Markets Never Close: The Case for Tokenized ETPs | Alex Pollak | 21Shares [EP. 308]

0:00 20 plus years ago, people were very skeptical about the ETF industry. So with the benefit of hindsight, 20 years later, it's become an incredibly popular tool. It reminds me of what we're seeing in the crypto ETP space as well. So I think it's got a very long runway ahead of it. Even though with tokenized assets, with blockchains, the way that people interact with the financial system is changing all the time. This is Money Never Sleeps. Sharp riffs, big ideas and real insights from smart people. I'm Pete Townsend. Let's go money. Never sleeps well. So joining the show today is Alex Pollock, Managing Director and Head of UK and New Markets at 21 shares, providing the largest suite of cryptocurrency exchange traded products or Etps in the world, making crypto investing more accessible. Welcome to the show, Alex.

0:48 Pete, thanks for having me on. Listen, Alex, when we caught up recently, we ended up in a really interesting place and it wasn't just where crypto ET PS are today, but where they might go next. The first thing I wanted to dig into was that this thought I've had that's been mulling for a few years and that as institutions get more comfortable with custody, with on chain operations, with wallets and the related security around all that, do you think they're going to start holding crypto directly rather than through ET PS? Or is this really about operational risk appetite where Etps will continue to play a role? What do you think if we go back kind of, you know, 10 years or more than that, it was quite difficult to to buy, buy crypto. And the way that the market has evolved, I think has been really helpful in allowing investors to access crypto, whether it be via Etps, They can access crypto via centralized exchanges, centralized crypto exchanges, or you can do it via a crypto wallet or via a decentralized system as well. So I think Etps will definitely play a part, but I think more and more investors will look at other options as well as the market evolves.

2:03 I also think it what it depends on what type of investor you are. So if you are a an investor just looking to allocate a small part of your capital to the crypto space, I think an ETP probably is the easiest way to do it. You can trade it via your regular brokerage account. It trades on a regular exchange. It looking, it looks and feels a little bit like a regular equity. Those investors will continue to use Etps. I think if you're an asset manager and you're running a multi asset portfolio, I think the ETP is probably the easiest way to allocate to the space because of AML and KYC and things like that. However, I think you know, if you are somebody who is deeper in in in the crypto world or you're a crypto native investor and have been investing in the space for many years and you're comfortable kind of with having your own wallet and password and keys or you are running a crypto fund, then you'll probably trade via one of the other routes, potentially not via an ETP, but doing it directly.

3:01 But but I think what is interesting, Pete, is, is that the ETP narrative is evolving so quickly. Investors, I think assume that when they're buying crypto directly, it's going to be cheaper than doing it via an ETP. That's not necessarily always the case. We always encourage clients to look at this from a, what we call a TCO perspective, a total cost of ownership perspective. So looking not just at kind of what the headline TR is, but also looking at what the spreads are and looking at the liquidity. And because investors want to know that it's fine to buy, but they want to know that they can sell as well. So you know, looking at that TCO, looking at the liquidity and looking at how these products have performed during stressful times is very important as well.

3:46 Yeah, that's interesting. I hadn't thought about that in that you're going to have a spread on what you buy or sell through a crypto exchange. And if you're buying or selling through an ETP exchange traded product, then the fund manager themselves might have negotiated a different type of spread or a lower rate that you would typically find buy directly through an exchange. Pi, you know, a few years ago when I started at 21 shares, I remember looking at some of the spreads and sometimes even for some of the more popular coins, you know, you'd have spreads of like 10-15 basis points. That's pretty wise. But when you look at the market today like it's come down to minus minuscule bits.

4:27 If your US listeners, the Etps there will actually they're ETFs in the US, they're some of the most successful ETFs ever been launched in the US market and those have spread of of minuscule bits. If you do your homework and analysis, you'll find that you may actually get a more value for money out of trading the ETF or the ETP than going in any other way. ET PS are a major financial innovation of the last, you know, 30 years problem, right and that we're just at a point where this is an evolution and that we have new products coming in, we have new asset classes coming in and as the market evolves that so will these products with you guys with 21 shares, this isn't just about single asset products because those were technically phase one. Do you think the next phase becomes more sophisticated basket exposures effectively doing portfolio construction inside the wrapper I?

5:23 Mean, first of all, I, I've been in the ETF industry for, for a very long time. I remember 20 plus years ago I was working at iShares and people were very skeptical about the ETF industry. So, you know, with the benefit of hindsight, 20 years later, as you say, it's become an incredibly popular tool. It reminds me of how what we're seeing in the crypto ETP space as well. So I think it's got a very long runway ahead of it. Even though with tokenized assets, with blockchains, the way that people interact with the financial system is changing all the time. I think baskets will become a lot more popular, but I don't think we're there yet. I think at the moment the focus is still the single coin ET PS It's it's a little bit of push and pull.

6:06 So I think, I think investors are really interested in baskets, but I think many investors are constrained by what regulators are doing for your UK audience. For example, if we look at what the FCA has done over the last six months, they, they, we, we've made progress in the UK. The FCA has lifted the ban on crypto, we call them ET NS here. So resale can now buy crypto ET NS. But what they've done is they've only opened it up to to Bitcoin and Ethereum. So even even if you're a retail investor in the UK and you want to buy a basket right now, you can't because because the regulator doesn't allow it. the US is clearly kind of evolving a little bit faster than that in Europe, as people become more informed about the asset classes, the education improves and people people want to get wider exposure, baskets will become more relevant.

7:00 But I don't think we're there quite yet. OK, OK. And just think about where it could all go, right? And that the the dream scenario that people in investment operations started talking about 10 years ago was that a fund itself becomes a smart contract. And that all of these very complicated terms that get built into old school transfer Agency systems and share registers and all of that, all of that goes away. And when you can truly have funds operating as smart contracts, they become what we call composable and Etps itself will eventually become programmable.

7:41 What does that resonate for you like E? TETFS are very efficient vehicles, right? It's a great way of getting exposed. Well, you know, whether you're interested in equity or bonds or crypto or commodities, whatever it is, it's a very, you know, it's, it's a great tool. It's, it's a technology essentially. And I, and I always thought, well, why would you need another version of that when it's already a very efficient market? But actually the way that markets are evolving where it is becoming more of a 24/7 game, clearly, when, when your, your Stock Exchange is closed, how, how do you buy and sell into into this market? You know, I think the way that what you're referring to is kind of tokenized versions of of the EPS and you know, there are some big brokers out there who are working on this.

8:26 You know, we, we are definitely looking at this. In fact, we, we really do want to tokenize some of our, our only ETP's. And I think the beauty of that from an investor perspective, and it's all about, you know, giving investors the tools or the solutions that they that they, that they need to help them manage their portfolios. You know, if you wanted to, you know, if you're too busy in the week to, to actually trade or you want to maybe trade in the weekend based on some news that's out there, you know, you could do it via a token on on, on a blockchain. And then I think what would be really interesting is that when the market opens on a Monday morning, can you actually transfer it that into your brokerage account? So, so, so, so kind of, you know, make an efficient mechanism where you can trade between the the token and the and the ATP. Yeah, yeah, that's it.

9:13 And it's if NASDAQ, the New York Stock Exchange and others are making a big push into tokenizing their exchange frameworks and tokenizing their post trade frameworks that this all started 7-8 years ago and now they're just really serious about this. What you mentioned about the market opening and closing, that's that's one interesting point is that markets are effectively open 20% of the hours of the week. How is that interplay going to work between we've got instruments, underlying instruments that are trading 24/7 and we've got funds that are perhaps not trading 24/7. How? How is that all going to play out? I think that there is definitely a group of investors who is trying to push for that. But again, this is down to regulators as well. Yeah.

10:00 And so we really need regulators to help create frameworks to give investors guidelines about what they can and can't do. But I think once that is all live and up and running and there's more clarity around that, it is going to happen. So I think, you know, the, it's almost like the technology is a little bit ahead of where the regulators are. But I think once, once the regulation comes into place, and I think it will do, I think we will see more of that happening. In a nutshell, it's not the ET PS are disappearing. They're not or I don't think they will. They will continue to be there as an instrument that is used for people to access certain returns and certain assets and return exposures. There's tons more innovation that can be done with ET PS, from simple wrappers to programmable baskets in a market that may not sleep anymore.

10:49 Exactly. Exactly. Wonderful. So listen, Alex, thanks for jumping into Rif with me on this. What's the best way for people to get in touch and to learn more about 21 shares? Research and product information is on the website. You've got some contact information on there as well. We're on all the socials as well. We as as an issuer, we're really trying to help investors access this space and doing it in a responsible regulated vehicle and producing content and research that will also help them become more informed about the space. Please look at the website, sign up to our newsletters or or get in touch with us individually. Thank you and keep up the good work. Great. Wonderful. Thanks so much, Alex.