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Exchange Traded Crypto – Crypto without the cryptic?

How investors gain digital asset exposure while trading on traditional stock exchanges. An Interview with Maximilian Monteleone, Co-founder & Head of Products (CPO) at ETC Group

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Today, Bitcoin and Co. has become a popular investment among private as well as professional investors and is often considered as potential means of diversification in a balanced portfolio. For institutional investors the questions around the “if” and “why” regarding an investment in digital assets have given way to the questions of “when” and “how”. 

As relates to the “how” question, no viable alternative existed until recently when it comes to buying cryptocurrencies through a crypto exchange and storing them in a “digital wallet”. This fact proved to be a knock-out criterion for institutional investors, who, when it comes to trading and custody of their investments, are restricted by their mandates and internal policies, as well as external regulation. 

With the emergence of exchange traded crypto products, which structurally are very similar to e.g., physical gold backed exchange traded commodities , this asset class is being made accessible as an investment to a broader range of private as well as institutional investors through traditional regulated stock exchanges. 

We spoke with Maximilian Monteleone, Co-founder & Head of Products (CPO) at ETC Group about Bitcoin, exchange traded crypto and the developments in the market.
 

ETC Group were the first to launch a centrally cleared Bitcoin exchange traded crypto product (ETC) in June 2020 on Deutsche Börse XETRA, Europe's largest ETF trading venue. Since then, the company has continued to expand its suite of ETC products and is with around $1.86 bn in AuM  Europe’s leading provider of exchange traded digital asset-backed securities.

 

Mr. Monteleone: ETC Group was created to serve the increasing demand in the market for investments in digital assets. We realized that the interest and demand from investors was only going to increase in the future and that investors would want to invest in this asset class through traditional channels at some point. With this in mind, we focused on institutional-grade structure as well as the highest level of quality and investor protection while designing our products. 
 

In this context, I would like to highlight two features in particular. First, that investors hold the digital assets in what is known as an institutional grade “cold storage custody” with a regulated custodian. “Cold storage” means that the digital assets are kept offline in bank class physical vaults at the custodian’s secure facilities. With dedicated insurance in place this is currently the most secure method to store digital assets.
 

And secondly, that our Exchange Traded Crypto products (ETCs) can be redeemed for the underlying cryptocurrency.

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What is „Exchange Traded Crypto”?

Exchange Traded Crypto, or ETC, is a simple and seamless way to invest in digital assets through a traditional stock exchange. The product class enables any investor to efficiently participate in the growth of digital assets while using secure, institutional-grade products traded on major stock exchanges, just like stocks or ETFs. 

Simply put, Bitcoin and other digital assets now have an ISIN number .
 

From a technical point of view, crypto-ETCs are very similar to the popular physical gold exchange traded commodities, but instead of a certain amount of gold, each ETC unit is backed by a predefined amount of cryptocurrency. Therefore, the price of the underlying asset is closely tracked on exchange.

 

So how do investors access Exchange Traded Crypto?

Just like buying a stock such as Amazon, Apple, Tesla, or any ETF, investors can search for the ticker  or ISIN on their online trading platform or bank, purchase e.g., Bitcoin ETC and add it to their existing stock portfolio. The shares are securely held in one’s own securities account like any other security and there is no need for a so-called digital wallet.


What is the difference between crypto ETCs and direct investments in bitcoin and other cryptocurrencies?

Many investors want to invest through the traditional financial markets they also use for their stock or ETF portfolios and are simply not clear about security or regulatory standards of online crypto platforms and exchanges.
 

In addition, fees on traditional stock exchanges are very transparent. Investors face product management fees in a similar fashion to ETF annual fees and trading spreads can be as low as 0,05% for entering and exiting a position.
 

Furthermore, digital asset custody and safekeeping is a hot topic. While some investors do not want to engage with the challenges of setting up their own cryptocurrency wallet, others have been rattled in the past by reports of wallet hacks, forgotten or lost passwords, as well as hacks and fraud targeting cryptocurrency exchanges. Crypto-ETCs therefore offer a straightforward and safe alternative, as the underlying crypto assets are deposited with a specialized and regulated custodian.

And why is there no Bitcoin ETF in Europe?

Bitcoin ETCs would actually be referred to as ETFs in other markets, for instance Canada. The difference is that the European UCITS  financial regulation imposes a framework around minimum diversification criteria that prohibits European ETFs from investing in single-asset benchmarks or individual physical underlying.

However, looking at it from a structural perspective, the ETC methodology is very similar, and apart from the “F” in ETF the product mechanics do not really differ much. Both types of products are set up to be bankruptcy remote, open-ended and trade the same way on the stock exchange. Bankruptcy remote in this context means, that even if the issuer ceases to exist, thanks to an independent trustee holding security interest over the assets at the independent custodian, the assets are safe, and not affected by the issuer going bankrupt, and the issuer itself has no substantial claim over the assets.

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How do ETCs differ from cryptocurrencies stored directly in one’s own wallet for institutional investors from a legal perspective?

Many institutional investors are not allowed to buy or hold Bitcoin, due to restrictions imposed by their regulatory authority, or their investment mandate.
 

Often, Bitcoin and other digital asset holdings might not qualify to be accepted as part of regulatory capital required by the regulator for various reasons, for example due to Bitcoin not having a recognized closing price on the stock exchange, thus not allowing to mark to market such holdings. Bitcoin held through ETC securities traded on a stock exchange such as XETRA are therefore better positioned to qualify as regulatory capital than direct Bitcoin holdings.
 

Finally, as previously mentioned, the trustee structure around ETC products is set up for the benefit of investors, which means that conventional securities investor protection mechanisms that we know from regulated markets do apply.
 

What do you foresee as the medium to long term development in the market?

I believe that in just a bit over a decade, bitcoin and other digital assets have altered the way we think about finance and financial institutions, governments and businesses are increasingly accepting digital assets as more than just an experiment.
 

Digital assets now facilitate real-world transactions every day and some of the world’s leading payment companies are accepting digital currencies as means of payment, including VISA, Paypal, Square and Venmo.
 

We are seeing a trend across the world of wealth platforms and financial advisors adopting this new asset class. This is reflected by increasing institutional investment in the asset class supported by investment banks and brokers expanding research capabilities in the technology and regulatory entities expanding legal frameworks and regulatory oversight.
 

Mr. Monteleone thank you very much for the interview.

It’s my pleasure. Thank you as well.

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Digital assets like Bitcoin and Co. have proven over the past few years that they are more than just a passing trend. They are here to stay. The asset class is experiencing continuously increasing interest from private and institutional investors and can now also be traded on traditional and regulated securities exchanges. Any serious investor can no longer categorically exclude them in their investment decisions and must at least consider them.

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