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(Kitco News) – As blockchain technology is increasingly adopted 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 take advantage of the growing popularity of digital assets.
One such company is FTSE Russell, an index provider owned by the London Stock Exchange that has historically served more traditional stock market investments – such as its Russell 2000 and FTSE 100 indices – but has begun to flounder in the field 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 company 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.
FTSE Bitcoin index futures “are an ecosystem game for us,” Mierzwa said. “Derivatives are really important and fundamental, and once you establish that product, it’s easier for other people to create other products that might use that futures contract to hedge positions.”
FTSE Russell first entered the blockchain space in 2017 and formed a partnership with Digital Asset Research (DAR) in 2019, which serves as the company’s price provider, she said. Together, the two companies have created a common methodology for verifying exchanges as price sources, as well as verifying assets.
“Each quarter, we review the universe of exchanges to find exchanges that meet our criteria. We will then use them as a price source and aggregate their prices in real time, using volume, weight and trade price. to determine our reference price.
Since FTSE Russell specializes in indices, the digital asset space is particularly attractive due to the 24/7 nature of cryptocurrency markets, Mierzwa said. “We were looking at private equity and it turns out that indexing digital assets was an easier business venture to get into due to the round-the-clock nature of pricing. In private equity, it’s really hard to get a good price.
As digital asset products began rolling out for FTSE Russell, the process “took us a long time,” Mierzwa said, largely due to the uncertain regulatory environment around the asset class. . “We followed EU BMR regulations, so we worked with the regulator before entering space.”
Unlike the experience many blockchain companies in the US have had working with regulators, FTSE Russell’s experience has been rather smooth, she said, with EU regulators being helpful throughout the process. The company also met with the FCC and CFTC, which Mierzwa called a “great process.”
“We were applying the same principles that we apply to all these other established asset classes in this space, so it was a little easier for us because we knew what you had to do to get that status,” he said. she declared.
Future plans for FTSE Russell
As for future plans in the area of digital assets, Mierzwa said FTSE Russell was evaluating several options.
“We have unique digital asset indices and that’s great because you need them for derivatives, contracts and things like that,” she said. “But right now we have a basket of assets that have met all of our criteria. There are 65 assets in this out of a universe of 350 assets. Once you have this universe of assets, you can do anything.
FTSE is currently in the process of “weighting the circulating supply” of these indices, it said, but added that they could also be equally weighted, which is what they are working on. She has also received several requests from clients requesting ESG in digital assets. “It’s very difficult, but we’ll get there one day,” she says.
Other possibilities include taking the FTSE 100 and valuing it into Bitcoin, or using the FTSE Emerging Index to hedge against Bitcoin. “If you really think of bitcoin as a global currency, then it’s a great game, especially in emerging markets,” she said. “So I think the sky is the limit. It’s not just Bitcoin.
Staking and sector indices
Another popular topic with clients is yield staking, as institutions are always interested in passive income. “What’s interesting about staking is that we don’t call it a yield on our end, because yield involves a guarantee,” she said. “It’s really more of a reward because if you’re available to be a validator, you’ll be the one to receive the staking reward. Not all token holders receive the rewards, only those who participate in the validation process.”
As the cryptocurrency ecosystem continues to grow, FTSE Russell will be monitoring the various sectors to see what additional product types might be successful.
“It’s time to do sector indices,” Mierzwa said. “I think what’s great is when someone doesn’t know about digital assets and I show them our product files with everything, all of a sudden it comes to life.” Some areas currently being explored by the company include decentralized finance, smart contracts, and gaming.
When asked if FTSE Russell was planning to launch any of its on-chain products – similar to what Franklin Templeton did when he launched FOBXX, a US-registered money market fund that records transactions and provides transparency to investors – Mierzwa replied that she would like to do this, “but it is difficult to do from a regulatory point of view”.
“We’re not a regulated entity like Franklin is,” she said, “but I think it would be so cool to put our clues on the blockchain. Then you just manage everything there, and I think that’s the future, but it’s going to take a long time to get there.
On 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 played with that, but again, it’s something regulated.” 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 increased over the past two years, but “it’s a long journey.”
“The conversion I hear the most from the institutional side, which for sure we all know is disruptive technology, is that it’s happening, it’s going to change everybody’s life” , she said. “And if you ignore disruptive technology, you are kind of taking a gamble. So why would you do this without knowing more and understanding what type of bet you are taking? You still can’t allocate, but you’ve at least assessed that risk and made an informed decision.
Mierzwa said regulation is slow, especially in the US, “but many asset managers in the US will wait for an exchange-traded product to be approved. Others are doing separately managed accounts, and they find ways to access assets in an approved way.
For now, FTSE Russell is monitoring how the Securities and Exchange Commission decides to classify different cryptocurrency tokens in the future, but that’s not the company’s primary focus.
“Is it a commodity or a title? The question is how are we going to handle this, especially when you factor in things like staking,” she said. “We’re just looking at whether 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 United States, it does not 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 have to limit access to certain products in specific jurisdictions.”
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