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Switzerland Approves ETP: Why Nobody Cares

22 November 2018 08:54, UTC
Anastasia Ermolaeva

While the whole crypto community is waiting for the decision of the American SEC on Bitcoin-ETF, Switzerland is approving the listing of the world's first crypto exchange traded product. The country's largest stock exchange SIX Swiss Exchange, which in July reported that it was working on the offering of trading, clearing and custodial services with digital assets, next week is launching trading of a crypto ETP, developed by the fintech company Amun, under the marker HODL5. The CEO at Amun Hany RASHWAN notes that after studying 23 different exchanges and territories around the world, the company has come to the conclusion that the Swiss law framework is the most optimal for the launch of the first product. It is worth noting that the Amun project itself comes from London, but at the moment there is uncertainty about the regulation of the digital market in the UK.

Unlike actual assets, ETP does not have its own price. Conceptually, it can be compared, for example, with the stock index S&P 500, which reflects assessment of the performance of 500 large-cap U.S. equities. In turn, Amun ETP is based on the Amun Crypto Basket Index, which tracks the performance of the five best cryptocurrencies in terms of market capitalization and liquidity. When news about the impending listing arouse, the composition of the index was as follows: Bitcoin (49.7%), XRP (25.4%), Ethereum (16.7%), Litecoin (3%) and Bitcoin Cash (5.2%).

The procedure of investing in Amun ETP implies that an investor purchases secured debt securities, which contain the obligation of an authorised market maker to buy an equivalent quantity of the underlying coins and send them for safekeeping to the custodian. At the same time, market makers, which agreed to be trading firms Jane Street and Flow Traders and who will charge 2.5% of the annual management fee, will be able to adjust the percentage ratio of virtual coins in accordance with the market situation. Given that, due to the recent hardfork and the division of BCH into two coins, Amun made a choice in favor of BCHABC, but then completely removed the currency from the basket, explaining on their official website that the newly forked crypto asset will be counted as a separate asset and will not be added to the Amun HODL5 Crypto Index until they meet the eligibility criteria. Thus, as of November 21, the index is formed only from 4 currencies, where BTC takes 48.41%, XRP - 33.09%, ETH - 15.8%, LTC - 2.7%.


"The Amun ETP will give institutional investors that are restricted to investing only in securities or do not want to set up custody for digital assets exposure to cryptocurrencies”, -  explains the head of Amun, adding that retail investors, who currently have no access to crypto exchanges due to local regulatory impediments, will also have the opportunity to purchase the ETP. However, after visiting the company’s official website, it becomes clear that only residents of Switzerland get access to the new financial instrument, which is one of the reasons why this quite positive news did not receive that much of enthusiasm from the crypto community, that was focused on the hashwar and the Bitcoin fall.

“Let's face it. More and more jurisdictions are bringing crypto regulation to the table: Switzerland, Malta, Liechtenstein. But these jurisdictions are too small to affect the entire market. The launch of such a product is important, as the industry is still at an early stage of its development, and this event can serve as an indicator that in the future investment in digital assets can become a mainstream. Why is everyone so focused on ETP and ETF? Because they are the mass market products. But until big jurisdictions, such as the US and Asia, which are now trying to solve its issues with hacker attacks, do not approve this product, we will not be able to talk about big tectonic shifts on the market”, - points outs our expert, Partner and Leader of the PwC Legal in Switzerland Guenther DOBRAUZ-SALDAPENNA.

The question is whether the Swiss achievement will be able to push the US regulator to approve Bitcoin-ETF? Unlikely. Firstly, ETP are secured bonds that are not subject to the Collective Investment Schemes Act and are not supervised by FINMA in contrast to ETF, so even with all the desire SEC would not be able to use this case as foundation to build its own policy on it.  

Secondly, similar products have been already introduced to the market, but they could not have any impact on the SEC.

Back in 2015, investors were able to make indirect purchases of Bitcoin and Ether via ETNs developed by the Swedish company XBT Provider AB and traded on the Nasdaq Nordic exchange. Crypto exchange traded notes are nothing but the same debt securities, however they are not secured by assets. If for the sale of shares an ETF-fund is obliged to purchase an asset, to which the yield of its share is tied, then it is not necessary for the issuer of ETNs to do so, its main obligation is to pay the required amount to the investor on the expiration date. It became possible to buy Bitcoin Tracker One and Ether Tracker One notes by paying with US dollars only from the middle of August of this year. However, soon the SEC imposed a ban on trade with these derivatives on the territory of the United States due to lack of clarity among market participants regarding these instruments.  

Another example of a crypto investment vehicle is products by Grayscale Investments, that operates in the US and sells shares of funds such as Bitcoin Investment Trust and Digital Large Cap Fund, whose basket includes the same five cryptocurrencies as in Amun ETP did according to its initial plans. In the July report, the company reported that for the first half of 2018, capital inflows in funds reached $248.39M, where $157.04M were invested in Bitcoin. Herewith, 64% of investors were the US residents, and 56% turned out to be institutional investors.

But here’s the thing - Grayscale has found legal loopholes. Its funds are limited liability companies registered on the Cayman Islands and they have not been registered with the SEC. Therefore, Grayscale products are not subject to the regulation of the US securities laws. The company itself openly declares that its products are in fact highly speculative, and the period of investment in them should be limited to one year. Therefore, the appearance of Grayscale funds on the market did not affect the SEC’s policy. And the Swiss product is also unlikely to succeed in this, believes the consultant of institutional hedge funds and Bitcoin enthusiast Michael GRAUB: “The SEC is the gorilla in the room and once the SEC approves the policy,other countries will follow.”

In addition, the expert doubts the investment attractiveness of products like Amun ETP for the US based investors: "The current VanEck ETF, the application for which is waiting for the SEC approval, will have only Bitcoin as the underlying asset. It is one major difference from the Swiss ETP. Everything but Bitcoin is multiple times riskier now, and this hardfork seems to have turned into a mess for those holding BCH”. It is worth noting that in the early stages Amun is going to include only Bitcoin and XRP in its ETP, and capital allocation even between these two currencies can reduce risks.

In particular, during last week the leading cryptocurrency fell by 30%, and XRP - by 12.6%. If we assume that the investments on November 14 had been $10,000, the losses from Amun ETP, in which according to the basic index Bitcoin takes 48.41%, and XRP - 33.09%, and the remaining 18.5%, which in the future will be distributed at least between ETH and LTC, but at the moment had been allocated equally between BTC and XRP, the losses from investments in such a product would have been less than $2,300, while putting money solely in Bitcoin would have brought losses of $3,000, which is $700 more.

In the case of investments in a basket of four currencies, a market maker has even more opportunities to choose the least loss-making option even in the conditions of the recently strengthened bearish sensations.

Therefore, the position Michael GRAUB takes is very subjective, and the golden rule of any investor to diversify his portfolio works on the crypto market as well as any other market, and products similar to the reviewed ETP can be effective investment tools. However, this does not deny the fact that their popularity will largely depend on the big jurisdictions, which is why the listing of Amun ETP on the Swiss stock exchange can be considered only a local victory for the crypto industry, but not a sign for a new trend to begin on the market.