Interview: Bosses of Sweden's bitcoin ETF explain their product

David Tuckwell

a man and a woman

CoinShares - through its affiliate XBT Provider - is the world's largest issuer of bitcoin and ether exchange-traded products. But how do they work and what should investors know? We spoke to Laurent Kssis and Ryan Radloff, two of the company's founders, to find out more.

ETF Stream: Your prospectus says your products are "non-equity linked certificate[s] which synthetically track the performance of the price of Bitcoin or Ethereum". So how do they work?

Laurent Kssis: What we're replicating in these products is the price movement of the underlying assets (bitcoin and ether).

In structure, the certificates are definitely non-equity linked derivatives; but in practice - to properly hedge each certificate - when it is issued the representative amount of bitcoin or ether is purchased and stored to "physically back" the certificate. So said differently, even though its categorised as a synthetic product; in actuality we are hedging with bitcoin (or ether) backing for each of the units that we sell on exchange.

Simply put, it is very hard to find proxies in order to hedge the issuance of these certificates, without an actual purchase of the underlying asset, so with this structure we operate similar in function to what an exchange-traded fund does with other products such as gold.

Do you have enough capital to secure your guarantee on the €400 million in total assets across your bitcoin and ether ETPs?

LK: Yes, we absolutely hold the representative amount of bitcoin and ether to support that USD AUM value. And just as an added measure - let me walk you through the guarantee structure and the subsequent level of scrutiny we are under with respect to proper issuance and management of the ETPs.

XBT has a regulatory responsibility to ensure that all its products are deemed as fit and proper. In Sweden, the Swedish FSA (regulators) review and approve all aspects of our product as described in the prospectus. Their focus is on whether or not the structure complies to the rules and regulations for filing any prospectus.

Additionally, as an issuer on the NASDAQ Stockholm, we are subject to ongoing scrutiny from 'NASDAQ Surveillance.' A group whose mandate is specifically to supervise and monitor all the aspects of the issuer and its on-going issuances; a task which includes oversight of all aspects of the structure, including the relationship with the guarantor of the ETPs.

To elaborate a bit more on the idea of a "guarantee." Typically, when a large credit institution such as a bank issues a certificate such as this, the product would simply be backed by the financial assets and liabilities of the parent (holding) bank itself.

In our case, as we are not a credit institution but an ETP issuer, like many independent issuers - to provide a similar assurance to the market of solvency, the guarantee for the note is held by our parent company (who has its own balance sheet). This structure is designed to provide assurance to regulators and certificate holders that in the event of a worst-case scenario - were everyone to 'redeem' the certificate - the issuer would be in the position to fulfill its obligation to the noteholders.

Why did you list in Sweden rather than New York or London?

LK: Sweden has always been forward-thinking in its approach to digital exchange of value. It was one of the first countries to embrace electronic payments; and regulators early on expressed mutual interest with the company on designing a proper structure. So in short - Sweden's culture, the regulatory environment and Nasdaq Stockholm's willingness to collaborate in determining the proper fit made Sweden the appropriate place to begin.

What's the relationship between Global Advisors, the Jersey company guaranteeing the bitcoin ETPs, and XBT Provider, the Swedish issuer of the bitcoin and ether products?

Ryan Radloff: Global Advisors is the penultimate owner of XBT Provider, via ownership of CoinShares. It is also the guarantor of the certificates issued by XBT Provider. Global Advisors group has a documented track record of owning and effectively operating bitcoin vehicles as a regulated manager. CoinShares launched late in 2017, and serves as home to all of our client-facing operations both on the ETP side and in the managed hedge fund side.

Your fees are around 2.5% and spreads around 10%. Are these too high for an ETP?

RR: This is a frontier and emerging asset class which means there are significant costs to properly dealing with the underlying assets and ensuring the integrity of a professional-grade crypto product. As a result of being in a frontier asset class with these higher associated costs, we as an issuer, charge a 2.5% fee for management of the product.

By enabling this easy and secure way to invest in bitcoin and ether we hope to have eliminated the boundaries that earlier prevented individuals and companies from being able to actively invest in these digital assets.

LK: The management fee, we feel, is fair value when you compare it to the US market for the underlying asset. For instance, when buying bitcoin or ether with Coinbase, one would typically be paying what is often a 4% embedded spread to purchase bitcoin outright; regardless of how long you hold the bitcoin. Compare this to our 2.5%, which is annualised, and most people won't even pay all 2.5%, as many will not hold for an entire year; in other words - 2.5% is actually, comparatively low in this environment.

Our average spread for our bitcoin tracker is around 29 basis points. What I think you're referring to is the premium, which can occur at times of high volatility. This is very much within the typical arbitrage channel for an ETP structure such as this - looking at the market, you will see similar products trading at a premium above 10%. So, all in all, I think the product has tracked closely with its underlying asset.

Who's taking this up? Is it hedge funds and institutions, or more retail investors, like young guys taking a punt?

LK: This is a retail product. The major distributors are massive retail brokers, with the largest being in Sweden. From what we can see in terms of the registrar, around 65% of noteholders are retail investors. This suggests most of the owners are retail day traders going in and out of this product because it's easier for them to trade through their broker than through digital exchanges.

Of the other 35% we speculate around 20% are institutions, family or wealth management offices. The rest is more opaque, as we are unable to view beyond the custodian holding the purchased certificates in most cases.

Over the last year, we definitely saw a shift to a more professional audience as a result of some of the initiatives we focused on in 2017; so we are seeing more institutional investors now coming onto it.

Your KID warns your product is for "speculative investors [who] accept the risk of losing some or all of their investment."

LK: In Europe, Mifid II came into force 3 January 2018 and this is the required language for KID's supplied by EU legislation in order to protect retail investors. XBT takes its regulatory responsibilities seriously and as such, the product carries the highest level of risk available to this category. However, it should be noted that this is not unfamiliar to KIDs. As a comparison, and I'm not suggesting that the risk is identical but high yield products or emerging market debts in local currency, their ratings will be similar.

So you'd rate the risk as similar to any other ETN or product with a similar structure?

LK: I would rate its risk profile as similar to those who carry a similar structure, this is however not a leveraged product. In leveraged products, you could potentially lose more than your initial investment. In this product you can only lose up to all your investment.

Thank you for this interview.


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