GM, Joanna here! 

Bitcoin is getting boring.

As the crypto world breathlessly awaits the approval of a spot Bitcoin exchange-traded fund, Bloomberg reports that a startup of Citibank alumni has launched a depositary receipt for Bitcoin. 

That might not sound very sexy, but bear with me — it says volumes about where crypto is headed in 2024. 

In short: the TradFi creep is real and it’s coming.

Let’s get the technical details out of the way.

Depositary receipts give US investment companies exposure to foreign companies, but in a way that feels safe and familiar. 

How do they do that? 

• A depositary receipt is a bit like a stock — it represents ownership in a company — but the company is outside the US;

• They are intended to mitigate risks associated with offshore investing;

• American depositary receipts are dollar-denominated, trade on stock exchanges, and cleared through the Depositary Trust Company — the plumbing of the US markets.

What does that have to do with Bitcoin? 

The startup, Receipts Depositary Corporation, is planning to offer an instrument that looks like a depositary receipt but provides direct ownership of Bitcoin. 

RDC said the underlying assets will be safeguarded at licensed custodian bank Anchorage Digital, and cleared through the DTC. 

The depositary receipts don’t go through the same Securities and Exchange Commission approvals process as ETFs do, as they are covered by a regulatory exemption. 

They are limited, however, to institutional investor clients — this is not a retail product. 

Why is a Bitcoin depositary receipt important? 

If this all sounds a bit dry, that’s the point. Institutional investors such as banks and pension funds like dry. 

Wall Street has spent the past decade talking a big game about innovation, but really these firms are too heavily regulated to move fast into new asset classes.

While hedge funds trading their own money have a foothold in crypto, Bitcoin has remained too risky for, say, pension funds managing the retirement savings of teachers and firemen.

Volatility, regulatory uncertainty, cybersecurity concerns, and a lack of market structure that feels safe and familiar are all deterrents. 

But pensions and endowments represent potentially huge inflows of money — one of the reasons there’s so much excitement about the prospect of ETFs. 

The Bitcoin depositary receipts are an answer to the question: How do you get direct ownership without the hassle of taking physical possession of the asset?

That’s what David Easthope, a senior analyst who heads up the market structure and technology team at Coalition Greenwich, told me. 

With these receipts, “you don't have any of the hassle of counterparty risk or cybersecurity. You are not controlling the physical asset. You don't have to worry about your private key, your wallet, [or if you will] participate in staking if you offer a product for Ethereum,” Easthope said.  

Firms don’t want the headache of selecting and onboarding a custodian to safeguard the asset, he added. 

“They just want to have 0.5% or 1% of the endowment or whatever to have access to Bitcoin,” but without having to bring on a new technology vendor.

Whether depositary receipts — or spot ETFs, for that matter — are good solutions remains to be seen. Investors will vote with their dollars. 

But RDC’s product is one more sign that capital markets firms are laying claim to crypto.

Email me [email protected] or Telegram @joannallama.

Story of the Week

The European Central Bank has said it is ready to pay €1.2 billion to partners in the private sector to help develop a digital version of the euro. The central bank said it would seek partners for five separate initiatives, including developing offline payments and risk and fraud management.

Post of the Week

Crypto lawyer Jake Chervinsky credited crypto asset manager Grayscale with paving the way for spot Bitcoin ETFs. But as expectations mount that US regulators are about to approve the first such products, Grayscale might be eclipsed by Wall Street giants like BlackRock muscling in on the market. 

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