Mr. Duke, ETC Group has launched a number of crypto ETPs on Xetra with a Bitcoin Cash product as a recent addition. By which criteria do you pick the underlying assets for your crypto ETPs?

We analyze the long-term investor interest and resilience regarding different crypto currencies, measured by market cap development and the number of active wallets. Bitcoin Cash actually possesses the fourth most active wallets out of any crypto currency, indicating that it is used as a means of payment rather than as a store of value. When it came into existence through a fork in the Bitcoin blockchain in 2017 digital asset experts got behind it immediately. At the time, there were many concerns regarding Bitcoin’s scalability and speed, and Bitcoin Cash presented an alternative that offered cheaper and faster transactions.

Bitcoin’s value has risen over 115% so far this year whereas Bitcoin Cash is up about 81%. Does the smaller crypto currency offer potential to catch up to the segment’s leader?

Performance is always difficult to predict. On a long-term basis, Bitcoin has far outperformed Bitcoin Cash. Some investors would rate that as a sign that Bitcoin Cash has potential to close the gap, but the supply-demand-patterns for these two crypto currencies differ from each other significantly.

Meanwhile, the number of crypto products in the market has been growing steadily. How does your strategy differ from those of other ETP providers?

Investors need to look at the way the different products are structured. The collateral that is held in custody for our Exchange Traded Products (ETPs) is not lent out and remains in cold storage to protect the bondholders’ investment. This is not the case for some competing providers who lend out their collateral to generate more revenue. However, lending of crypto currencies is not regulated in the same way as other financial services, which creates a lot of uncertainty. Thus, the risk-adjusted returns of different ETPs can diverge greatly.

Which other security measures do you implement?

We installed a third-party administrator who has veto rights over the crypto transactions within our operation in order to minimize the possibility of white-collar crime. We also do a lot of research into the technologies different custodians are using before selecting one for our products. Anyone who wants to access our processes needs to provide airtight authentication and documentation, either via digital signatures or via time-based video identification. Aside from these security measures, several other differences exist between our product and ETPs by other providers, which can influence performance directly.

For example?

Whether or not a product offers access to fork returns. When the Bitcoin blockchain forked in 2017 and Bitcoin Cash was created, investors received a unit of Bitcoin Cash for each unit of Bitcoin they held.  We think that investors should be entitled to these returns, just as they have access to stock splits when they invest in equity. Several competing products, however, either offer no access at all or leave the decision regarding fork returns entirely up to the issuer on a case-to-case basis. In our case, the assets are fully fungible as well, as we try to ensure that the liquidity is as high as possible and costs of transaction affect investors’ returns significantly.

How important is Germany a market for ETC Group?

The Xetra listings of our products were massively important to us. It’s remarkable that BaFin recognized the potential that crypto currencies offer and approved our products. The Eurex committee accepting our ETPs for central clearing was also very significant because this feature makes a big difference to institutional investors in particular. BaFin also confirmed its progressive stance recently by approving the Eurex Bitcoin ETN Future, which uses our ETP as an underlying. While other futures are cash-settled, the Eurex Bitcoin ETN Future allows you to take physical delivery of the ETP, which in turn is fully fungible with the Bitcoin units it uses as an underlying.

One characteristic that makes gold ETCs attractive to investors is the fact that investors don’t have to pay capital gains taxes for them after a holding period of one year. Will crypto ETCs be treated in the same way?

We have confirmation from the German tax authority that this will continue to be the case going forward. As to that, an update to the tax code is in the works and we have been careful to structure our products so they benefit from that same tax exemption rule.

Which potential do crypto ETPs offer in other markets aside from the EU and Switzerland?

This always depends on the regulator in charge. In the US, futures-based Bitcoin ETFs have started trading with implicit approval by the SEC. Several market participants are already regarding these products as the holy grail of crypto investments. However, the exposure investors get through these vehicles is by no means as good as the exposure via fungible ETPs that allow them to take physical delivery of the underlying. Thus, I don’t expect ETFs to take inflows away from other ETPs.

In the ETF space, asset managers have started to cooperate closely with brokers in order to market their products. Will ETP providers conduct similar strategies?

Definitely, crypto ETPs and ETCs are investment products like any other. They are just fairly new, so financial services providers and investors just need some time to become more comfortable with them. The approval of Crypto ETNs for retail investors has been an important step, as this allows brokers to advise these investors – which they couldn’t do for unregulated products. Cooperation with brokers will become more important for crypto ETP providers as the competition increases. We expect a race with many winners.

However, the discussion regarding the high energy consumption of crypto currencies has deterred many investors from entering the space.

Product issuers who are active in the crypto space have the duty to drive the industry towards sustainability. In our case, we are reinvesting returns from our products into renewable energy – and we need to discourage miners to use energy from fossil sources as well. Nearly three quarters of mining are already powered by renewable energy. In addition, few crypto currencies still use the energy-intensive Proof of Work mining mechanism. Ethereum is moving to Proof of Stake, which is far greener. Thus, the emissions the crypto industry produces are declining. They already seem small compared to assets like gold, for which energy usage and storage are very inefficient and the extraction process is polluting the environment by using cyanide and other poisonous materials.

Bitcoin, the largest crypto currency, will continue to use Proof of Work. Does Ethereum’s higher flexibility mean that Ether will eventually become the leading digital currency?

Investors would be foolish to write off that possibility. Aside from a more effective consent mechanism, Ether has also attained a more deflationary character through recent updates, as the network now burns parts of the transaction fees on the blockchain. Once investors have digested these changes, the dynamic within the crypto space can change significantly.