Structured Products for Digital Assets

Many institutional investors cannot or do not want to invest in digital assets directly. To meet this demand, there are several products that enable participation in price trends without holding onto a private key. These structured products for Digital Assets include Exchange-Traded Notes (ETNs) and other financial products that we will take a closer look at in this article.

Börse Stuttgart, for example, offers several ETNs which mimic the price development of Bitcoin and Ethereum. Another financial instrument that allows investors to participate in price developments are certificates. The certificate from Bank Vontobel with Bitcoin as an underlying is, for instance, available at Börse Stuttgart and Börse Frankfurt.

In addition to structured products, investors can invest in regulated fund products that give exposure to digital assets, such as the alternative investment fund (AIF) offered by Postera Capital in Düsseldorf. The company was founded in 2017 and deals exclusively with crypto assets and blockchain. Postera is the initiator of the Postera Fund — Crypto I, the first regulated crypto fund in Europe. The fund invests directly in crypto assets such as Bitcoin, Ethereum, and Dash. Since its launch in April 2018, the fund’s investment universe has been steadily expanded and currently comprises 15 crypto assets. The portfolio is actively managed, with individual positions being over- or underweighted based on fundamental data, technical analysis, and AI-supported sentiment analysis. The fund is aimed at professional investors and is approved for sale in Germany, Liechtenstein, Great Britain and Switzerland.

Another fund offering an actively managed AIF in the DACHLI region is Immutable Insights’ hedge fund. The hedge fund applies proprietary on-chain-analytics to generate a trading signal for the first BaFin registered Crypto Hedge Fund from Germany — the Blockchainfonds I GmbH & Co. KG for professional investors only. Different from other funds, it does not hold Bitcoin but instead focuses on the underlying value of tokens and the potential of the applications on the Ethereum blockchain. The fund applies a very conservative risk management and aims to achieve superior risk-adjusted returns that are catering to the needs of fiduciary asset managers with a view on the overall portfolio allocation and balanced risk. It also applies its own proprietary anti-money-laundering and compliance detection analyzes, making it as safe and clean as possible to invest in the new asset class. The fund is up 20% year to date.

Crypto-Enabling Structured products for Digital Assets

As already implied in the service offerings above, some banks are also positioning themselves in the Banking-as-a-Service (BaaS) segment. For this purpose, these companies provide the regulatory and technical infrastructure for trading crypto assets. This allows other financial institutions to integrate these products into their existing offerings.

Already embedded as a BaaS platform in the German ecosystem for crypto assets is Berlin-based Solarisbank AG. Its white-label platform for digital banking services is implemented by companies like BSDEX, BISON, and Bitwala. Furthermore, Solarisbank AG founded the subsidiary Solaris Digital Assets GmbH in December 2019 to also provide the technical and regulatory infrastructure
for crypto asset custody.

Another infrastructure provider offering regulatory and technically compliant white-label solutions is the Bankhaus von der Heydt. With its experience in the structuring of financing solutions, Bankhaus von der Heydt now offers a digital platform for the issuance of security tokens, crypto custody, and fiat-on-ramp. The latter enables its B2B and B2B2C clients to trade crypto assets into euros.

Fidor Bank AG, which also provides BaaS, however, offers access to crypto assets for retail and B2B clients alike. Its solution for financial institutions enables trading of Bitcoin against the euro with SEPA transactions. Also, Fidor Bank AG offers corporate bank accounts for crypto exchanges as well as for investors and companies conducting ICOs.

TEN31 Bank, a venture of the fully regulated German WEG Bank AG, works on a bridge for payment processing between digital currencies and the euro. Together with its partner Salamantex, a provider for PoS terminals, consumers will be enabled to pay with, e.g., Bitcoin, while the merchant receives euros. Also, TEN31 partnered with Nimiq enabling its clients to trade crypto assets against the euro by using SEPA bank accounts. Both services are, nevertheless, still subject to regulatory approval.

Another bank actively working on innovative, blockchain-based solutions for the capital market is Bankhaus Scheich. In February 2020, Bankhaus Scheich declared the successful replication of a DAX share as a digital security users of the German crypto phone app within 1.5 years 100,000 + on the blockchain together with Cashlink and Finoa. Now, in August 2020, Bankhaus Scheich announced to offer trading of Bitcoin & Co. to professional investors in cooperation with the German crypto custodian Finoa. The service offering seeks to enable in-custody trading, without exposing clients to transaction and counterparty risks of multiple trading venues.

For the retail segment, several players can also be found. Here, offerings have been available for some years. Nevertheless, it can be assumed that increasing investor protection and more user-friendly products will be beneficial for the retail market in general. Via Germany’s oldest exchange, for instance, retail clients can trade crypto assets in a regulated environment provided by Fidor Bank AG. While provides the peer-to-peer marketplace and the custody of crypto assets, Fidor Bank enables the corresponding SEPA transactions for customers.

Also, BISON, backed by Börse Stuttgart, provides an application that aims at retail clients and offers trading of Bitcoin, Ethereum, Litecoin, and Ripple. As for its institutional counterpart BSDEX, the solution includes the partners Solarisbank AG and blocknox GmbH.

Another player targeting retail clients is Bitwala. In this offering, customers are required to set up a SEPA bank account with Solarisbank AG in order to trade Bitcoin and Ethereum. Also part of this cooperation is BitGo, which is responsible for the management of private keys. Bitwala also offers debit cards to its customers, which can be used by converting crypto assets into euros.

Statistics like the 100,000+ users of the German Crypto Phone App show, that the demand for such financial products is rapidly growing but also that there is a real need for custodial solutions to reach all parts of the financial landscape.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.