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Applicability of Money Laundering Regulations

Anti-money laundering provisions must be implemented in the area of digital assets in basically the same way as for fiat money, both at EU/EEA level and in Switzerland. This article will therefore look at the various implementations of these provisions in the countries of the DACH region.


In principle, digital assets are divided into three token categories: payment tokens, asset tokens, and utility tokens. The Swiss Money Laundering Act (Geldwäschereigesetz — GwG) applies to payment tokens, which mainly include cryptocurrencies, such as Bitcoin. Asset tokens and utility tokens, on the other hand, are generally not covered by the scope of the GwG.

Anyone who carries out financial intermediary activities in Switzerland is subject to the GwG. A service provider that keeps payment tokens for their customers is generally regarded as a financial intermediary, and the money laundering regulations thus apply to their activities. The same applies to the trader of payment tokens, who exchanges digital assets into fiat and vice versa for their customers, and to the issuer of payment tokens. The applicability of the GwG in relation to digital assets includes compliance with due diligence obligations such as the identification of the contracting party and the clarification of the asset origin (KYC).


Germany has taken the revision of the 5th EU Anti-Money Laundering Directive as an opportunity to take the EU rules a step further and to fully regulate the “crypto custody business” as a financial service subject to authorization. Since January 1, 2020, “cryptovalues” and the “crypto custody business” are being regulated by the German Banking Act (Kreditwesengesetz — KWG) and are subject to authorization. The crypto custody business entails the custody, management and security of cryptovalues or private keys that serve to hold, store and transfer cryptovalues for others.

For the purposes of this act, cryptovalues are digital representations of a value that has not been issued or guaranteed by any central bank or public body. It does not hold the legal status of a currency or money but is accepted by natural or legal persons as a means of exchange or payment on the basis of an agreement or an actual practice. Furthermore, it serves investment purposes and can be transmitted, stored and traded electronically. In addition to tokens with an exchange and payment function, cryptovalues also include tokens with an investment purpose, e.g., security tokens and asset tokens.

An extension of the number of obligated parties in relation to money laundering regulations applies in particular when it comes to “virtual currencies”. Service providers offering the exchange of virtual currencies into legal tender or other digital assets are subject to money laundering regulations. Also subject to the authorization by the Federal Financial Supervisory Authority (BaFin) are service providers who direct offers from abroad to individuals who are domiciled or habitually resident in Germany using means of distance communication (without physical presence or an intermediary).

BaFin also examines whether a token is a financial instrument in accordance with the Securities Trading Act (Wertpapierhandelsgesetz — WpHG) or the Markets in Financial Instruments Directive (Richtlinie über Märkte für Finanzinstrumente — MiFID II) or a security within the meaning of the Securities Prospectus Act (Wertpapierprospektgesetz — WpPG) or an investment under the Capital Investment Act (Vermögensanlagengesetz — VermAnlG). If this is the case, there are other obligations, such as the prospectus obligation, in addition to the money laundering obligations.


As part of the implementation of the 5th Anti-Money Laundering Directive, the Financial Markets Money Laundering Act (Finanzmarkt-Geldwäschegesetz —FM-GwG) has been adapted amongst other things. The Financial Market Authority Austria (FMA) is the competent authority for the registration and ongoing supervision of service providers in the field of money laundering and terrorist financing in relation to virtual currencies. Unlike Germany, where the definition of cryptovalues also covers asset tokens, the FM-GwG defines the virtual currency as follows: a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically. The following services are covered by the registration obligation:

  • Securing of private keys to keep, store and transfer virtual currencies on behalf of a customer (electronic wallet providers);
  • Exchange of virtual currencies into fiat money and vice versa; the exchange of one or more virtual currencies among themselves;
  • Transfer of virtual currencies;
  • Provision of financial services for the issuance and sale of virtual currencies.

The registration obliges the service provider to comply with the FM-GwG. Compliance with the FM-GwG provisions is verified by the FMA as part of its ongoing supervisory activities.


As an EEA member, Liechtenstein has also implemented the EU Anti-Money Laundering Directive. The Token and TT Service Providers Act (Token- und VT-Dienstleister-Gesetz — TVTG) has been in force since January 1, 2020 and aims to increase legal certainty in regard to blockchains and counter the abuse of digital assets for money laundering or other criminal purposes. The implementing provisions for the 5th EU Anti-Money Laundering Directive are statutory in the Due Diligence Act (SPG) and the Due Diligence Ordinance (SPV). Service providers who, for example, offer the exchange of fiat into virtual assets or vice versa as well as operators of trading platforms for virtual currencies or tokens, and trustees fall within the scope of the provisions. According to article 2(1)(c) TVTG, tokens are considered to be “an information on a TT system that can represent claims or membership rights towards a person, rights in property or other absolute or relative rights or that can be assigned to one or more TT identifiers.” This definition goes further than the term “virtual currency” and covers a large part of the tokens. The registration obligation as well as the due diligence obligations to prevent money laundering and terrorist financing are linked to the service provided in connection to the token and not to the classification of digital assets as payment, asset or utility tokens as such.

ML/TF Risks have to be identified, analysed and ultimately mitigated by service providers or financial institutions. In next week’s article, we will look at how this is done in concrete terms.

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.

Complying with AML Laws for Investments in Digital Assets

The following report by Dr Karin Lorez of Scale Compliance GmbH discusses the two most important directives affecting companies in Europe that deal with digital assets. These include the Financial Action Task Force, originating in France, and the EU’s 5th Money Laundering Directive.

The subject of money laundering is often mentioned in connection with digital assets. The Financial Action Task Force (FATF), is an intergovernmental body that sets international standards worldwide for monitoring money laundering and terrorist financing. As a policy maker, the FATF is committed to national legislative and regulatory reform in the fight against money laundering and terrorist financing. Switzerland, Germany and Austria are among the 39 members18 of the FATF and have agreed to implement the FATF Recommendations. Liechtenstein is a member of MONEYVAL (Committee of Experts on the Evaluation of Anti-Money Laundering Measures), which is also a FATF member. The EU has taken into account the recommendations of the FATF in the 5th EU Anti-Money Laundering Directive, which also has been implemented into national law by the respective EU member states.

The FATF has stated in its definition of “virtual assets”19 that the risk of money laundering and terrorist financing (ML/TF) exists as far as virtual or digital assets are concerned. Countries are expected to identify the risks related to virtual assets and their service providers (virtual asset service providers — VASPs) and apply a risk-based approach to tackling ML/TF risks. The FATF Recommendations include, for example, that a financial institution should execute a know your customer (KYC) check of the customer starting at USD/EUR 1,000. In addition, FATF recommends that the virtual asset provider identifies the sender and recipient of digital assets and sends the information to the recipient or their service provider, as in the case of a bank transfer. This so-called “Travel Rule” causes some service providers anguish, because unlike in the banking world, there is no network and standard for the transmission of such data. The FATF members were asked to implement this recommendation in national law by June 2020.

In addition to the FATF, the EU has found that service providers who switch between virtual currencies and fiat money as well as providers of electronic wallets have not been obliged to report suspicious activities in the past. As part of the 5th EU Anti-Money Laundering Directive20, this has been taken into account and the scope extended to include precisely such (service) providers. With regard to the Travel Rule, the EU regulation is not quite as strict and only stipulates that KYC data should only be transferred to the financial supervisory authorities upon request. The 5th EU Anti-Money Laundering Directive was implemented by the EU Member States on January 1, 2020.

In Switzerland, it was only necessary to slightly amend the existing money laundering regulations based on the new FATF Recommendations, as Swiss regulation provides for a technology-neutral application of the law and the law, therefore, also applies to service providers in the field of digital assets. The recommendation on KYC verification from USD/EUR 1,000 was taken up by FINMA, and it was proposed to reduce the current CHF 5,000 to CHF 1,000. It is envisaged that the reduction of the threshold will come into force in the fourth quarter of 2020. In cases, where uncertainties about the applicability of the law arise in the market, the Swiss Financial Market Supervisory Authority FINMA specifies in communications and guidance the applicability of the provisions in order to provide more clarity.

In general, the provisions of money laundering legislation must be implemented in the same way for digital assets as for fiat money, both at EU/EEA level and in Switzerland.

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.

Bitpanda’s Series A Raised $52 Million

Although cryptocurrency trading is becoming increasingly popular, it is not traditional players from the financial industry that are leading the way in this area, but young companies that have become known as pioneers in their respective sectors. Especially in Austria, there are a number of companies that deserve a special mention.

Although the major banks have not publicly announced products for the digital asset industry, they are experimenting with blockchain technology. Raiffeisen Bank International (RBI) launched a separate blockchain hub, which has the task of analyzing how private and permissioned blockchains can be used to improve processes at the bank. In 2017, RBI joined R3’s global Corda network in order to participate in international developments relating to banking in blockchain. Their current token project REST and the coin project BILLON are being tested internally to understand more about the technology and to potentially implement solutions.

As discussed in the exclusive interview with Raiffeisen in this report, they also invested in the digital asset exchange Bitpanda via the blockchain-focused venture capital firm SpeedInvest. The fintech investment vehicle Speedinvest has a special position in Austria. Not only did they successfully complete three venture capital rounds, the sum of the capital employed reached approximately €190 million in the third round. As a strategic investment, Speedinvest along with RBI and Uniqa, acquired an unknown stake in Bitpanda GmbH in April 2020, propelling even stronger growth for the exchange across Europe.

Founders Paul Klanschek, Eric Demuth, and Christian Trummer
Source: Bitpanda GmbH

Founded in 2014, Coinfinity is a broker and educational center for Bitcoin and blockchain technology based in Graz. They develop products and solutions related to Bitcoin and still operate the first ever Bitcoin machine installed in Austria. In addition, they started Bitcoinbon, which allows people to buy Bitcoins quickly and securely in over 4,000 points of sale in Austria. They also advise decision-makers and offer professional support for entrepreneurs who want to accept Bitcoin as a form of payment. With their branch in Graz, they have successfully established the first Austrian “walk-in office” related to Bitcoin, similar to numerous “Bitcoin embassies” scattered around the world.

They also offer their broker services online for fully verified customers to buy and sell the most popular virtual currencies. At the same time, they personally take care of professional investors and enjoy a high quality processing standard for OTC transactions. They believe that Bitcoin and blockchain technology will change the economy and society significantly in the coming years, and their mission is to make Bitcoin as understandable as possible and to facilitate access to this technology.

Since 2016, ERSTE Group AG has been in partnership with Ripple Labs. They have been investigating how blockchain can be used for the settlement of real-time foreign currency transactions. In addition to their partnership with Ripple Labs, ERSTE conducted one of the first successful placements of a promissory note loan entirely on a private blockchain in 2018. The promissory note was issued by Asfinag, the Austrian motorway administration, and investors invested a total of €20 million. Asfinag was able to successfully sell to three customers: Wiener Städtische Versicherung, Donau-Versicherung, and Hypo Vorarlberg. In 2018, The Austrian Control Bank actually implemented a private blockchain solution notarizing services at federal bond auctions.

This was done to increase the level of data security in the bank. However, no further word on the success of the project or the expansion of the initiative has been communicated. Austrian Post AG, formerly a cooperation partner of BAWAG P.S.K., and Kurant GmbH have been in collaboration since 2019. The now leading European Bitcoin vending machine operator is active in five post office locations across Austria – spanning from Bregenz to Vienna. In terms of inhabitants, Austria has the highest density of machines in the world, which makes buying or selling Bitcoin and altcoins relatively easier. Kurant GmbH has already expanded to Spain, and they plan to further expand to Italy, Greece, and the Netherlands.

“A critical link — perhaps the critical link — in the institutional adoption of Bitcoin is custody. When investors have ready access to regulated custodians whose security and processes they trust, the full potential of this emerging asset class and technology can flourish.”

— Adam White, COO of Bakkt

The aversion to offering digital asset products and services may not be a coincidence. Banks in Austria are supervised by the Financial Market Authority (FMA), and the FMA has not been discreet concerning their negative views on the industry. At the beginning of 2020, the FMA actively contacted all of the banks and inquired as to their involvement in digital assets. They wanted to get an overview of which types of customers, private or companies, are directly or indirectly involved in digital assets. They also reminded the banks of the new requirement for virtual currency service providers to register with the FMA, which has existed since January of 2020. This has translated into extreme caution on the behalf of banks.

Many customers that would like business bank accounts are being turned away if they operate in the digital assets space. Although the general interest of traditional Austrian financial intermediaries has been in the technology of blockchain and not in cryptocurrencies, banks like Raiffeisen International have also engaged in venture capital investments in the blockchain space. Austrians are showing an increasing interest in digital assets, and traditional financial intermediaries must step-up to the business opportunity of offering digital asset products and services. If no Austrian provider can be found, foreign providers will most likely enter the market over the coming years.

Both the market and the technology have developed faster in the field of cryptocurrencies than was the case with state reactions to this phenomenon. However, there are now also regulatory efforts to create a framework that does not hinder innovation, but at the same time is also intended to react to illegal processes in this area. This is the subject we will be looking at in next week’s post.

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.

Actively Managed Structured Products for Professional Investors

Because of different requirements, professional investors can only make limited use of the same financial infrastructure that is used by private investors. A forerunner in this respect is the SEBA Bank AG, but other institutions now also offer products that are relevant for professional investors.

SEBA Bank AG is one of the world’s first banks dedicated to the digital asset industry. In addition to SEBA Bank AG’s banking services, SEBA offers a full range of products including directional exposure via tracker certificates, smart beta certificates on an actively-managed index of cryptocurrencies, and capital protected products. In addition, yield enhancement certificates like the Dual Currency Certificate, with which they started our product campaign in July 2020, are available. The relatively high volatility of Bitcoin deters many investors. Indeed, Bitcoin volatility has run as high as ten times that of equities. By the same token, by selling high volatility, a very attractive target yield can be generated. A yield enhancement product like the SEBA Bank Dual Currency Certificate on BTC/USD does exactly that: By selling a put option on BTC/USD, it harvests the inherent Bitcoin volatility and pays it out as an attractive yield to the product holder.

As digital assets emerge as a new asset class, many professional investors like family offices, HNWIs, and independent wealth managers are looking to build exposure. This new asset class offers significant diversification benefits due to low correlations to traditional assets and entirely new performance drivers. Many professional and institutional investors thus look to invest a single digit percentage of their assets in cryptocurrencies in order to tap this new diversification and performance potential. Based on this industry tailwind, SEBA Bank has enhanced its product capabilities to offer clients a variety of investment solutions and pay-offs on Bitcoin and other cryptocurrencies.

“SEBA aims to provide corporate financing, including advising on initial coin offerings, and other cryptocurrency and banking services to traditional corporate clients and cryptocurrency groups.”

— Reuters

Similar to Bank Vontobel, Leonteq is a traditional company that moved into the digital asset space with certificates. Leonteq’s most popular crypto certificate is its reverse convertible on Bitcoin that can be purchased on the SIX Swiss Exchange. Reverse convertibles are particularly suitable for investors who want to generate a guaranteed income over a certain period of time. Anyone who buys a reverse convertible on Bitcoin agrees to deliver the underlying asset, such as Bitcoin, on a specific, predetermined date in the future. At the same time, the buyer is compensated with a fixed coupon.

From the buyer’s perspective, a reverse convertible on Bitcoin works as follows: If the Bitcoin price at maturity is at or above the agreed strike price, the investor gets back 100% of their initial investment, which is also called the principal. In such a scenario, the investor would be in the money. However, if the Bitcoin price is below the agreed strike price at maturity, the investor participates to a certain extent in the negative performance of the underlying asset, in this case Bitcoin. At some point, the investor will be out of the money. This is the case, when the coupon is not able to compensate for the loss that the investor is incurring on the collateral that is being eaten away by the falling Bitcoin price.

The following table should help as an illustration

Source: Cointelegraph Research

Let’s suppose an investor entered a reverse convertible at a Bitcoin price of $9,000. At maturity, if the reverse convertible is redeemed at a Bitcoin price of $11,000, the investor gets 100% of his initially placed collateral as well as the agreed coupon. Notice that the coupon is fixed, even when the Bitcoin price rises and is higher at maturity compared to when the reverse convertible was bought. If the Bitcoin price at maturity drops below $9,000, the investor will not be refunded the entire collateral that he put up. Up until a Bitcoin price of $7,582, he won’t lose any money though, because the agreed coupon is able to compensate for the loss he is incurring because of a falling Bitcoin price. Once the Bitcoin price drops below $7,582 at maturity, the investor will lose money overall.

However, reverse convertibles are not only bought for speculative reasons. By buying a reverse convertible for a premium, the buyer can earn a regular income over the time the reverse convertible is running. This way, they can potentially keep their Bitcoin ,granted the Bitcoin price at maturity stays at or above the agreed strike price, but still earn a yield on it.

An investment in a reverse convertible on Bitcoin thus carries the risk of a capital loss at maturity. So all of the principal or parts of it could be lost. In addition, there is also the risk that if Bitcoin experiences an increase in value and the strike price at maturity is ultimately higher than the initial price, the investor will not benefit from this price increase. The investor’s total return is limited to the guaranteed interest rate of the coupon payment. Against this backdrop, it makes sense that reverse convertibles on Bitcoin are primarily suitable for investors when the Bitcoin market is stagnant or slightly declining in price. Leonteq’s launched structured offering was not only a novelty for Switzerland, but it was also the first reverse convertible on Bitcoin in the world that could be traded on a stock exchange, thus giving a broad investor audience access to such a product.

This innovation was launched at a time when the environment for cryptocurrencies was anything but easy. After a considerable rally in the first half of the year with a price premium of almost 200%, there was a correction to below $7,000, but the risk profile of the reverse convertible enabled the investor to achieve an absolute return of 10% in the first three months of the year. Looking at the product from the time of issue at the end of September 2019 onwards, investors were able to contain their losses significantly compared to a direct investment thanks to the attractive coupon of the reverse convertible.

Leonteq is now one of the leading issuers of yield enhancement products listed on the SIX Swiss Exchange with a market share of around 30% (measured by the traded turnover of products issued by Leonteq and its issuing partners). Leonteq also offers short tracker certificates on Bitcoin as well as tracker certificates and actively managed certificates on Ether, Bitcoin Cash, Litecoin, and Ripple on the SIX Swiss Exchange. Leonteq’s technology platform processes more than 100,000 customer transactions with a transaction volume of over CHF 15 billion per year and has one of the largest universes of structured products with over 2,000 underlyings and 90 payoffs.

For the most part, these offerings are very new and are being expanded all the time, which is another indication of the growth potential that many professional investors attribute to this innovative industry sector. Another form of investment that is also relevant in this respect is the investment in companies from this sector. Therefore the next article will discuss a recent investments in this form.

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.

Passive and Active Structured Retail Products

Due to the friendly regulatory landscape, Switzerland in particular has seen the development of a market for both passively-structured and actively-managed crypto products for retail investors. This article will take a closer look at 21Shares and other providers in this area, along with their efforts to operate in the EU as well.

If you are looking at the landscape of financial instruments with Bitcoin and other digital assets as underlyings, 21Shares created the first crypto basket ETP (exchange traded product) on the regulated market of the largest Swiss stock exchange in 2018. Since then, 21Shares has issued a total of 11 institutional-grade passive investment trackers with the largest single assets (Bitcoin, Ethereum, Ripple, Tezos, etc.), different index baskets of digital assets, and the world’s first inverse Bitcoin ETP on four different stock exchanges in Switzerland and the EU.

Notably, the 21Shares crypto ETPs are the most readily available crypto products on the market, as any institution with access to Deutsche Börse XETRA or SIX Swiss Exchange can easily access the ETPs. This includes all the large Swiss and European online brokers such as Interactive Broker, Swissquote, Comdirect, etc. This is particularly relevant as it gives retail clients without the proper know-how to set up accounts with unregulated crypto exchanges the ability to participate in this novel asset class. Furthermore, all 21Shares ETPs are 100% collateralized at all times and custodied with independent custodians in order to give institutional clients safer access and reduce the counterparty risk often associated with other financial products.

Source: Cointelegraph Research

“Cryptocurrencies offer experienced investors a new way of diversifying their portfolios. With the listing, we are increasing the selection of asset classes on the Vienna Stock Exchange. Investors can also benefit from the advantages of the stock exchange in crypto trading: monitored and transparent trading with real-time information and secure processing via their securities account.”

– Thomas Rainer, Head of Business Development at the Vienna Stock Exchange


In addition to actively managed structured products for professional investors, Switzerland has become home to the world’s first actively managed Exchange Traded Product featuring cryptocurrencies as the underlying asset class. Launched in summer of 2020, the Bitcoin Capital Active ETP allows retail and institutional investors in Switzerland and, after approval of the prospectus in the EU, across selected EU jurisdictions to invest in digital assets via a certificate structure. The product is issued by Bitcoin Capital AG and managed by FiCAS AG, a Swiss-based crypto asset manager. Its investment objective is to increase the net asset value of the ETP by trading Bitcoin against carefully selected altcoins from the top 15 coins. Their strategy also involves moving in and out of fiat depending on the trading signals they analyze.

Actively Managed Digital Asset Investment Vehicles’ Assets under Management

Source: Cointelegraph Research

The product is similar to a structured product, but it is not a certificate. Unlike certificates, ETPs are also designed for retail distribution.

Exchange Traded Products are collateralized, non-interest paying debt securities designed to replicate the performance of the underlying assets. ETPs trade on exchanges similar to stocks meaning their prices can fluctuate intraday. ETPs are structured and operate very similarly to traditional Exchange Traded Funds (ETFs). However, contrary to ETFs, ETPs are debt securities issued by a Special Purpose Vehicle (SPV).

Currently, their AUM is CHF 3.2 million. They launched with CHF 2 million on July 15, 2020, so their assets have already increased by more than 50% since their launch. On the launch date, the issue price of each security was CHF 100, and the product as of today is trading at CHF 109 representing a 9% increase in value within six weeks. More information on the FiCAS ETP can be found on the historical chart on the SIX Swiss Exchange.

Their fees include a 2% management fee per annum and a 20% performance above a high water mark (HWM). The fees will be collected quarterly and this will reset the HWM to the new level. Storage of the assets is diversified across five custodians including Crypto Broker AG, Sygnum Bank AG, Coinbase, Bitstamp, and Kraken, and they plan to further diversify by adding further custodians.

This article has so far only dealt with products for private investors. Institutional investors, however, have different requirements for investment products, which is why next week’s article will deal with these very products, focusing in particular on the SEBA Bank AG.

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.

Regulated Crypto Funds

Long gone are the days when cryptocurrencies only attracted the interest of private investors. Although the field of digital assets remains uncharted territory for many institutions, the number of professional actors is nevertheless growing steadily. In this article, we will look at a few of the most prominent regulated crypto funds.

One of the most famous crypto funds in the world hails from the Swiss firm Crypto Finance AG. Crypto Finance AG is a fintech company that provides institutional and professional investors with products and services in the digital asset space. Founded in June 2017, the Zurich-based company has 40 employees and three operationalsubsidiaries including Crypto Fund AG, Crypto Broker AG, and Crypto Storage AG. With just over 50% of the overall Crypto Finance Group business linked to international clients, Crypto Finance is continuing international expansion and product and service development.

Crypto Fund AG offers an active as well as a passive investment approach for crypto assets. The passive approach tracks the performance of the Crypto Market Index 10 (the “CMI10”), which is independently calculated and maintained by the SIX Swiss Exchange. The Index does not include privacy coins like Monero, indexed crypto assets, or pegged crypto assets, such as gold-backed stablecoins. Indexed crypto assets refer to crypto assets which are, for example, based on a basket of other crypto assets such as a “fund token” or similar. These are excluded as they are an indirect representation of other assets, similar to pegged assets. Furthermore, crypto assets which cannot be safely stored in an institutional-grade storage solution are also excluded. This may be an issue when a crypto asset based on a new blockchain would be eligible for an index where storage of that asset is
only possible via exchanges.

The fund employs a strategy involving automated trading algorithms that take long and short positions on Bitcoin. Assets under management in the active strategy are currently at €25 million, and the year to date return is between 33% and 40% — dependent on the share class. The active strategy is deployed with Bitcoin futures only. Crypto asset custody is, therefore, not a necessity. For the passive strategy, crypto assets are stored with the depositary, Bank Frick. The fund does not self-custody any crypto assets. Both funds are alternative investment funds (AIFs) administered by CAIAC Fund Management AG in Liechtenstein.

Domiciled in Liechtenstein, SwissRex AG operates a crypto fund with a British Virgin Islands (BVI) structure and a tracker certificate setup by GenTwo Digital AG and MTCM Investments AG. The main advantage of the certificate is that it can be subscribed without any problems via any bank thanks to its Swiss VALOR number. The VALOR number, which is incorporated in the Swiss ISIN number, is a code which uniquely identifies listed securities and financial instruments in Switzerland. Both products are distributed to qualified investors by Crypto Consulting AG in Switzerland.

Fundamental analysis of crypto tokens forms the basis for the investment decisions of their actively managed crypto fund. The strategy gives the investor access to a diversified basket of Bitcoin and altcoins (alternative coins). The tokens are analyzed on a daily basis, and the positioning is actively managed. The strategy takes care of the timing for the investor. The exposure is determined on the basis of valuation models and the cycle model described below and ranges between -20% and 120%. In February, the allocation was reduced to 50% due to a slight overvaluation and the hype around the Bitcoin halving. It was increased to 100% again during the correction that the Corona crisis caused. In addition, the choice of individual tokens is of great importance. The largest 50 tokens are analyzed, and a fair value is calculated. On this basis, 10 tokens, of which the greatest potential is expected, are purchased and stored safely. The asset allocation mixed with the right choice of altcoins contributed to a fund performance of 120% in 2020 (net in CHF as of July 28, 2020). Bitcoin generated a return of 49% over the same period. The AUM now stands at CHF 8 million.

SwissRex distinguishes four phases in the cycle of crypto tokens: the beginning of a bull market, the outperformance of altcoins, the hype, and the bear market. When investors seek exposure to crypto again after a prolonged downtrend, they typically buy Bitcoin, as it is the most liquid and best known of all tokens. Since Bitcoin is one of the few tokens that are trending up in this first phase, altcoins are sold and the correlation between Bitcoin and altcoins can be negative for a short period of time. Through these shifts, high quality altcoins become bargains and value investors make their first purchases. Individual altcoins show better returns than Bitcoin in this second phase. As soon as Bitcoin reaches a new high, the third phase begins; the masses start buying crypto. Since Bitcoin already seems expensive, purchases are made in the second and third phase.

The most important decision is when to exit the market in order to have as little exposure as possible in the fourth phase, the bear market.

SwissRex differentiates between three categories of tokens: stores of value, currencies, and securities. As there are no cash flows for securities and currencies, the analysis must be based directly on supply and demand. On the supply side, velocity and inflation are important, while on the demand side the adoption rate is estimated using an S curve. The fair value is calculated and multiplied by an individual success rate that weighs factors such as liquidity, trading venues, and the survival chances of the start-up. For tokens with security character, traditional valuation methods such as a dividend discount model are used.

The fund’s assets are held with Crypto Broker AG and Bitcoin Suisse AG on segregated accounts with individual client wallets. They also hold a small part on a few exchanges which passed their due diligence process for trades in tokens and futures that aren’t covered by their storage providers.

Among the terms that are mentioned quite often in connection with cryptocurrencies and digital assets are ETPs and ETFs, but how is their market availability at the moment? Next week, we will look into this in detail in another article!

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.

Marketplace for Security Tokens and Digital Assets

Digital asset trading presents many challenges to interested parties, some of which are technical and some regulatory in nature. This is not only true for traditional cryptocurrencies, but also for many other forms of digital assets, such as security tokens.

Although there are many security tokens coming to the market, there is still not an easy way for professional traders to trade security tokens. However, the SIX Digital Exchange owned by the SIX Group is working on solving this problem.

“Blockchain technology has the potential to modernize, simplify, or even potentially replace current trading and clearing and settlement operations.”

– Mary Jo White, U.S. Securities and Exchange Commission Chairwoman

In addition to the SIX Digital Exchange, Liechtenstein also has a token issuance platform, called area2invest. As a tied agent of Bank Frick & Co. AG, the fintech company built a network of banks, brokers, asset and fund managers in order to become Europe’s first marketplace for securities and token issuances.

Another one of Switzerland’s banks that are involved in crypto is Swissquote Group Holding SA. Professional and retail traders can trade Bitcoin and 11 other cryptocurrencies. In 2020, the bank started offering regulated institutional cold storage, and it is already used by WisdomTree and other institutional clients. In terms of the custody solution, one of Swissquote’s technology partners is Switzerland’s Crypto Storage AG, which is a subsidiary of Crypto Finance AG. While Crypto Storage’s solution has been used as the foundational layer, Swissquote has built its own additional security layers upon it. The other main pillar is Swissquote’s trading platform. Swissquote has an API (FIX and Websocket), so its institutional clients are able to access liquidity. APIs are Application Programming Interfaces that allow trusted larger partners to communicate directly with one another super quickly and without barriers — like having a phone line that is always open. FIX is what traditional financial institutions generally use for the electronic transfer of financial data. Websocket is a more modern version of FIX that is often preferred by crypto funds. For larger orders, the bank also supports OTC trades.

Currently, Swissquote’s DLT/Blockchain team already counts twenty team members, reassuring that all the different processes and procedures work just fine — be it in the front office, development, compliance or risk. Concerning fees, Swissquote’s crypto retail pricing is, on the face of it, more expensive than most of the unregulated exchanges. Fees range from 0.50 and 0.99 percent. This is due to a combination of reasons, including the fact that Swissquote is a highly regulated Swiss bank with operating costs much higher than most of its crypto exchange competitors. Oftentimes traders use different exchanges to send crypto assets around. This costs additional gas fees, which can make the overall transaction cost of trading through “cheaper” unregulated exchanges just as expensive as using a regulated platform such as Swissquote.

Staying within Swissquote’s ecosystem will save a trader these kinds of fees. On the institutional side, the fees are very competitive and they can be tailored to an institution’s needs. Interestingly, Swissquote has quite some plans for the future regarding blockchain and crypto assets. As a matter of fact, the bank wants to expand into Bitcoin futures and options, tokenized securities and staking. Many of these new features are planned for Q1 of 2021.

Online trading platforms need to find the right balance between a rich feature set and user-friendliness. However, it is precisely through saving on fees that a plus in user-friendliness can be gained, without this having to be at the expense of the feature richness. This is especially clear when the concentration of numerous functions in one place itself provides the basis for the savings.

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.

The Custody of Crypto Assets

When thinking about investing in crypto assets, investors should not only keep an eye on the actual buying process. The custody of the assets also plays an important role in addition to the purchase, because a careless approach can lead to the loss of significant sums. There are fortunately already a wide variety of solutions to this problem.

In the research for this article, a new tendency regarding crypto custody could be observed. As described above, the custody of digital assets has been a much-discussed topic due to the regulatory initiative in Germany. Therefore, several startups have focused on this subject. However, the custody of crypto assets can be carried out by applying very different technological solutions.

Next-Generation Technology on the Horizon

The majority of the custody startups, e.g., Finoa, Tangany, and Upvest, rely on so-called hardware security modules (HSMs) for the storage of crypto assets. The main task of an HSM is to generate, store, or manage cryptographic keys and to protect them from unauthorized access.

Established banks such as Solarisbank AG and Bankhaus von der Heydt, however, already utilize the next technological generation for crypto custody called multi-party computation (MPC). Also, CommerzVentures, the corporate venture arm of Commerzbank, invested in the Series A funding round of the custody startup Curv, which specializes in MPC. Simply put, MPC is a cryptographic mechanism that requires multiple instances to sign a transaction. Therefore, such a solution eliminates the single point of attack for hackers.

Regardless of the technological stack, however, one problem currently appears to be common to all players. Insurances that protect investors against any form of loss of crypto assets are too expensive. This can be seen as the missing piece of the puzzle for comprehensive investor protection.

Insurance premiums for assets under custody are currently around 1% for cold storage solutions and between 2% to 3% for MPC based solutions. In the next few years, however, insurance providers will probably acquire more technological know-how for risk assessment so that lower insurance premiums can be expected.

Another rising trend is phone applications that enable investment in digital assets. One such application out of Switzerland is Relai, which has become one of the hottest trending apps on the Android app store. The Relai app allows anyone to buy Bitcoin without giving up their identity. The phone app works with one of the first Swiss regulated crypto companies, Bity, in order to buy Bitcoin. In addition to requiring no KYC, the phone app does self-custody, so there is no need to trust counterparties with private keys.

This app has made Bitcoin ATM transactions possible within the privacy of one’s own home and internet connection. In Relai’s first three months, they had more than 2‘000 app downloads in 20 different EU countries, more than 1‘000 investments per month, and more than €500‘000 in volume. This is a good innovation as many Bitcoin ATMs in Germany have had to shut-down due to Germany’s new licensing raj.

This variety of approaches and solutions shows that there is a constant discussion in the area of crypto-assets about the tension between usability, security, and the principle of “be-your-own-bank.” This debate is not only one of principle but, as we have seen here, also one of technology.

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.

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 bitcoin.de, for instance, retail clients can trade crypto assets in a regulated environment provided by Fidor Bank AG. While bitcoin.de 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.

Retail and Professional Investors in Germany’s Target Market

What is the actual number of people interested in cryptocurrencies? Are there any indications that the German target market is of a relevant size? Several studies have been conducted on these questions within the last few years. We would like to shed light on the results of these studies in this article and look at them in an intra-European context.

In 2018, the German retail bank Postbank surveyed 3,100 Germans and found that 29% of Germans believe that cryptocurrency is a desirable investment opportunity. This number is high given that the survey was conducted between February and March of 2018 when Bitcoin was in a bear market. The study found that 6% of respondents in the 18 to 34 year old group own cryptocurrencies and that 14% planned to buy cryptocurrencies during the next 12 months. This is in contrast with the 3% of the whole survey sample that owned cryptocurrencies.

A survey carried out half a year later by the German Consumer Centers of Hesse and Saxony found similar results to the Postbank survey. In this study, 28% of respondents from the age group 18 to 29 were interested in buying cryptocurrency. The survey polled 1,000 Germans in Hesse and Saxony.

Blockchain Research Lab conducted a survey of German cryptocurrency adoption in 2019 and found that 87% of Germans had heard about cryptocurrencies. According to the study, 24.8% of respondents had invested in cryptocurrencies. 14.1% owned cryptocurrencies at the time of the study, and 10.7% owned cryptocurrencies in the past. The overwhelming interest was in Bitcoin. Out of the 14.1% of respondents that held cryptocurrencies, 85% of the respondents were invested in Bitcoin. Ethereum was the second largest coin held by respondents (30%) followed by Litecoin (23%) and Bitcoin Cash (20%). The survey had a sample of 3,059. In the sample, German investors trusted Bitcoin.de the most, followed by Coinbase and Kraken. The average size of a respondent’s original investment was €2,546.

ING Bank also published a survey that asked 12,813 people across Europe what their perception of cryptocurrencies were. German respondents had a more friendly attitude toward cryptocurrencies than Austrians with 20% of Germans saying they found cryptocurrencies to be positive compared to only 13% in Austria. Interestingly, ING Bank found that 12% of Austrians wished that banks would offer cryptocurrency-enabled accounts.

In early 2020, the market research institute Intervista and Migros Bank in Switzerland published a survey showing that 13% of investors under 30 believe that Bitcoin and altcoins will play a more prominent role in their basket of savings. The survey also reported that around 7% of Swiss people have invested in crypto. The survey studied Swiss aged 18 to 55.

Source: Cointelegraph Research, Postbank, Blockchain Research Lab, Migros Bank, Official population estimates

To summarize the surveys, retail ownership of digital assets ranges from 6% in 2018 to 24.8% in 2019 in Germany and 7% in Switzerland. In Austria, the estimate is 12%. Taking the average of the two German surveys, the current size of the target addressable market for retail cryptocurrency in investment products is approximately 15.4% of the adult population aged 18 to 59. This is approximately 5.5 million potential clients out of German’s 46.05 million adults. Relying on the only survey of average investment amount that was conducted by the Blockchain Research Lab, this gives an estimate of an addressable market worth over €14 billion in Germany alone. The current size of the target addressable market in Switzerland is approximately 7% of the adult population or 343,923 people. The current size of the target addressable market in Austria is approximately 12% of the population aged from 18 to 59 or 657,766 people, and it is the second-largest addressable market for retail cryptocurrency in investment products in the DACH region.

In conjunction with improved technological solutions, companies are now offering institutional investors the appropriate setting for professional crypto trading without needing to hold on to private keys. The Börse Stuttgart Digital Exchange (BSDEX), for instance, targets financial institutions and is offering the first regulated trading venue for crypto assets in Germany. For its trading platform, BSDEX partnered with Solarisbank AG, which holds a full banking license and, therefore, handles the bank accounts, as well as blocknox GmbH, responsible for the custody of crypto assets. Currently, institutional investors can trade Bitcoin against the euro, and the addition of more digital assets is planned.

Following this figure, the target market for cryptocurrencies seems to be of a magnitude that should arouse the interest of retail as well as professional investors. A potential customer base of 5.5 million in Germany alone and another million potential customers in the other DACH countries is certainly a relevant figure.

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.