Episode Transcript
Ryan: Hello and welcome to the FTSE Russell Convenes. I'm Ryan Sullivan. I'm excited to talk to Russell Barlow and Stephan Coltman from 21 Shares about digital assets. Russell. Steven, great to have you guys here today. Thanks for joining.
Russell: Thank you for having us.
Ryan: Why don't we jump in with you, Russell? You know, going back to 2018 when 21 Shares was founded, we've seen a number of different approaches to regulating crypto assets globally. Can you talk to us a little bit around the amount of conviction and how 21 Shares has kind of stayed the path with that level of uncertainty from a global regulatory perspective?
Russell: Yeah, I mean, it's really interesting question from the perspective where we are today where there's a lot more comfort with crypto and digital assets. But back in 2018, you're right, it was very early in its infancy. That conviction came from really our belief that digital assets and cryptocurrency was a technology that's here to stay. At the time, we really demonstrated our conviction by being first.
What does first mean? Well, we were the first into the marketplace with an index ETP. We were first to the market with a physically backed Bitcoin and then an Ethereum ETP. We were first into markets such as the UK and Australia. And then when the US opened up, we were there on day one with our Bitcoin products and they're on day one with our Ethereum products and has continued to be first to market with products like Ethereum and Sui and Hyperliquid in the US.
Now that first mover advantage really I think is that demonstration of conviction. We set ourselves up in Europe primarily because the regulatory framework at the time was more open and accepting of crypto assets. We didn't want to wait until the US was ready. We really believed that the right thing to us to have presence and product in the market. And that's put us in a really strong position as being the largest issuer in Europe in terms of market share and the largest issuer in terms of the number of products we have in the market.
Ryan: That's great. Yeah, over 50 products globally. I believe that's right now. So a lot of first to market, a lot of first for the firm that first wave naturally, you know, looks like innovation, right? So we're talking about being first to market, first mover advantage. But when it comes to innovation, we're seeing, you know, a lot of talk right now, especially within Footsie, Russell and tokenization. And some are already kind of saying this is going to replace the ETF wrapper, which you know, I think everybody's looking for the next ETF killer, right?
That's a good headline.
But where do you guys see tokenization? Is this something that's going to become the more preferred wrapper or will this kind of just be one of many product solutions available for investors?
Stephen: I think we're a long way from tokenisation, replacing the ETF industry. There's a huge amount of market infrastructure that's built up around trading, custody, administration with the ETF wrapper and that's going to continue to be the main way that people invest for the for many years to come. There's so much built around that.
Where tokenisation can maybe come in more in the near term, I think is for assets that you can't currently easily put on an exchange to trade.
So tokenising things like specific buildings and a real estate project or specific private equity businesses, royalties related to IP, pieces of fine art, these, kind of, more niche use cases which you can't replicate within an ETF. But where they may be interested in holding an asset like that. And where some people may be interested in issuing a token on that kind of asset just to for there to be a publicly available price that people can see the value of that underlying asset that they have within a broader portfolio maybe. So these kinds of niche use cases that are specifically suited to tokenization, but can't be replicated within an ETF. That's where you may see some growth.
And then longer term, as that becomes developed, then you will start to see some of the benefits of that tokenize structure in terms of efficiencies around the back office and cost savings. And then you might start to see a migration of that market infrastructure across, but I think that's going to take many years and it's not going to be a threat in the immediate term at all for the ETF industry.
Ryan: Russell, anything to add there?
Russell: Yeah, I think what you need to remember is that the wrapper is not the moat. So it isn't the wrapper that makes you kind of better or worse than another issuer. It's actually the expertise that you have in that particular area.
And for us, the moat is around our expertise as digital assets and crypto product provider, and we do believe that over time, tokenised offerings will get to have a more important and larger share of the way in which capital is allocated to that ecosystem.
But right now, the ETPs are the product of choice ETFs because they have the clarity from a regulatory perspective and from the market infrastructure perspective that I think the to Stephen's point, and they're still going to be very, very important for a number of years to come.
Ryan: Absolutely. It's funny because I mean, that's the ETF market 30 years ago with a handful of providers, not much back-office functionality. And now it's become the dominant player and it's a must have solution for any service provider…
Russell: And that’s just innovation and progression. And I think you could try and stand in the way of that, then you're probably doing a disservice to the industry.
Ryan: And Stephen, you had mentioned niche in your response here And I think when folks look at the crypto industry at large, I think there's a lot of folks that say, might say, this is kind of a niche asset class. But when you guys drill into the actual raw trading data and fundamentals of how this market is continuing to evolve, is, is that a fair comparison or is this a much broader use case than investors might be recognising?
Stephen: Well, I think it's a much, already today, a much bigger market than most people recognise. You speak to people in traditional finance and because I guess because the regulations only really come in quite recently, so they haven't been following it that closely.
But when you look at the scale of the industry today, Bitcoin trades easily $50 billion in a day.
And you compare that with the FTSE 100 where the aggregate volume of all the FTSE 100 companies is typically around £7 billion a day. The UK main index is not a niche asset and look at the UK gilt market, the debt market which is substantially larger but still trades maybe 30 to £40 billion worth a day. So this is, you know, Bitcoin has 10s of millions of active users around the world, trades huge volumes as a large market cap.
So to ignore this asset now is really to get left behind with what has been a trend that has been growing for a number of years now. And the regulators have been really catching up. People worry about the volatility of the asset, saying it's been it has a reputation as being a very volatile asset, but that in itself has been coming down as well. It's getting comparable to that of gold.
So we have a, we have product that balances gold and Bitcoin together on a volatility adjusted basis and that weighting in Bitcoin has just been steadily increasing over time as the Bitcoin volatility has come more in line with that of gold and more comparable. It's a similar volatility to a large cap US tech stock. So it's really highly investable asset class and of a very large global scale. So to consider it as a niche speculative corner of the financial market is there is just incorrect.
Ryan: Ignore it at your apparel, I guess because it's kind of the messaging now. Russell, we're halfway through 2026 give or take. What surprised you the most around kind of the performance of the the crypto asset class at large so far this year?
Russell: An asset that trades 24/7, 365, there's always kind of activity occurring and we need to live with that. Well, our products don't trade 24/7, the instruments do.
And we need to be aware of what's going on in terms of what kind of what surprised me less over the near term, but maybe more over the past 18 to 24 months has been the regulatory environment and the comfort and the framework that's been put in place.
So regulators are increasingly now more comfortable about thinking about a framework for how they can provide investors with access to what would be regulated products or maybe more traditional exchanges, bringing the asset from something that's more speculative through online exchanges into sort of more traditional wrappers that allows me to incorporate in their portfolio.
So the regulatory backdrop's been something that surprised me. I expected it to pick up and to be more favourable. But maybe the pace at which it has happened and really it's been led here in the US with the SEC’s changing stance has been a really favourable dynamic in terms of the market environment.
Ryan: That's great. You don't usually hear a positive surprise when it comes to the regulator. So that's, that's a nice change of pace. Stephen, how about yourself?
Stephen: I think what has surprised me this year is Hyperliquid, which as Russell mentioned that we've launched Hyperliquid products middle of last year in in Europe, the first one globally, but also more recently here in the US. But what has been surprising is it's obviously a protocol that we had a positive view on for some time. But the way it's just it emerged as this go to venue for assets they can't otherwise trade. So, it trades 24/7.
It was historically a very crypto focused exchange but is now increasingly trading traditional assets like the S&P 500, like oil and gold. And what's been surprising is who would have thought that, you know, the start of the war with Iran would be the catalyst that drove this need for people to then be able to trade oil over the weekend.
And then once you get that critical scale of liquidity, you know, liquidity begets liquidity and you get the network effects and suddenly you're seeing, you know, SpaceX securities trading and all these new traditional finance assets traded on this exchange and the interest that's just exploded around that.
So that's been, it shows how unpredictable these things can be. You can have a positive view on something, but the catalyst that really gets it to take off and really succeed is just very hard to see beforehand.
Russell: And what I like about that hyper liquid example actually is it's something tangible. So, when I look at the enthusiasm for AI, sometimes kind of surprises me because as a technology and innovation, it's certainly kind of very disruptive. But I feel blockchain technology actually has a much greater use case, and maybe more disruption can come from that. But they're very difficult to touch and feel and feel like you can connect with blockchain technology.
Whereas AI, we all managed to sort of interface use Claude or ChatGPT and all of a sudden, you can start to see the power. That's where I kind of feel like Hyper Liquid has helped credentialise, actually the technology because now, as Stephen mentioned, you can trade at the weekends, or you can trade in securities before they actually become IPOed.
And so all of a sudden now it's giving you a use case and a framework within which you can express your kind of investment views in a way that you wouldn't have been able to do before.
So maybe that helps just people sort of understand the power of the technology because they can interact with it, although they don't necessarily know they're interacting on the blockchain. Underpinning Hyper Liquid is, is their network.
Ryan: That's a good segue into education. So, as it comes to you know, educating your investors whether it be retail, institutional, I'm kind of curious what approaches do you guys take? Where have you seen success? Is there a particular avenue you guys pursue when it comes to investor education?
Russell: First, we have to think about the channel down the retail channel. Actually, there's a larger degree of understanding of the differences around the different crypto asset protocols from what are quite a crypto enthusiastic community. So in there, it's being able to demonstrate that we're specialists in an area that they're passionate about and committed to.
And when you think about the broader retail marketplace, you're really just trying to help them understand why this technology has a role and where it's different and why owning it in part of the portfolio can be something that just brings an additional source of return and some diversification.
And then it's not that similar a story when you move through the more sort of experienced investor community. So you're moving into high net wealth or advisors or institutional investors. But the language that you need to talk does need to adapt.
So you need to be comfortable about talking about strategic asset allocation frameworks and long-term capital assumption models to be able to help them connect with kind of the assets they're investing in. One of the ways in which we like to think about articulating it, it's a lot of this technology is very early-stage venture investing.
And if you frame it in that approach, then you're not looking for a multiple on earnings of a business that you might from a traditional equity. You're framing it through a venture investment that actually could look quite expensive. But when you understand the growth opportunity, then you can start to see the payback and the value in owning it.
And we're at a point now where crypto is deemed to be an emerging asset class and the regulatory framework is credentialising it in that particular role. So now actually it's an active decision by an investor to have a 0 allocation, whereas in the past, they could have defaulted to, “It's something that we don't need to look at” your question around speculative is something could have easily been used as a challenge.
But now to not have a view to sit at a 0% allocation, that is something you actually probably do start to need to have to justify.
And it's just our ability to help investors understand where they want to fall when it comes to being able to make that decision.
Obviously, we're biased. We sort of think that it does have a role to play. And I think if you can incorporate an asset that's got a positive expected return that has a correlation differentiation to the other assets that you're home, then it hold it does earn its place in a portfolio and then it comes down to the sizing.
So you've got to just think about the, the sort of contribution you want from that asset in your portfolio.
And that's how we're sort of leaning into the conversations with the different investors.
Stephen: Yeah. And I think that's underappreciated that if you're a passive diversified investor, in theory, you want to, you're supposed to want to own the whole market, just own everything on all assets and then you get the general growth in the overall asset base. And to argue that crypto is not a part of that now is an increasingly anomalous position.
So if you're 0, then you're actively betting against something that is, you know, a significant asset in its own right and has been growing and is a you know, if you're if you're, if you're philosophies that you don't market time and you don't take a view on you want to have a strategic asset allocation and you want to own again, maximum diversification and own the market, then yeah, it's difficult to justify not having some exposure to this asset class.
Ryan: Yeah, no, is almost an investment decision in and of itself.
Russell: Right.
Ryan: You have to explain the ‘why’ if you are going to be at 0.
Russell: Maybe to use your analogy, it's off benchmark.
Ryan: Yeah, exactly. Nicely done gentlemen. Thank you both very much for the time. This has been a great conversation, and we really appreciate the partnership with 21Shares. Thank you.
Stephen: Thank you
Russell: No problem. Thank you very much as well.
