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Deutsche Börse will add a bitcoin-based exchange product to the listing - will it become an alternative to ETF?

By Artur89 | Arthur Crypto 2020 | 17 Jun 2020


The British company ETC Group at the end of June will conduct a listing of a new exchange product (Exchange Traded Product, ETP), tied to bitcoin, on the German exchange Deutsche Börse. The product is registered as debt paper and is an attempt to circumvent the restrictions of regulators on the launch of Bitcoin ETF. In this way, it will open up access to digital assets to traditional regulated financial markets. How will the new product be arranged, how much crypto-ETP is in demand, and whether to wait for ETF approval this year - DeCenter figured out.

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How Bitcoin Exchange Traded Crypto from Deutsche Börse will be arranged

Deutsche Börse Group is one of the largest exchanges in the world, organizing the work of several securities markets. It includes the Frankfurt Stock Exchange, the Eurex Exchange and many subsidiary financial companies. Deutsche Börse is known for its friendly attitude towards blockchain and cryptocurrencies: it has been building its own blockchain platform for securities and an ecosystem for tokenized assets for several years.

The official name of the new exchange tool is Bitcoin Exchange Traded Crypto (BTCE), which can be translated as "Bitcoin, a traded cryptocurrency." The name is assigned to the product by analogy with “traded commodity exchange” (ETC).

BTCE will be hosted on XETRA's Deutsche Börse-owned electronic trading platform and will be the first crypto product launched on it. Distribution of the asset will be realized through the British platform of exchange products for European investors HANetf, which will assume the role of a central counterparty. This tool is often used on the European derivatives market - it will protect users from default by the other party to the transaction.

HANetf is a regulated platform, which means investors can be sure that all bidders passed a strict KYC / AML test. The press release also emphasized that the BTCE issuer has partnerships with major global liquidity providers. The listing of the asset occurs after the Federal Financial Supervisory Authority (BaFin) approves the BTCE project, which in March this year officially recognized cryptocurrencies as a financial instrument.

BTCE will be tied to bitcoin and fully secured by a digital asset in a 1: 1 ratio. A total of 21 billion BTCE will be released. Each of them will provide the holder with a right of ownership of 0.001 MTC less commissions. Thus, the maximum amount of BTCE will correspond to 21 million BTC - that is, to all possible coins. Bitcoins will be stored in the cold storage of the regulated custodial service BitGo. Strict KYC / AML service standards ensure that there are no “dirty assets” among coins.

BTCE will be available to traders from Germany, the UK, Italy and Austria. It is assumed that buying BTCE is an easier way to invest in cryptocurrency than buying a digital asset directly. Unlike investing directly in bitcoin, the user does not need to understand the technical issues of the functioning of the cryptocurrency: its purchase, storage, key management and other points.

In addition, you can buy and sell ETC as ordinary stocks or other exchange products: through your usual broker, a bank that has access to XETRA, or through authorized bidders. According to the creators of BTCE, this will help break down the barriers for regulated market participants to access digital assets.

How BTCE differs from ETF

The press release and issue documentation emphasized that the proposed hybrid product - trading in the MTC through ETP - although similar in structure to exchange traded funds (Exchange Traded Fund, ETF), but differs from them.

ETF is a traded Bitcoin based index fund. In fact, this is a set of securities - having bought a share of the fund, the user, as it were, becomes the owner of this set. In the traditional market, this is one of the most popular passive investment tools. In the crypto world, an ETF would be a way to exchange an exchange product for digital assets. But so far not a single issuing company has been able to obtain permission from regulators to launch them.

BTCE performs the same functions as an ETF, but it is structured as debt securities and not as equity. The documentation states that BTCEs are “perpetual secured uncoordinated structural bonds”. Structuring BTCE as a security is most likely an attempt to circumvent regulatory restrictions on ETF issuance.

At the same time, the total cost factor (TER) for ETP - management and storage costs - 2% per year. For traditional ETFs, management typically takes from 0.5 to 0.7%. The “premium” BTCE, apparently, is explained by the fact that the introduction of such a product into regulated markets is not an easy task.

How the crypto-ETP market works

BTCE, of course, is not the only similar product on the market. There are several ETF issuers that also offer ETP for cryptocurrencies.

The first such product based on bitcoin in 2015 launched the XBT Provider at Nasdaq Stockholm. In 2017, he added support for indexed bonds on the air, and in 2018 - on bitcoin.

Since 2018, the Swiss fintech startup Amun AG has issued over ten crypto-ETPs on the major Swiss exchange SIX: based on BTC, ETH, XRP, XTZ, BNB, the top 5 index and the top 10 coins, among others. In February 2019, the company received permission from the Financial Markets Authority of Switzerland (FINMA) to sell ETP to private customers in Europe. At the end of January this year, Amun AG added the first inverse bitcoin-ETP to SIX, which allows it to earn on falling prices of the underlying asset.

And in February, Germany’s major stock exchange, Börse Stuttgart, also added the inverse Bitcoin ETP from Amun AG to the exchange. The company has stated high demand for cryptocurrency exchange products and plans to launch ETP on several other European exchanges by the end of the year.

Another company, WisdomTree, launched BTCW (WisdomTree Bitcoin ETP) on six Swiss exchanges last December. The company was the first of the ETF issuers to enter the crypto space. The total cost coefficient (TER) is 0.95%, which makes the product the cheapest crypto-ETP on the market.

Alexis Marinof, head of WisdomTree, commenting on the launch of the product, said that the company “saw enough to believe that digital assets, such as bitcoin, are not a passing trend and can play a role in investment portfolios ... We see many parallels between cryptocurrency space and commodity goods ”. The company believes that “Bitcoin is here to stay” and “the crypto industry has huge potential.”

The Swiss jurisdiction for listing crypto-ETP was not chosen by companies by chance - it is in this country that the most favorable regulatory requirements for cryptocurrencies are compared with the rest of Europe. However, Switzerland is not the only country with ETP-enabled cryptocurrencies.

In April this year, the Nordic Growth Market, the Swedish subsidiary of the second largest German exchange, the Stuttgart Group, launched ETPs based on XRP and Litecoin. Last May, Bitcoin-ETP was launched in Toronto, Canada. At the same time, the sale of this exchange product to American investors is prohibited.

When to wait for ETF to start and if market tool

Many professional investors are still wary of investing directly in digital assets. For them, a bitcoin-based financial instrument that allows you to make money on it, but without directly interacting with the asset, is a great way out.

The fact that such tools are in demand confirms the success of the Grayscale Investments Bitcoin Trust: it acquired every third mined Bitcoin in the spring of 2020 and reported a record investment attraction from institutional institutions. The demand for fund shares is so high that they are stably trading at a premium to the price of the underlying asset.

The issue of launching Bitcoin ETF has been relevant for several years. Several ways have appeared on the market to exchange an exchange product for digital assets, but there is no fully-fledged regulated ETF. The US Securities and Exchange Commission (SEC) filed dozens of applications for its opening from different companies, but the agency rejected them all. Among the reasons for the refusal are: lack of regulation in the crypto market, manipulation of asset prices, legal difficulties with liquidity, custody and arbitration, inconsistency with SEC rules.

In February 2019, SEC chairman Jay Clayton told a CNBC interview that the main reasons for the Commission’s refusal to approve Bitcoin ETFs are the lack of a regulated custodian that can provide an adequate level of storage, as well as unregulated exchanges that manipulate market prices. The crypto community hoped that the adjustable custodian from Bakkt, launched in September last year, would solve the problem. However, this did not change the position of the Commission.

So, in February this year, the SEC, after reconsideration, again rejected the request to launch the Bitcoin ETF, this time filed by Wilshire Phoenix and NYSE Arca Inc. The arguments of the SEC are the same: the applicants did not create the necessary conditions to effectively counter manipulation. Therefore, ETFs can only be launched after stakeholders can provide reasonably strong evidence that the instruments are safe for institutional investors. The SEC's next refusal of ETF approval leaves little chance that the tool will be launched this year.

Most likely, one of the companies applying to the SEC will eventually be able to ensure compliance with all regulatory mechanisms, and the Commission will finally approve the crypto ETF. But it seems that the community is not really waiting for the launch of this tool. A regulated market and infrastructure for institutions is developing without them: more and more custodial services are launched, companies are fighting for the role of the prime prime broker of the industry, and the volume of institutional investments is growing. Crypto brokers have already brought to the market reliable ways to buy bitcoins for institutional.

Nevertheless, the launch of regulated crypto ETFs can still be great news, embodying the development of financial instruments of institutional players in the cryptocurrency market, as well as increase bitcoin liquidity, reducing the possibilities for manipulation. But this will not turn the market up and lift it to the moon, as previously expected.

 

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