Banking vs Cryptocurrency - Are ETPs the Best of Both Worlds?

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Cryptocurrency was introduced to the world via Bitcoin in 2009, but it didn’t garner much public attention until 2017. Since the 2017 crypto-boom, cryptocurrency has further cemented itself in our lives. Today, it’s viewed as a real cash alternative in countries like El Salvador who have officially recognized Bitcoin as a national tender.

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While it has continued to garner an incredible amount of attention, it has also seen a considerable amount of drawbacks as well. Investing in cryptocurrency can be incredibly lucrative, but its volatility presents significant risk. This inherent risk has made many institutions label it a speculative investment, and shy away from offering products geared towards cryptocurrency.

But these risks don’t seem to bother the many new investors clamoring for access to the crypto market. In fact, many of these new investors aren’t even what I’d call “Crypto-enthusiasts”. These investors are your average Joe looking to add smaller holdings to their larger portfolio which may consist of shares, real estate, and precious metals.

Now, one might think that cryptocurrency and banking were bound to never get along. That’s partially true, crypto was invented to move away from centrally controlled institutions. The decentralized nature of crypto makes it a natural enemy to central banks and government regulations. But the increasing demand and calls for acceptance have triggered a broad rethinking across the market.

This demand has put pressure on banks and other financial institutions to provide access to the crypto market. But what are the best products and options to provide?

The Financial Products of the Future

During my initial research, I stumbled upon the article “A Blend of Cryptocurrency and Traditional Banking”. The article introduced the idea of utilizing ETPs as a potential offering for those interested in dabbling in the crypto world. The author, Rene Delrieux, was a Product Manager for Investments at Commerzbank, one of the top 100 largest banks in the world.

What better resource than an expert source with over 15 years of experience. So I reached out and interviewed him on the topic. For someone with considerable time in banking, he showed a significant aptitude and understanding of cryptocurrency. Better yet, it was from the point of view of a product manager at a well-established financial institution. Wasn’t cryptocurrency supposed to be the natural-born enemy of central banking?

When asked about this, Rene responded frankly.

“Satisfying the customer’s needs is the highest priority. If the customer would like to buy cryptocurrencies, it is the task of the product management to fulfill this wish as best as possible. 

However, it’s necessary to take into account other interests that customers sometimes ignore or rely on the bank for — namely, investor protection and acting within the framework of applicable regulations. The creation of new financial solutions is therefore sometimes a lengthy and complex process.”

As it turns out, Rene’s 15 years of experience exposed him to several established Fintechs and Online Brokers. So undoubtedly he was well versed in tech and he understood many of the new innovations and their implications. He made a good point too. While investors clamor for new products and options to engage the cryptocurrency market, it was the bank’s responsibility to ensure regulations were followed and clients were protected.

But most crypto-enthusiasts simply saw this as a means of control over an asset that was meant to be unregulated. So was there some kind of middle ground that banks and investors could meet? And would ETPs be that solution?

Exchange Traded (Crypto?) Product

Rene’s article brought up the idea of using Exchange Traded Products (ETPs) as a bank product for investors. So I asked him for a bit of an explanation.

“ETPs history is the simple exchange trading of passive assets such as an index, commodity or currency. Accordingly, it is only natural that ETPs bring with them the ideal framework for the mapping and securitization of the new digital assets, cryptocurrencies.”

He also shed some light on why other products like Exchange Traded Funds (ETFs) and Exchanged Traded Commodities (ETCs) didn’t fit the bill. Financial offerings were highly dependent on the region in question. For example, crypto ETFs are a big possibility in North America and are currently waiting for SEC approval. However, Europe has much stricter regulations on ETFs in order to protect investors. This makes it a much more difficult process to bring that type of product to market.

Rene did note that ETCs could be suited for the purpose of owning crypto since it issued a certificate, and are currently in use. In fact, crypto ETCs are seeing a strong upward trend in popularity. Rene had personal experience with this as well, as he had pioneered a crypto savings plan which he helped design to “give customers a wide range of easily accessible cryptocurrencies which could easily be invested in on a regular basis.” The product was quite popular with private customers and even caught on with other online brokerages. So why did he believe that ETPs were a better option?

“ETP’s history is the simple exchange trading of passive assets such as an index, commodity or currency. Accordingly, it is only natural that ETPs bring with them the ideal framework for the mapping and securitization of the new digital assets, cryptocurrencies.

So while ETCs can offer clients the opportunity to interact with cryptocurrency, the overall system was a little clunky and wasn’t optimized for dealing with these digital currencies. Instead, ETPs offered a more natural framework and more thorough security for these new assets.

The world of cryptocurrency is certainly developing and is far from maturity. Every day new offerings are introduced, and the financial industry is having to adapt and evolve to meet the ever-changing needs of its client base. Fortunately, pioneers like Rene are helping to pave the way for cryptocurrencies and their continued adoption within central banking. As the market continues to evolve, there will undoubtedly be many more opportunities for innovative solutions to help couple the financial industry with these exciting new digital assets.

 

Author Bio:

Jonas Wilken is a recognized expert on independent financial market topics, including investment solutions, regulation, and cryptocurrencies. He has written and spoken extensively on these topics, is quoted in the trade press, and speaks at industry conferences.

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