The story behind building Europe’s largest digital asset investment house

Jean-Marie Mognetti, CoinShares

Europe’s first and largest digital asset investment house, with over USD4.5 billion in assets, listed on the Swedish Nasdaq (ticker CS.ST) earlier this month, seeing shares up 33 per cent in the first day of trading.

CoinShares’ CEO, Jean-Marie Mognetti (pictured), says: “We are the first company in our industry to go through a traditional listing process from start to finish, not through a SPAC or a reverse takeover, which we believe is encouraging for our peers and for the growing acceptance of our industry amongst more traditional financial services companies.”

Mognetti explains that CoinShares started life as Global Advisors in New York and London back in 1998 with two partners, Daniel Masters and Russell Newton before moving to Jersey in 2008. Masters had had a lengthy career in the oil industry, and was a former global head of energy trading at JP Morgan. The pair ran this commodity investment firm until early 2013 when global macro investors began moving out of commodities and into equities and fixed income and were looking for new areas in which to invest.

“We stuck with our DNA of deep value thematic investment,” Mognetti says. “And in that process, we discovered bitcoin.”

“Our first foray into bitcoin was trading it with our personal account by wiring money into a bank in mainland China and hoping we wouldn’t lose all of it. Obviously, this way of accessing bitcoin was not a viable proposition for normal investors so we saw an opportunity to build a regulated investment vehicle, GABI (Global Advisors Bitcoin), that would remove some of the counterparty risk of the structure and allow investors to obtain pure exposure to the bitcoin thematic.”

The CoinShares name came in 2016, and the Global Advisors product, GABI, closed in early 2018 when the CME launched a cash-settled bitcoin futures product aimed towards institutional investors and industry participants alike.

“Our bitcoin fund, which was listed in Jersey on the Channel Islands’ stock exchange, didn’t allow us to express the market view we had. Regulatory requirements made it challenging to evolve our investment mandate as quickly as the digital asset market was evolving,” Mognetti explains.

The next product was XBT Provider, which came through the acquisition of a Swedish company in 2016, offering tracker certificates on Nasdaq Sweden.

“This was the first Delta 1 product which investors could buy on a Stock Exchange via their traditional broker, and XBT Provider made bitcoin accessible as an investment to a very broad group of investors, from retail to institutional.”

XBT started with USD10 million in assets and currently has USD4.5 billion. XBT issues Exchange Traded Notes (ETNs) that track Bitcoin and Ethereum, denominated in SEK and EUR. The products are registered under the European Prospectus Regulation in Sweden and listed on NASDAQ Nordic First North segment and Boerse Stuttgart. 

The ETNs are synthetically replicated, via a collateral management arrangement with an affiliate, who then must hedge the exposure created by the ETNs with a minimum of 75 per cent of physical digital currency and no more than 25 per cent in futures, other derivatives or cash. The assets backing the ETNs can be viewed in real time, thanks to a partnership with Armanino LLP, which CoinShares claims as an industry first, allowing investors to independently verify the products they hold are fully collateralised with the underlying. 

The second platform which is part of the CoinShares group is the CoinShares Digital Securities, a Jersey domiciled issuer with approximately USD400 million in assets. This entity issues ETPs that track Bitcoin, Ethereum and Litecoin. These are physically backed, can only be created and redeemed by delivery of the underlying digital asset and, like ETPs on other commodities such as gold, have a trustee and security deed structure, designed to make them bankruptcy remote and to mitigate credit risk. The ETPs are listed on the SIX Swiss Exchange ETP segment.

Mognetti says: “We realised that if we wanted to go to the next level, we needed to adjust the way our product structure worked and recruit an expert team to help us build that business.” 

The result was the arrival last year of ETF veterans Frank Spiteri, Townsend Lansing, and James Butterfill.

“The elegance is that all the products are very simple to invest in,” Mognetti says. “You just click and invest, but the legal wrapper behind them is very complicated.”

Clients come from across Europe at the moment, obviously ex-UK since the FCA’s retail ban, with a big support from the Nordics and Germany.

Investors in cryptocurrencies are driven by two things, Mognetti believes. A concern that central banks are printing money without thought of the future, and the investors’ desire to express a lack of trust in natural or fiat currencies.

“There is a low correlation to the rest of the investment classes,” he says, adding that there is a Schumpeterian recurring cycle within cryptocurrencies as innovation replaces the previous innovation in a self-fulfilling prophecy.

“The narrative around bitcoin continues to evolve as the macro climate continues to shift,” Mognetti says. “Our team at CoinShares also continues to evolve and build for the future as the digital asset space evolves beyond bitcoin and becomes more financialised and more connected to capital markets. Interest in the space is growing and there is still a clear lack of understanding from investors on how to buy digital assets in a secure, trusted manner.

“Our team at CoinShares is focused on enhancing trust and transparency in our products, our brand, our people, our policy frameworks, and the industry overall. Our listing adds a further level of transparency, and offers investors and analysts alike an opportunity to delve more deeply into our business model, our financials, and our operations.”

Next on CoinShares’ journey through the digital assets space is to expand its presence in new markets, enabling global coverage in all markets. Since bitcoin is borderless and without jurisdiction, it is important for CoinShares to be where its clients are, Mognetti says.

In addition to being CoinShares’ CEO, Mognetti runs the capital markets division for the firm. “We have a well-developed capital markets desk which helped with providing the liquidity for the products and was a spin-out of our hedge fund business, where we built extensive electronic trading infrastructure to support our prop book” Mognetti says.

“It is a digital asset focused activity which allows us to trade digital assets on traditional exchanges, acting as a liquidity provider for CME futures and options in bitcoin and Ethereum plus other listed products. We are active on every single meaningful and compliant market place 365 days a year.”

The firm also has a growing investment arm, under Meltem Demirors who is the Chief Strategy Officer, and is also in charge of the growth initiative and infrastructure developments within the digital asset sector.

Lastly, the firm has also been active in building new ventures, such as Komainu, an institutional-grade digital asset custodian that is a joint venture with Nomura and Ledger. 

“We realised early on that if we wanted our ETP and asset management business to grow, we needed to build and own infrastructure that supported our unique needs,” Mognetti says. 

“Over the last seven years, the CoinShares business has really grown and evolved as we built solutions to very specific problems, and now, we have the ability to build not only in the digital asset space, but to connect our world with traditional markets.”

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