“With a commitment in a structured product, specifically a tracker certificate, one does not invest directly in the cryptocurrency but follows the price movements like a shadow. Investment risk depends on price losses and creditworthiness of the issuer (default risk). However, the investor must remain vigilant. Just because he has purchased a tracker certificate from a bank, it doesn’t mean that it’s iron-clad. Should the price of his cryptocurrency crash or even disappear from the market, there is, of course, a total default risk here as well.”
Jürgen Kob and Paweł Sobotkowski
We want to sincerely thank Lucas Ereth and GenTwo Digital for contributing this chapter. Lucas is a managing member of GenTwo Digital (https://www.g2d.io).
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This chapter features a sneak peek into the life of the Managing Partner of GENTWO Digital and Forbes DACH 30 Under 30, Lucas A. Ereth.
- What does your business do?
To put it simply, we’re securitization experts working to bridge the gap between traditional finance and the emerging crypto market. While our parent company GENTWO creates securities for all asset classes, GENTWO Digital specializes in the securitization of digital assets. In other words, we convert digital assets, like cryptocurrencies, into structured products. These products are then outfitted with an International Securities Identification Number (or ISIN, for short) ‒ the de facto standard for securities trading internationally ‒ which ensures that the product is “infrastructure compatible” with every bank and large scale/institutional investor.
In doing so, we turn a digital asset into something that is bankable and manageable within traditional investment portfolios inside the global banking system. Why would we do that? Well, large private and institutional investors were having quite a bit of trouble accessing the market for digital assets due to different aspects of the traditional functional framework. So, we set out to provide a service that would make crypto assets accessible for qualified investors from around the world via GENTWO and GENTWO Digital.
- How are tokens different from structured products?
Structured products are flexible investment instruments that offer an attractive alternative to direct financial investments (such as stocks, bonds, currencies, etc.). Thanks to their flexibility, structured products allow for the creation of investment solutions that are suitable for different risk profiles and market expectations, even in demanding market environments. New, next-generation structured products can now be utilized to give access to a myriad of digital assets.
Tokens, on the other hand, are digital assets themselves, and are not necessarily considered financial instruments. Both structured products and tokens can be used for similar purposes, but the two are not the same thing. Tokens also live on the blockchain, while structured products are financial products that live in the banking system, and asset managers, banks, and professional investors use them in their daily lives to get access to assets and markets.
- What are advantages of securitization vs. tokenization?
I think that within today’s investment landscape, one could make use of both, as they are each tailored to different purposes and clientele.
A token offering, for instance, is limited to investors that can handle the complexity of crypto wallets. At this stage, most crypto wallets are best suited for retail investors that usually invest in small ticket sizes. With the help of securitization services (this is where we come into the picture), you can now take a crypto portfolio or a portion of any token and convert it into a traditional financial structured product. This “real” security is now suddenly made available to banks, family offices, pension funds, high-net-worth individuals etc. So, big investors who generally do not make use of digital wallets are, thus, granted the opportunity to actively participate within the crypto market.
- What makes securitization attractive to traditional market participants?
Institutional investors can invest in new assets with their proven and compatible form of investment. Structured products are investment instruments that are very familiar to traditional market participants. So, institutional investors can finance a crypto venture, and serve as a strong, key member of the project supporters’ community, all while using the same daily financial instruments that they are already used to. This is a wonderful example of how structured products and tokens complement each other. At GENTWO, we firmly believe that this setup will not only grant access to but actively attract investors of the highest caliber. We’re essentially allowing the investor to choose which format he or she prefers: a fully digital asset that lives on the blockchain and in a digital wallet or a traditional investment certificate (structured product) that lives in your bank account and represents a digital asset. Securities are issued through a tailor-made and segregated issuance vehicle that is unique and stays off of a client’s balance sheet. With this design, the so-called issuer risk is (by default) eliminated.
- As someone who works with many structured products on a daily basis, what would you personally invest in?
I personally currently hold 27 different coins and tokens in my crypto portfolio. If I were to create my own structured product, I would most probably turn my portfolio into a so-called Actively Managed Certificate (a structured product with an actively managed strategy behind it) and make it available for qualified investors. This is actually one of our most common use cases at GENTWO Digital – traditional or crypto asset managers who utilize us to turn their strategy into an investable asset. Our platform provides the tools to facilitate the process from start to finish, from converting the AMC into a Swiss-compliant security to getting a Swiss ISIN. All within 5 to 15 business days.
Just to be clear, this is my personal view; cryptocurrencies are highly volatile, and it’s important to remember that while there are attractive return opportunities, you have to be willing to expose yourself to high risk and the chance of losing your principal if you choose to embrace crypto investments.
- What is the biggest opportunity for entrepreneurs who want to make a successful business in the crypto space?
Today’s digital world is quite literally at our fingertips. I would encourage entrepreneurs to try to look into the future and play around with connecting the dots between what is present and what is possible. Making use of and/or sometimes just breaking up and reshuffling certain dots can make all the difference.
I also think that making crypto-based services or applications so accessible that an individual user does not even realize that he or she is interacting with a blockchain-powered product or service still remains the biggest challenge for mass adoption, and therein lies the biggest potential for entrepreneurs within the crypto space.
- What should entrepreneurs be aware of?
As always, everything starts with a good business case, a business plan, and a good execution strategy ‒ I’d say that applies regardless of whether or not you throw blockchain into the mix. Once you’ve laid that foundation, you now need to evaluate how to use and leverage blockchain technology for your specific case. Also, and I can’t stress this enough, ask yourself if it even makes sense, because in most cases blockchain alone probably won’t be the sole, magic ingredient that will ensure your business’ success.
- What is the biggest threat to the crypto space?
I would say a lack of understanding and public disinterest. If people fail to recognize or acknowledge the benefits, value and possibilities of cryptocurrencies, Bitcoin and the like will eventually die out as the hype and fanfare of even the starkest supporters begins to wane.
- Where do you expect the sector to be at the end of 2020?
It looks as though 2020 is set to be the year where blockchain technology may (for the first time) reach billions of people at once, as big tech firms like Facebook become active participants within the space. I think this will mark the real start of the Internet 2.0, with the potential to usher in an era of trust and digitized value. Decentralized services will definitely help shape the future development of this planet.