ETC Group enjoys one of the most successful launches with its crypto products
Last June saw the launch of a new bitcoin ETP from new issuers ETC Group, working through the HANetf white label platform. That ETP, the BTCetc Physical Bitcoin Exchange Traded Crypto, plus its two crypto siblings, one based on ether and the other on litecoin, have now raised USD1.5 billion in capital, making the arrival of this fledgling firm one of the most successful ever.
ETC’s CEO, Bradley Duke’s background was in a fortuitous combination of financial services and fintech and he had worked in New York, Paris and London.
“I am a tech nerd,” he says. “I am interested in technology and the technology side of the business including algo trading and blockchain.”
Duke (pictured) did the six-week Blockchain Strategy course at Oxford University’s Said Business School and had been investing privately in cryptos for quite a few years.
“Cryptocurrencies as an alternative to the global banking system, as it exists today, fascinate me,” he says. “This vision of what they are trying to achieve, the democratisation and social upliftment elements, are not just pie in the sky but of practical use in countries where the currency has been devalued or the banking system is broken.”
Duke started to consider securitising bitcoin. “The thinking was that at some point people are going to want to invest in this properly,” he says, and with his background as a broker working with the buyside, he sat down with the other founders, Tim Bevan and Maximillian Monteleone to design a product that the institutional investment community could use.
The team looked at the existing offerings in the crypto space, including the US’s Grayscale trust version, and CoinShares’ XBT Provider ETN.
“We thought we could do a better job in terms of making something that would appeal to the institutional investor so we set about making something that could trade on a major exchange with a good liquidity profile but could also track the underlying asset closely,” he says.
“We wanted people to get in and out with no holding periods in the same way as a regular ETF, but realised that, in Europe, an ETF wasn’t technically possible because of the diversity rules.”
The result was that they used the ETC structure with added enhancements, designed to build in investor security such as an independent trustee and administrator, who has veto rights over any transactions.
The team then met up with the European white labelling firm HANetf and that first launch happened.
“We had expectations for what we hoped for after the first year, and knew that Grayscale had lots of assets, and felt that our product was better, but we didn’t expect it to grow as quickly as it did,” Duke says.
Reasons for its popularity lie, he believes, in the fact that it was the first centrally cleared product. “I know that some institutional investors are not interested in trading something that is bilaterally settled and there was not another crypto product that was centrally cleared,” he says. Also, there was inbuilt security in the product, with a bankruptcy remote structure that meant that if they stopped trading, all assets are protected.
“I am super happy about that,” Duke says. “Our ETP is never, at any moment, unbacked, and we don’t issue out the ETP until we have the bitcoin safely in custody.”
Support for the crypto products come from four authorised participants who are all in tier one jurisdictions and regulated to the highest standards, Duke explains.
Bitcoin is limited to just 21 million coins in total, with 18.6 million already in circulation today. “It’s basic supply and demand,” Duke says. “Limited supply is why this product is moving up so fast, because unlike gold, you can’t pull any more out of the ground – it's a scarce asset.”
More ether can be issued, but litecoin is similar to bitcoin with a total of 84 million available of which just 66.7 million are currently in circulation.
“Cryptocurrencies have more relevance to investors especially because of the quantitative easing and funding of stimulus packages which are inflationary. It makes sense to put some of the portfolio in an asset which is as hard as bitcoin and out of the normal world of central bank economics,” Duke says.
The firm has a number of other products on the books, he says, with innovative structures.
The ETC products are aimed at a global audience so the UK’s regulatory restrictions for retail investors have not proved an issue for the firm. Investors are coming from all around Europe and the rest of the world and in the main are institutional. “Lots of people want exposure to this phenomenon,” he says.
For its part, when asked for a comment on the banning of cryptocurrency ETPs for retail investors in the UK, ETF Express was referred to the FCA’s original statement, issued last October. At the time, Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA, said: “This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.
“Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.”