell:
Exactly they would be very liquid, but we haven’t got them.
Ian:
You said it’s often the projects or the protocols that are coming to you I can imagine that is most of the demand. Is there ever kind of the demand from more a financial institution that you want a product around this?
Isabell:
It was actually so the most recent launch was from the investor side. Yeah, but you you’re right many foundations many partners on that side also engage with us and want to launch their own token.
But again, in some cases – not many – but we really are adhering to that process and sometimes we need to give an answer where maybe the other party doesn’t really want to hear it. But it’s like either it is liquidity concerns or could be some mechanics or it could also be because working with the exchanges, they need to approve the underlying as well.
So Euronext or Xetra or SIX here of course in Switzerland – they need to become okay – “Yeah you’re allowed to list.”
So we need to play by the rules there…
Ian:
Excuse me, that’s a nice phrase “playing by the rules”. When it comes to the liquidity is it is it a volume I suppose a volume number that you’re looking at or is it a number of listings across different venues or what is kind of the metric behind the liquidity requirement for something?
Isabell:
We are looking at it from an access point of view. So can you get, say for example we get a big creation and our APs, our Authorized Participants need to deliver us the underlying. So that really is the case.
Where can they source the underlying token?
And that could be various different venues. This is the expertise they have on their side. But it really is sort of the first hurdle: can you get access and then also on the way out.
If we have redemptions, do the opposite of the trade.
Ian:
And not to go down the geographic/competition/jurisdiction “rabbit hole” too much, but obviously you launched in Switzerland – in 2018 is that correct? Was there a particular reason? That was I guess before your time, but maybe you know some of the company history, a particular reason for Switzerland? What was the rationale?
Isabell:
Yeah, so our co-founders Hany and Ophelia, they really traveled the globe to find the right jurisdiction to turn their idea into reality. Many different countries so many discussions with various different regulators on all continents.
Hany always makes the point – it’s like we’ve been on every continent bar Antarctica. So really the due diligence on both parts was immense and then Switzerland became our home because of very forward-looking regulation, very accommodating rules and frameworks, which is something all the institutional players and retail investors said: this is exactly the route we need.
So I really think Switzerland and the approach to crypto and digital assets is really a strong partner. It really has seen the opportunity and has put the foundations in place that many different organizations can build on.
There’s a reason why you have sort of Crypto Valley and you know and this is also – we come to this party as the ETF issuer but then you have custody, you have hedge funds, you have, you know, the whole spectrum.
But because Switzerland has these very transparent rules and is willing to listen and really facilitates the innovation. I think a lot of other jurisdictions look at Switzerland as the leader and then try to replicate – take the best bits.
But everybody has their own approach.
Ian:
So let’s go now to the big news and the topic of the ETFs in the States. We talked a little bit about this back in Davos in January when it was very fresh. Now we’re a few months out and things have gone very well I think across the board, also for 21Shares and ARK.
Again going down a little bit deeper level, we discussed before that these were a bit different products in that they were cash-settled. This was a requirement from the SEC based on their reservations about the spot market or perhaps different considerations.
Just walk us through again – what that means… How that’s different from the other products and maybe we’ll ask a few follow-ups.
Isabell:
Yeah, so the main difference and I mentioned briefly you what happens when we get a creation.
So in Europe cash-creation is possible as well, but the majority of creations will be in kind. So there our Authorized Participants send us the underlying.
In the US as per SEC requirements – slightly different setup is that the creations are in cash.
So the Authorized Participant will send us US dollars and then the trading of fiat versus Bitcoin happens with us. So, it adds an extra step if you will, but of course as I said before because we built the infrastructure just for this specific product area or for this specific underlying, it wasn’t a heavy lift on our side.
It’s something you know you could say well, ”pros and cons” of cash creation, in-kind creation. Probably if you have cash creation counterparties who currently wouldn’t be able to touch crypto because of their infrastructure and their setup, they will be able to engage and be active in this market.
So, it opens up different routes. If you are more on the “contra side” of the cash-versus-in-kind you would say well it’s less efficient and but I I think both works and both are very established concepts in other asset classes.
So like I say it wasn’t something new we encountered and I’m pretty sure all of our competitors were in the same boat, where, okay yeah, we’re familiar with both.
Ian:
And ready to roll with the punches of course. And so, do I understand then correctly from that with the “in-cash” you are doing the trading yourself versus the authorized participants puts a bit more of the trading burden shall we say on you and responsibility on you.
Does that lead to other considerations about risk management and things or not much of a difference?
Isabell:
I mean, there again, the way it’s set up is very efficient. Our primary concern really is the quality of the product that it does exactly what you promise your investors it does.
So as I said it was sort of an extra step we needed to introduce but we have this platform Onyx which is the infrastructure we use for our own products. They have not been used by other participants as well, so because we have that in place it wasn’t that much.
From a risk perspective, of course, we need to ensure this is all done also on a trading perspective in the most efficient way, but this is it – it hasn’t been a a big burden for the products on day one this is, of course.
I think I mentioned that when we spoke last, you can do all of your preparation, but really then, there’s that moment there’s a T-0 when you go live and then everything worked as it should. They trade in huge volumes – all of the spot Bitcoin ETPS at tight spreads. It’s been a phenomenal success. We are very proud. In sort of opposition versus some very big established other asset managers. But…
Ian:
I think they remain nameless..
Isabell:
Exactly.
Ian:
I was going to ask a follow-up, then just on the SEC and the cash-settled side. I’m sure you know, of course, and you were having all kinds of conversations with them. Then they said, “Okay, it has to be cash-settled”…was it some kind of feeling about market integrity in the spot market?
Were you making arguments to them? I know some people were making arguments to the SEC about the integrity of the spot Bitcoin market. How did those conversations go or can you say something about that?
Isabell:
Yeah, I think the SEC’s biggest concern was the unregulated nature of the spot Bitcoin market and, you know, not being able or not being regulated by the SEC or even the CFTC.
But here the good thing was that there many issuers – we spoke with one voice pointing to the commodity ETPs that are in existence. So you have ETPS on spot commodities.
And the spot commodity market is not regulated by either of those regulators either, so you know it was really a case of pointing out this sort of chain of arguments wouldn’t then apply to a huge part of the market.
And I think also of the fact that CME futures on bitcoin have been trading and established and had ETFs launched on these products. The correlation between the futures and the spot market is so strong where I think then – and I can’t speak on behalf of the regulator – but that probably gave some comfort of “Okay, there is an aspect, but we have no concerns on the spot Bitcoin market, on the underlying market.
It’s huge, liquid – you have I don’t know on a daily basis but huge numbers trading – 20 billion in liquidity with various different market participants.
And then we got the green light for these products which was really significant and the assets that have flown into these products – I think is also a strong sign of the pent-up demand that was there. So, from day one you really had inflows.
I think with a few weeks off in April where media says already “Oh is this the end of spot Bitcoin?”
It’s like no, this is how these products work with the exchange traders, inflows/outflows etc.
Ian:
Just double clicking a little bit on the market and market structure and and how they work – kind of “the back end” or “the under the hood” side of things when you’re trading the underlying. The market as we know in crypto has developed in various ways.
It’s fragmented and some people make the comparison to the FX market in some ways. Different venues, different OTC desks or exchanges and, you know, different models: RFQ and and all kinds of different things.
How do you navigate this to support these products for Bitcoin or other assets?
Isabell:
This is where the expertise comes in on our trading side, if we do the trades in-house. But also working closely with our partners in the market, with our Authorized Participants who have expertise. And I would say the ETF or the ETP part of the crypto – of their crypto engagement is only part of the overall trading volume they are active in.
You really see that evolution. Maybe coming back to my very first point. You know this is what I’m excited about because there’s so much innovation. It’s not an established market where it’s like: “Well, this is how it is and end of story.”
You know that there are different, like you said, different venues different ways of trading popping up.
I think also here we get a healthy combination of what is good practice in traditional finance and what can be the innovation, because sometimes not every idea is great, and we always need to sort of do the reality check there.
Ian:
And thinking about how you support that with trading and markets are there some advantages or disadvantages as the market has grown?
Because we know it started very retail and maybe in 2018 it was, of course, market makers there and liquidity was good, but it is changing over time.
Do you see any changes or developments in that side of things?
Isabell:
It’s interesting because I think from my experience for the first time it was really sort of bottom up, retail first.
In many other asset classes or especially in the ETF world, you will see a different path where I don’t know, in thematic ETFs or fixed income it sort of starts with big institutions and then filters down to retail.
Here it was completely the opposite way. We do see changes and I think a lot more institutional players would like to get involved and would like to add these products to their portfolios. And clearer regulation will help.
So here this is really the path because these are big organizations really in the spotlight need to be adhering, of course, to all the rules.
But that’s difficult when the rules are still a work in progress or not really spelled out.
I think in in Europe, MiCA will be a big step in the right direction.
There’s more to come, of course. It’s that work in progress but really something tangible and a tangible result.
And again, coming back to what I mentioned about Switzerland. Here in Switzerland, you see even small pension funds getting or making investments in crypto because they feel comfortable. They understand the risk.
They understand how it fits into their portfolio and they see the benefit of even small allocations in that space. But yeah, it’s gone from retail to institutions.
Ian:
And as an institution, I mean you’re becoming an institution actually with all of these all of these different products and with a clear position in the market.
But you know things are developing more and more. Now you said you maybe didn’t want to say too much about custody, but I would ask the question – since holding these assets for these products is a pretty important thing.
There were a few voices that said even about the ETFs in the States that Coinbase being one of the main custodians or a predominant custodian was a risk – or perhaps a problem.
How do you think about the risk of those things? I mean you said custodians in the plural, right so you work with various…?
Isabell:
Yes, we work with a number of custodians and here it’s a fine balance, because you don’t want to have too many – that would be a huge operational burden.
You also lose some of the economies of scale. But at the same time you also don’t want to put all your eggs in one basket. It’s again here the process we use to ensure that the product development cycle.
Very much part of that is the vetting of our partners we work with and due diligence on both sides. But also, who are you dealing with?
Here we really have found some great partners have found also partners that are willing to innovate with us in terms of new underlyings, in terms of facilitating the staking aspect and playing by the regulatory rules, who have been really present in the markets where we we need their support.
So a lot has happened here as well and I think that that will continue to grow. But it’s super important really if you think back to the end of 2022 and FTX and all of these events in the market.
What our clients wanted to know was really, “Who do you work with? Is my money safe? Where is it in custody? How does that work? How do you ensure nobody runs off with private keys?”
Everything like that and we really made sure clients do know and it gives them comfort that we’re working with the right partners. The processes are robust and in place even during those times where it was a real stress test.
But we can say and proudly say our products were trading. Nothing was halted. The spreads were given the market events still in a range where it was it was reasonable everything worked and that was not because we got lucky but because it’s by design.
This is really where we thought through, and we really put our heads together speaking with people we work with – just to make sure it’s solid.
Ian:
I think it goes without saying then that 21Shares doesn’t custody any assets on exchange, so to say.
Isabell:
No, we don’t no and we work with Coinbase – Coinbase Trust which is removed. Same name..
Ian:
You mentioned the space evolving and the custody space particularly. Do you imagine any big traditional financial players moving into the custody space – the crypto custody space?
Isabell:
Yes, the sort of hurdle of “What is this? Why should we look at it?” – that’s way behind us now.
Many organizations are looking at it and need to also add it to their service offerings. Again because of client demand on a custody side but also on, think of a big organization offering the wealth, the investment banking, the custody space it all needs to work together.
The demand is there so therefore you need to put all the piping in place to facilitate that.
Ian:
And on the back of these ETFs, we talked about this also just a little bit in in Davos but also with the other products. I mean it opens up many other possibilities for lending and for more sophisticated strategies.
How do you see this, and will there be some kind of new lending markets developing?
Because, as people have pointed out, holding this crypto, the underlying that just sits there is a little bit counterintuitive to how financial markets usually think. Everybody wants yield. They want to make money even as assets sit there. What do you see or what could you anticipate?
Isabell:
Here you have to distinguish what are we talking about on the lending front. So either the ETF or the underlying.
Ian:
I’m interested in both.
Isabell:
On the underlying none of our products allow the lending of the underlying. That is for several reasons to ensure the integrity of the product to really ensure when we claim “physically backed/fully collateralized” that needs to be true. If you look at the lending of the of the ETPs of the parts of the product – that will evolve.
It’s a huge market in other asset classes and when you have the critical mass of products out there, it’s interesting. People will get into it.
It’s also, of course, in our interest because it adds to the liquidity – it adds to the utility of these products and different strategies you can put in place using those products.
So here it’s in its nascency, but I think there will be quite a lot of development on that front.
Ian:
We talk about kind of the first spot ETFs in the US, the first ETPs back then here in Switzerland from you. Now a “second-generation ETP” something that’s more sophisticated maybe more like a tokenized structured product or something like this. Is this something that’s that is being explored?
On the back of other kinds of crypto assets, what do you anticipate?
Isabell:
There are solutions and there are these discussions with our clients, because we really don’t want to launch products for just a product’s sake.
Like do you need it and what challenge is this product solving? So yeah, I think there will be products like I said similar to the traditional asset classes, with some capital protection. There are many ideas that could be packaged into the ETP wrapper in the crypto space.
I like it how you call them “second-generation” – that’s great. Where we move away from the sort of plain vanilla to “Okay it’s more ‘results driven’ if you want to call it that.
So I think definitely this is something that will that will happen.
The token part is I think is separate and it’s an interesting development. You see it goes both ways. The ETPs facilitate investment in crypto via the regulated exchanges.
Tokens and of course big buzz word “the real world assets” in token form go the other way really.
You take money market funds and put them into the token wrapper in order to offer them via a different route and it’s exciting to see that because it’s sort of like this is where the the two worlds converge. And both have absolute validity.
It comes down to “What are you trying to do?” How would you like to access these investments?” A money market fund you can buy via the very traditional routes directly with a fund manager. You can go via ETFs. Why not buy it via a token if this is my preferred route?
If I’m very familiar with the crypto space and I do all my trading like that I might not want to go back to stage one. It’s like, “No I want the exposure, but I want it in this form.”
And this is where we have to be really mindful ETPs/ETFs/tokens they’re wrappers. They’re really just the vehicles. What you put in that vehicle is where the innovation happens.
Ian:
…can be interesting. Perhaps also as finance moves forward, where your financial world is on your phone not in the office on Bahnhofstrasse or in the City of London somewhere and you are more used to using something like a Revolut or a Bitpanda or something like this – but you want sophisticated things that then should operate “at the speed of light” and so on and so forth…
Isabell:
Yes, I think it’s really a great development. We will see more of it because as I said, it’s an access route.
And also, who’s your target audience? Who do you speak to? Do you speak to somebody more traditional, and they have their portfolio in place and they’re quite comfortable going to their bank branch or their financial advisor and sit down and go through this?
Or is it somebody who’s just like “I need this now. I don’t want to speak to a person. I want two clicks.” It’s going to be a generational shift.
Where does the demand come from? At 21Shares, this is our our brand for the for the ETF/ETP space. But then also via 21.co, we do have a token business. We’ve launched tokens with partners. We get a lot of questions and a lot of engagement there, where people say, “Okay can you help us with our token strategy?”
One of the first questions we ask is like “Why would you like to tokenize it? What are you trying to achieve? Do you want to access new investors or a different investor group? Do you want to broaden your distribution? Do you want to optimize internal processes which could be available via this route?
But and this is interesting because there are use cases for all of those.
But I think when you look into the token space, you need to be clear like, what are we trying to achieve? Because if you do it because everyone’s doing it, maybe not the best strategy.
Ian:
Exactly. We won’t touch on it too deeply, but there is the topic of settlement and you alluded to it earlier.
Of course, the ETF is settling on one schedule and crypto being what it is with settlement – in different ways and at different stages in crypto markets depending on what counterparties you’re working with.
Is this a challenge? I understand the US they’re moving to T+1 settlement, so is that an adjustment for operations?
Isabell:
No, because it’s 24/7 and we already settle T+1 so that’s fine. Maybe one area where also the trading is more expensive than other asset classes is the pre-funding.
So you really have a case of – and this is on the crypto, the underlying – it is “free of payment.” The Authorized Participant would send us the coins before we issue the shares.
This is really something where, of course, then if I send you the coins, but I haven’t received the shares yet, it could be sort of a counterparty risk, if you will. But you know this then needs to be priced in. I think here we will see an evolution towards Delivery vs. Payment which is more the norm in other asset classes.
Also I think this is where you at RULEMATCH come into play and really facilitate this next step. How can we make these markets more efficient, creating networks creating or networks of participants, which will then help to move away from this “free of payment system.”
But there is work to be done. I’m not saying it’s the most efficient yet. sometimes also on the settlement side it can still be quite manual because you want to ensure it all works in the right channels. So sending a test transaction then this gets all approved and then the actual coins get send the shares get issued.
It’s something we’re working on to optimize our infrastructure, but this is still being worked on. It’s still early days. I can imagine as more and more financial institutions come into the space this this regularity or this certainty and different things will become more and more important.
That will help to drive things, which is a good thing and again helps the the investors’s confidence. And I’m not saying we should replicate everything that happens in equities, but some things are there for a reason – clearing houses and things like that, which of course goes completely against the idea…
Ian:
The crypto ethos..
Isabell:
Exactly, the ethos of decentralization. But I think we can come up with a solution there which would adhere to the decentralized nature but still gives comfort around it.
I think there’s a some very clever brains working on these kinds of ideas.
Ian:
Going back to this second-generation ETF or ETP topic – there is a particular generation in conversations right: an Ether ETF in the US now this has certain regulatory considerations.
But also then this next generation of tech- staking of Ether. I think that is perhaps a challenge for you or for these products.
How do you look at that?
Isabell:
So we we have an two Ether ETFs actually available for the European investors or non-US investors. Here we have both options, so we have one Ether ETP with staking and one without.
The reason why we have both options is that some of our investors right now are not comfortable with it. They can’t assess it. Their compliance and risk departments say “No no.”
But again maybe this is just a case more of education really understanding what is it, what does it do, what’s the extra layer of risk if you will you would be exposed to. This is the biggest staking ETP on with Ether underlying in the European market and this is for investors who really say “No I want the whole package Ethereum, proof-of-stake network. This is the additional benefit, of course, and I would like to benefit from this.”
So here it comes more also on the part of the custodian: can they facilitate it? We do then reinvest the staking award into the product, so it’s not distributed out.
Ian:
Accumulation.
Isabell:
Exactly. So on a daily basis it gets added to the NAV, the Net Asset Value of the fund. So it stays within the fund, but of course it reflects in the performance of the product.
So this is as an investor this is how I benefit from it. We also show on our website what are the staking rewards, but also what is the utilization rate.
What that means is, okay it’s our AETH. This is the product so the Ethereum product is fully collateralized and then we stake the assets which doesn’t mean that they move anywhere, but you get the additional yield from staking.
And we need to ensure – coming back to the daily creation/redemption that there is enough liquidity, because when you stake you lock up your underlying for a certain period of time.
So for example, we don’t stake 100% of the ETH in the product. We do calculate what is sort of a prudent margin. What can we stake in order to benefit the investors from the staking rewards but at the same time also what still gives us the flexibility within the product?
Also this is important for investors to understand. First of all, what is it? how do I benefit? How is it done? And reflected in the product, but then also in case I do want to redeem, is there enough liquidity?
We’ve really spent a lot of time trying to determine that utilization rate, just to avoid any issues on that front.
Ian:
How long has that product been live?
Isabell:
Ethereum was one of the early ones, so actually number one product. Our product was a basket of cryptocurrencies where Ethereum was included. The ticket is HODL. The second one was spot Bitcoin and then spot Ethereum.
It’s been available to trade for many years, back to 2019. Again long track record. Then of course when ETH moved to proof-of-stake in the meantime.
Ian:
That was I’m sure a process to figure out how to make that operate and figure that out…
Isabell:
Yeah, and if you think about it – also again engaging with the regulators
Explaining, what is it? and what does that mean and how we’re going to deal with it going forward, explaining it to clients.
We spend a lot of time on that, but I think again this is where our “crypto nativeness” really helps us, because we know what this is. Sometimes we get the push back from or at the time push back from the regulator: “But does that this is a fork? But shouldn’t you stick with the original chain?
All of those discussions, we are really happy to have and also explain You can show the pros and cons but this is one was interesting.
It really was also for the ETPs some other issuers took some different approaches.
Ian:
Very interesting. Looking into the crystal ball just a little bit and looking forward, I’m sure you are working on many things, most of which you can’t or won’t tell me about, but for our viewers and listeners on the podcast, do you think there is something generally not just with 21Shares but generally in the space happening that probably nobody is talking about, but that we should be paying attention to or that we should be looking out for?
Isabell:
Well that’s a huge claim: “that nobody’s talking about it.”
I’m sure people are talking about it and that’s a good thing. It’s really the differentiation when we say crypto or digital assets. What do we actually mean?
I really think here we need to be very clear. We need to create this understanding and also look at different components within the crypto landscape differently.
Are we talking layer-1 blockchains? Are we talking scaling solutions? Are we talking oracles? Are we talking, I don’t, know decentralized exchanges?
Because at the moment, everything is sort of clumped in and we would never do that in equities. We would never say “Equities.”
No – what is it? Automotive or transportation, financial services? Different nuances, different drivers – completely different animals.
If you look at Lido lending protocol or you know Chainlink – it’s different things. So I think the understanding of what it is and moving away from “This is just crypto” because also it’ll become a lot more relevant in people’s daily lives.
So with our ETPs we only look at it from an investment point of view and participating in the innovation – being able to benefit from the returns in that space. But each of those different areas will affect us – digital identity is always a good example.
So I think more knowledge in that space will then also translate into more demand for different solutions and making them investable.
My favorite or if I had sort of the wish list of where is this going is almost like you have in equities like sector ETPs on different sectors of the crypto ecosystem. So a taxonomy or or kind of an asset manager.
Well, we do have that with the Global Crypto Classification where we really split it up. But then more of an adoption, more of an understanding and then also accordingly we can tailor new products.
Of course, we’re completely mindful that if you’re a big institutional investor, crypto will always remain a smaller percentage of your overall portfolio. So how much time do you need or do you have the luxury to educate yourself in all of these different areas?
Probably not. We’re here to help. But you know we all have just a limited sort of mind space for all of these things.
But like I say because it will come out of the just pure investment space or trading space into usage in our daily lives so I think that evolution will happen.
I have always also said that technology needs to merge into the background. I’m not a programmer – understand the technology a little bit, but we can’t get too hung up about it. And let’s be honest some of the user experience – I’m sure you had the same where you think like this is terrible.
There will be no mainstream adoption of this particular function if I have to click 15 times then wait then, “Oh my God did I use the right address? I still don’t have any confirmation.”
There’s a lot that will change and time will tell.
But we’re only very much at the beginning of the road.
Ian:
I would agree. Isabell, thank you very much for joining RULEMATCH Spot On. It’s been very interesting to speak to you today. I’m sure 21Shares will be doing many more interesting things, so perhaps in the future we’ll welcome you back as a guest or someone else from the team as there are new developments and new things to talk about.
Again thank you very much.
Isabell:
Thank you very much for your time.