21Shares’ US dollar yield exchange-traded product (ETP) faced a dilemma within its first month and briefly stopped generating income last week as its issuer halted lending activity.
The 21Shares USD ETP (USDY) aims to lend out USD in exchange for counterparties posting at least 110% collateral made up of USD Coin.
The firm suggested USDY might help investors attempting to deal with the high-inflation environment after more than a decade of historically low-interest rates.
Unfortunately, this use case faced question marks last week as its 5% target yield swung to -0.3% as 21Shares decided to temporarily halt lending activities.
Following the move, the issuer temporarily waived the product’s fees.
Speaking to ETF Stream last week, 21Shares co-founder and president Ophelia Synder said: “Crypto markets have been extraordinarily volatile over the past few weeks and as markets fluctuate, so do loans.
“The extent to which USDY lends assets is a function of demand for loans as well as market conditions and risk.
“USDY has the ability to modulate risk by reducing lending activity during periods in which the risk/return of available loans is less attractive – like we are seeing in today’s environment.”
Snyder added dynamics in crypto lending bear resemblance to traditional finance and when markets recover, there is typically stronger demand for loans, reduced volatility and improving yields.
On Friday, 21Shares confirmed it had redeployed USDY with 150% collateral and 5% yield as “the market is more stable now”.
USDY’s total expense ratio (TER) of 0.30% will resume on Monday, in addition to its entry and exit costs of 0.16% apiece.
The disruption will prompt some to reflect on the risks and opportunities of income generation within digital asset ETPs.
While USDY provides yield on DeFi, other products offer income via staking crypto assets – which are distinct activities.