The futures contracts offer direct exposure to the price of Bitcoin with three distinct advantages. First, it is fully backed by Bitcoin as the ETN is a paper claim into a certain number of Bitcoins. Secondly, it is secure; the underlying securities are in custody with Clearstream Banking, and BitGo. Finally, there is complete regulatory clarity. The underlying ETN and the future are regulated instruments traded on a regulated market, said Randolf Roth, member of the Eurex executive board.
A crypto world first
In November, the Eurex Bitcoin ETN Futures won Most Innovative Contract of the Year at the FOW International Awards 2021. Randolf Roth, member of the Eurex Executive Board, tells FOW how the contract was developed, its usage and its benefits over holding physical bitcoin.
Eurex Bitcoin ETN Futures provide the first regulated European market in Bitcoin-related derivatives, giving the advantages of Bitcoin in the safety of a future. The euro-denominated contract lets participants trade Bitcoin performance like any other Eurex product, providing access to Eurex's trusted trading, clearing, and settlement infrastructure with none of the additional operational burdens typically imposed by cryptocurrency.
In their citations, the FOW judging panel acknowledged the achievement as a world first and emphasized the outstanding innovation required to create exposure to cryptocurrency in a traditional regulated product.
Can you explain how the futures contract provides exposure to Bitcoin?
The contract is based on the BTC/ETC Exchange Traded Note (ETN) introduced on XETRA in June 2020 and has since become the one of the most traded crypto ETP. The underlying Bitcoin ETN (equivalent to 1/1000th of a Bitcoin at launch) is fully backed by, and redeemable in, Bitcoin. As a result, the price of the ETN closely tracks the Bitcoin/Euro exchange rate and avoids the cost of carry created by ETPs that create their performance using futures. The futures contract settles into the ETN, which in turn can be redeemed in Bitcoin. This way, the product bridges the gap between the cryptocurrency markets and traditional financial infrastructure.
The futures contracts offer direct exposure to the price of Bitcoin – the cryptocurrency with the highest market capitalization – with three distinct advantages. First, it is fully backed by Bitcoin as the ETN is a paper claim into a certain number of Bitcoins. Secondly, it is secure; the underlying securities are in custody with Clearstream Banking, and BitGo, a professional institutional crypto custodian, manages the Bitcoin that backs the security. With BitGo, there are multiple safeguards protecting against hacking, loss, or damage. Finally, there is complete regulatory clarity. The underlying ETN and the future are regulated instruments traded on a regulated market. Therefore, customers do not need to leave the regulated infrastructure of financial institutions in Europe.
With which parties has the contract proven popular so far?
So far, the increase in trading volume in cryptocurrencies has been driven by trading firms and retail clients. To date, in our contract, we have seen most trading occurring between trading firms, arbitraging between contracts offered in different formats on other venues, such as Kraken, Coinbase, ICE or Binance in Asia. Increasingly, though, as open interest builds, we will start to see activity from the buy-side. This group will include institutional investors looking to adopt the product as more and more consider exposure to the asset class within their portfolios.
Why might institutional investors be wary of holding Bitcoin and does the Eurex Bitcoin ETN Future address their concerns?
Holding cryptocurrencies provides several specific operational and compliance problems for institutional investors. The first concern is hardware. A retail investor losing their device and passwords and with it, any manner of recovering their cryptocurrency is one thing. But for a large pension fund to do the same would be far more severe. To properly warehouse cryptocurrencies, these investors require a technical infrastructure that protects against loss or theft. This includes data and hardware stored across numerous distributed venues ensuring that safekeeping is robust to events such as a fire in a building that destroys crucial hardware.
There are also legal and compliance factors to consider. For instance, who is authorized to access the wallets and who has authority to buy and sell tokens? So, you need a completely new compliance rule book that governs the handling of cryptocurrency tokens. In the case of Eurex Bitcoin ETN futures, clients need not worry about any of these issues. There is no wallet to keep, no choices to make about custody and no security protocols to establish and maintain.
How do customers trade the contract?
We have worked hard on simplifying access, making it the same as any other Eurex contract. Operationally, the contract falls within the traditional Eurex trading infrastructure. So, it requires no special clearing relationship or new account – everything sits within a client’s existing Eurex connection. This feature distinguishes it from other venues where accounts must be opened specific to cryptocurrencies. And of course, it is very different to trade cryptocurrencies themselves, which requires not just a wallet to hold tokens but also accounts for every exchange where you want to trade them for fiat currencies.
The Eurex Bitcoin ETN future is traded long or short through a central electronic order book or off-market through bilateral price agreements and entered in the clearing system using trade-entry services. The financing costs are favorable because the underlying is a paper asset and not a cryptocurrency. The gap between the futures price and underlying is not as high as many similar products offered on other exchanges. Anyone with an account with Deutsche Börse can buy the Bitcoin ETN and sell the ETN future, gaining access to the carry of the instrument. This option is not available when a contract is offered on physical Bitcoin.
Customers can also be completely confident when it comes to regulatory compliance. The future and the underlying note are fully regulated, and customers trade them on a fully regulated futures exchange.
Describe the regulatory scrutiny that the contract underwent
Even though this contract was a look-alike instrument to many we already offer, we had intense discussions with the regulators on the path to approval. The exchange regulator needed assurance of the regulated nature of the underlying. They wanted reassurance that the price discovery mechanism was adequate and that the close surveillance of our trading activities also applies to the new product. Meanwhile, the clearinghouse regulator needed to be satisfied we were eligible to clear the underlying as part of our clearinghouse authorization.
This article was first published on globalinvestorgroup.com
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