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(Kitco News) – As blockchain technology gains wider adoption around the world, institutional investors and traditional financial institutions continue to look for ways to enter the cryptocurrency market and offer new products designed to capitalize on the rising popularity of digital assets.
One such firm is FTSE Russell, an index provider owned by the London Stock Exchange that has historically served more traditional equities markets investments – such as its Russell 2000 and FTSE 100 indices – but has begun wading into the realm of cryptocurrencies.
At the recent Consensus Conference in April, Kitco Crypto sat down with Kristen Mierzwa, Head of Digital Assets at FTSE Russell, to discuss their latest developments on the blockchain front.
Most recently, the firm launched the FTSE Bitcoin Index futures on the Eurex exchange, becoming the first exchange in Europe to offer Bitcoin index futures. The service launched on April 17 and offers cash settlement in USD and EUR.
The FTSE Bitcoin Index futures “are an ecosystem play for us,” Mierzwa said. “Derivatives are really important and foundational, and once you’ve got that product established, it’s easier for other people to build other products that would maybe use that futures contract to hedge positions.”
FTSE Russell first started looking at the blockchain space in 2017 and formed a partnership with Digital Asset Research (DAR) in 2019, which serves as the firm’s pricing provider, she said. Together, the two companies created a joint methodology to vet the exchanges as pricing sources, and also to vet the assets.
“Every quarter we look at the universe of exchanges to find exchanges that pass our criteria. We’ll then use them as a pricing source and we aggregate their prices in real-time, utilizing volume, weight and trading price to determine our reference price.”
Since FTSE Russell specializes in indexes, the digital asset space is particularly appealing due to the 24/7 nature of cryptocurrency markets, Mierzwa said. “We were looking at private equity and it turns out indexing digital assets was an easier business venture to get into because of the 24-hour nature of the prices. In private equity, it’s really hard to get a good price.”
While digital asset products have begun to roll out for FTSE Russell, the process “took us a long time,” Mierzwa said, largely because of the uncertain regulatory environment around the asset class. “We followed the EU BMR regulations, so we worked with regulator lockstep before we entered the space.”
As opposed to the experience that many blockchain firms in the U.S. have had when it comes to working with regulators, FTSE Russell’s experience was rather smooth, she said, with EU regulators helpful throughout the process. The firm also met with the FCC and CFTC, which Mierzwa called “a great process.”
“We were applying the same principles that we do for all of those other established asset classes in this space, so it was a little bit easier for us because we knew the things you had to do to get that status,” she said.
Future plans for FTSE Russell
Turning to future plans in the digital asset arena, Mierzwa said that FTSE Russell is evaluating multiple options.
“We have single digital asset indices and that’s great, because you do need them for derivatives, contracts, and things like that,” she said. “But right now we have a basket of assets that have passed all of our criteria. There are 65 assets in that from a universe of 350 assets. Once you have that universe of assets, you can do anything.”
FTSE is currently ‘circulating-supply weighting’ these indices, she said, but added that they could also be equal-weighted, which is something they are working on. She has also received multiple requests from clients asking for ESG in digital assets. “That’s very hard, but we’ll get there someday,” she said.
Other possibilities include taking the FTSE 100 and valuing it in Bitcoin, or using the FTSE Emerging Index to hedge into Bitcoin. “If you really think of Bitcoin as a global currency, then that’s a great play, especially in emerging markets,” she said. “So I think the sky’s the limit. It’s not just Bitcoin only.”
Staking and sector indices
Another popular topic with clients is staking yields because institutions are always interested in passive income. “What’s interesting about staking is we’re not calling it a yield on our side because yield implies a guarantee,” she said. “It’s really more of a reward because if you are available to be a validator, you will be the one who gets the staking reward. Not all token holders receive the rewards, only those participating in the validation process.”
As the cryptocurrency ecosystem continues to expand, FTSE Russell will be monitoring the various sectors to see what additional types of products could be successful.
“It’s time to do some sector indices,” Mierzwa said. “I think what’s so great is when someone doesn’t know digital assets and I show them our product files with everything, all of a sudden it comes to life.” Some sectors currently being explored by the company include decentralized finance, smart contracts and gaming.
When asked if FTSE Russell had plans to launch any of its products on-chain – similar to what Franklin Templeton did when it launched FOBXX, a U.S.-registered money market fund that records transactions and provides transparency to investors – Mierzwa said that she would love to do that, “but it’s hard to do it from a regulatory standpoint.”
“We’re not a regulated entity like Franklin is,” she said, “but I think it would be so cool to put our indices on the blockchain. Then you kind of just manage it all there, and I think that’s the future, but it’s going to take a long time to get there.”
On the topic of artificial intelligence, Mierzwa noted that one application of AI that FTSE Russell is exploring is the possibility of using ChatGPT to come up with interesting index ideas. “We’ve been playing with that, but again, it’s a regulated thing.” She said ChatGPT could also be used as part of their risk control process.
FTSE Russell has also been able to launch products that combine precious metals with cryptocurrencies, such as their Bitcoin Gold index, which is designed to help investors determine risk weighting.
Institutional adoption is slow
Mierzwa said interest from institutional players has slowly been increasing over the last couple of years, but “it’s a long journey.”
“The conversion I hear the most from the institutional side, who are sure we all know this is disruptive technology, is it’s happening, it’s going to change everyone’s life,” she said. “And if you ignore the disruptive technology, you’re in a way taking a bet. So why would you do that without learning about it and understanding what kind of bet you’re taking? You may still not allocate, but then you have at least evaluated that risk and made an informed decision.”
Mierzwa said that regulations are slow, especially in the United States, “but a lot of asset managers in the U.S. will wait for the approval for an exchange-traded product. Others are doing separately managed accounts, and they’re finding ways to get access to the assets in an approved way.”
For now, FTSE Russell is monitoring how the Securities and Exchange Commission decides to classify different cryptocurrency tokens moving forward, but it’s not the primary focus for the company.
“Is it a commodity or a security? How we are going to navigate that is the question, especially when you factor in things like staking,” she said. “We very much just look at if the protocol is built on blockchain technology, so that’s really what we’re trying to figure out. Not whether it’s a security or not.”
Mierzwa said that if a token becomes a security in the U.S., it doesn’t necessarily become a security in another jurisdiction. “So what we’ll have to do is be very nimble and have them in our universe, but we’ll need to limit access for certain products in specific jurisdictions.”
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
