Crypto Broker: structured products represent 30% of our annual flow

In the second of a two-part interview (part 1 here) following Deutsche Börse’s acquisition of a majority stake in Crypto Finance, Rupertus Rothenhaeuser (pictured), CEO of the firm’s brokerage arm Crypto Broker, talks about the role of structured products in providing access to digital assets, the increasing demand from institutional investors and why banks should adapt their systems and businesses to deal with this new asset class.

About 30% of Crypto Finance Brokerage’s annual flow is the result of structured products – ETPs, ETNs, certificates being traded somewhere with the hedge ending up on the firm’s system.

Banks have the infrastructure to execute structured products but cryptos is a different asset altogether - Rupertus Rothenhaeuser

“Structured products are an extraordinary important contributors to the liquidity and the activity of our company,” says Rothenhaeuser, noting that this part of the market is still growing as an increasing number of asset managers look for platform solutions to enable their clients investing in the crypto space.

Three of the firm’s clients are issuers of actively managed certificates (AMCs) in the Swiss market.

“Asset managers can build their AMCs linked to crypto assets or baskets of coins according to their daily liquidity. These products are listed and tradable straight away, also on the SIX exchange. Whatever the outcome on trades on the certificate these end up in our books essentially,” says Rothenhaeuser.

Most of the demand for crypto exposure is coming from the buy-side, mostly because many banks don't want to touch these assets individually and are not making them available to private and retail banking clients, or even wealth management or ultra-high net worth individuals.

“Banks have the infrastructure to execute structured products but cryptos is a different asset altogether,” says Rothenhaeuser, adding that cryptos require key management, wallet management, blockchain infrastructure and bank systems cannot monitor those positions, make sure that payments are pre-funded, cash flows are organised, produce risk reports, etc.

“Some banks are offering exposure to cryptos via ETPs which as a security can go within the existing product and process chain, but you cannot trade cryptos with them directly.”

Over the last few months, several banks have started using crypto derivatives and proxys in structured products.

“I think it's a good starting point. Once providers and investors get familiar with these assets, they will feel more comfortable trading them directly in a venue like ours,” says Rothenhaeuser.

There is a gap and banks’ adoption of digital assets will take time. Crypto is still a relatively new asset class and not everywhere adequately regulated. Many banks are still hesitant to get involved because they don’t have a hand on it and lacking the required infrastructure. The market will tell us who's right and who's wrong.”

Regulation

Rothenhaeuser believes the low level of adoption is not connected to lack of regulation, but lack of familiarity.

As the digital asset class evolves, there is an increase in liquidity and a new derivatives ecosystem around cryptos provided by fully regulated venues - CME futures on BTC on a cash settled basis.

“You can theoretically offer investors a BTC-related structured product without touching BTC as you can use the BTC cash future as the underlying of the product,” he says. “We are at an early stage of development despite the tremendous increase in volumes and instruments we have seen over the last six to nine months in the institutional space.”

The ‘tremendous’ shift in ownership of cryptos in the last six months has not gone unnoticed. By mid-2020, 80% of the volumes were sitting in retail investor hands but this has since changed. Institutional investors now hold significant amounts of cryptocurrencies, according to Rothenhaeuser.

“The market is going through a correction, but it has not dropped like a stone. It seems there is now serious support from institutional money flowing into the market,” he says. “I think it is good that the volatility in the crypto market has gone down as the last thing you want to have is the perception that we are in a casino.”

Outlook

According to Rothenhaeuser, having a slight setback in relative terms from where the market was (10 -15% movements) and aligning the crypto market to the equity markets (four to five percent) will have a positive impact because the volume from the client side is still there.

“It is not as mad as when BTC was trading at US$60,000, but we have created a healthy daily flow which pays our bills and makes us able to grow, as well as build a more robust platform, add additional coins, and invest into the future of the company,” he says.

The use of structured products is helping to grow the market and make these assets accessible. Building a platform like Crypto Finance takes a lot of time and money which are very scarce in banks and financial institutions, according to Rothenhaeuser.

“If you want to be in the game and respond to demand from clients structured products are a very efficient way to retain your clients and offer them access to crypto assets via a product they already understand.”

With opportunity there is a big advantage for first movers, and Rothenhaeuser believes some recent announcements from leading, international banks will reap the rewards as crypto assets are seen as part of an asset class in its own right.

“Each of these assets has a viable business case behind it. Trading digital assets goes well beyond BTC. It is like trading stocks but in a different format - it serves some purpose,” says Rothenhaeuser.

Independent from BTC, digital assets have a reason to exist, they offer and deliver something. There will be researchers that find out if the model is high margin, what assets are winning/losing market share, as well as research papers that will analyse digital assets as any other equity stock or index in the market.”