MASTERCLASS: Digital Assets

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  • 50 mins 36 secs
Three experts explore how the economy around digital assets and cryptocurrencies continues to evolve. They look at the scope and scale of adoption, different strategies for gaining exposure, tips for wealth managers as they consider offering a solution to clients, and much more.
  • Payal Shah, Director, Equity Research and Product Development - CME Group
  • Chris Baker, Director, Business Development at Fidelity Digital Assets - Fidelity
  • Kyle DaCruz, Director, Digital Assets Product- VanEck



Jenna Dagenhart: Hello, and welcome to this Asset TV, digital assets masterclass. We'll cover the evolution of the ecosystem, the scope and scale of adoption, tips for entering this space and much more. Joining us now we have Chris Baker, director of business development at Fidelity Digital Assets, Kyle DaCruz, director of digital assets product at VanEck and Payal Shah, director equity research and product development at CME Group.

Well, everyone, thank you so much for joining us. To start us off, Payal, how has the digital assets ecosystem evolved in recent years? Likewise, how has the derivatives landscape shifted over time?

Payal Shah: That's a really interesting question to kick off with, Jenna. We introduced Bitcoin futures back in December, 2017. Since then, we've seen a real upwelling of customer demand, both from all existing clients and from new clients coming to the market, especially to access crypto markets. Folks are really warming up to the idea of crypto. Interest has come from banks, from asset managers, from hedge funds, from prop firms. It's pretty clear to see that this asset class isn't going away. As we've seen from some of the recent announcements from the large asset managers entering the space and signaling in growing conviction that crypto markets are worth dedicating more and more resources to. I think this will only increase as people figure out better use cases for digital assets and use them more and more in their portfolios.

If we layer in the current macroeconomic environment, I think that there are three broad narratives that support upwelling of interest. Firstly, some view crypto as a hedge against future inflation like digital gold, if you will. Then, whilst, historically some of the prize characteristics of crypto was that it was uncorrelated with other assets, which helped portfolio diversification, I think recently some correlations with risk assets like stocks have begun to creep a little higher. Thirdly, I think, investment managers are now more comfortable with the volatility of the asset class and the returns that it generates. In fact, for us, the conversations that we've been having with our clients, those conversations have really shifted over the past few years. It was all about how clients were asking us, what is Bitcoin or what is cryptocurrency? Now they're asking us, how do they actually get involved with crypto? How do they get exposure? How much should they allocate?

When it comes to allocation, access has always been a sticking point. Not all firms have been able to, or they don't want to, access the spot markets or unregulated platforms. With CME's cash settled futures on Bitcoin and Ether investors are able to access those crypto markets on a platform with really deep liquidity. The CME Bitcoin contract is a regulated USD settled monthly futures contract that settles to an index. Breaking that down just a little bit, it's regulated by the CFTC, it's plug and play, in terms of design, so just like the S&P 500 features contract. Its notional size is five Bitcoin. A great size for institutional to use. But, it's USD settled, which means that although there's price exposure to the underlying crypto, you don't have to handle things like wallets or custodians or deal with security concerns in terms of insurance on your wallets and so it makes access easy. It does away with some of those barriers that you would find in the spot markets or the underlying spot markets. Now, the futures contracts go all the way out to December 2024. We have six monthly contracts, four quarterlies, and two Decembers always listed. The main concept is the notion of settling to an index, so convergence to an index. We started by introducing the CME CF Bitcoin reference rate, or BRR back in 2016, so about a year before the launch of the future's contract. It's a once a day reference rate to the us dollar of Bitcoin. It represents the executed trade flows on major crypto exchanges, like Bit Stamp, Coinbase, itBit, Gemini, Kraken, LMAX. Because the future's settled to the reference rate, it's not vulnerable to any, one price or over reliance on any, one exchange. Because of those design choices, together with the incredible interest that we've seen, when we introduced the Bitcoin contract back in 2017, we were doing about 1000 contracts a day, and now we're doing 100,000. That's crazy and it's amazing to have that kind of growth in four years for an asset class that didn't even exist 10 years ago. It's been a pretty incredible ride for us.

Jenna Dagenhart: Chris, turning to you, what's your approach? Why did Fidelity decide to be a player in this space to begin with?

Chris Baker: Yeah, I think a lot of it was market demand. Much like Payal was just talking about, where different investors want different flavors of exposure and they're just trying to express, I would say, an opinion around the space. Something we heard back in the 2017, 2018 timeframe, obviously on the heels of the market bull run for Bitcoin when we basically about clipped 20,000, we heard pretty loud and clear that there wasn't a good solution for registered investment advisors or wealth managers, people that were regulated that needed, say, a third party custodian. They looked around the space and I think looked and said, "Some features are checked off, but ultimately we don't have an avenue to go and express this and really facilitated for clients." Fidelity is a large institutional business that services a lot of RAAs in particular. That was a focus to start and say, "Okay, broadly, institutions may benefit, Fidelity ourselves may benefit from having a custody and trading platform to actually get exposure to spot Bitcoin."

That's the journey that we started on in 2018. I think a testament to fidelity going back to Abby Johnson's father, when he started what is called the Fidelity Center For Applied Technology. He started that in 1999. It allowed Fidelity, as a private company, to kind of incubate these new business lines and say, "Is there a need for clients or is it an internal need for Fidelity? Therefore, is there something we should try to build out of that?" Ultimately, we were a group that grew out of that, became a commercialized business in October of 2018. For the last about four years, we've basically been growing that business, bringing an institutional offering that clients can then look at and say, "This is a Fidelity experience, but with a new asset class."

I think we'll talk through it today on the panel, there's different ways to get exposure. Each of the groups represented, kind of represent a couple different paths there with options, investment vehicles, and really spot custody. It's been quite a journey. It's been an exciting four years. I think in Fidelity's eyes, there's still a very, very long timeframe to work towards, 5, 10, 15 years. That's really our scope of building these businesses.

Jenna Dagenhart: Given this new asset class, what role do digital assets play within the portfolio, Kyle?

Kyle DaCruz: Yeah. I think it's varied. I think I would start with saying digital assets, as an asset class, is not monolithic. Often, you'll hear clients say, "Well, I have Bitcoin, why do I need to buy Ethereum or other assets?" The reality is they're all very different and have different use cases. When we think of product design and what investors are going to be looking for, it really starts with the re investible opportunities and it's a potential store of value, so something akin to gold, which Bitcoin should eventually, or hopefully eventually, achieve, although, a caveat is right now is trading more like a risk asset in the short term. The second is really the growth type of allocation. You can achieve that through either crypto equities or buying tokens directly or through funds. We've done that through private funds in the US. Really the third bucket in opportunity is a fixed income type of exposure, so yield generation. There are various ways you can do that through staking lending and lending in both centralized lending, as well as defiant lending.

Jenna Dagenhart: What about the role of digital assets derivatives, Payal?

Payal Shah: Yeah. What's interesting is to see what purpose derivatives serve in our marketplace, either in managing risk or accessing the market or even speculating. With our futures, it's really easy to trade that market view in a capital efficient way. We're seeing different personas coming in and different reasons why people are trading. We have hedges coming in. We have miners. We have those firms that have accumulated positions in the spot market. If you take the example of a miner, or a company that's accepted Bitcoin payments, for example, they would be [inaudible 00:09:35] the physical, and they can use the two year structure in Bitcoin to figure out how much they should allocate in capital expenditure, on new servers, or, again, use the futures to hedge against price volatility. We have people using futures, because it's on a regulated exchange and they want to access the market in lieu of the spot market.

Also, because it's a regulated trading venue. Our platform promotes transparency and efficient price discovery. Counterparty risk is mitigated. Our clearing house is actually the buyer to every seller and the seller to every buyer. Then on the other side, you have the speculators, who are trying to trade or deploy strategies around price movements. They're easily able to short the future. Unlike the spot market, where you'd need to borrow the crypto to express a short view, with futures, you'd simply buy that number of contracts. Then, the futures are accessible 23 hours a day, so they start trading Sunday evening at 5:00 PM, Chicago, and they trade all the way through till 4:00 PM, Chicago time on a Friday afternoon. Cryptocurrency futures can also be traded on the platform and bilaterally, 24/7.

Really the role of derivatives, to your question, is to offer this melting pot. It's all of these different types of personas coming together. It's exactly this that makes for more efficient markets. It makes risk transfer more efficient, and it makes our futures the center of price discovery. Now, with the advent of crypto customers like crypto trading firms or crypto hedge funds or crypto lending funds, we're seeing a new and expanded customer base and interest, not only in Bitcoin, but Ether as well. Actually, we launched the ether futures back in 2021 and that contract is equivalent to 50 Ether.

Interest really peaked at that point because investors could now allocate to Bitcoin, they could allocate to Ether, they could trade them against each other. Now we're starting to see that portfolio effect around crypto. We're already starting to see macro trading firms take a tactical view with crypto allocations through futures. We're seeing equity long-short firms looking at crypto derivatives to compliment what other strategies that they already have. Then you have some of the prop firms who are also very active in the underlying spot markets and also our futures. It's really all coming together, just as Kyle mentioned earlier.

Jenna Dagenhart: Clearly a lot of different use cases, a lot of different ways that digital assets and derivatives can fit within a portfolio.

Jenna Dagenhart: ... can fit within a portfolio. So Chris, once wealth managers decide to enter this space, how are they getting their feet wet and what are some of the different approaches?

Chris Baker: Yeah. And I think to dovetail off what Payal says, the derivatives market, sometimes the leading indicator for some of the wealth managers we speak to, it's a regulated, well understood marketplace. And while they may be looking for spot exposure, a lot will reference the derivatives market and say, “Hey, we're now seeing the volumes that are being traded on the CME or elsewhere.” And that's been, I think a positive indication for teams to say, “I've been hearing this from clients for years, but now I'm starting to get comfortable more internally.”

A large segment that Fidelity works with is wealth management teams. And a lot of times, the progression that I essentially witnessed over the past few years that we've been in business is really this, I would say arm's length approach, at first, where people said, “We don't have a thesis around crypto. We don't have an opinion around digital assets yet, but our clients seem to want exposure.” Back a few years, they may have said, “You can go do that yourself.” But I think over time, as markets mature, as planners and wealth managers look at their book of business, they start to think of, how can we give a holistic approach? It's always, how can I help my clients in the most holistic way to plan for the future?

And really what we've seen is that maturation of the market kind of comes in, and converges, in this point where clients are still looking for exposure, they're starting to understand the space a little bit better, but also we're seeing advisors come up the curve as well and saying, "We're getting where this may sit into a portfolio. We're having conversations around portfolio allocation. Should this be 1%? Should it be 3%? Maybe half a percent?" Most of the time, likely, people aren't looking to have much larger positions, but they're really looking to have exposure into the space. And commonly in the marketplace, and Fidelity has a paper on this as well, talk about getting off zero. So having some exposure to the space, whether it's through Fidelity with spot markets, through investment vehicles out there, really the pathway is how do we just get an investment into the space?

And so oftentimes what we're seeing is teams really bucketed into three pieces. And it's really looking at it, as a firm, do we have an opinion around the space? From there, we can obviously offer guidance. So as a wealth manager, how do I guide my clients to the right solution? Then they think of how do I actually operationalize it? And that's really picking the particular solution. But then I think the last bucket, maybe they don't fall in a complete linear fashion is really, do we have an investment thesis on it? So even beyond just a non-solicit facilitation, do we actually have a recommendation around this? And I think we're still in the early phase of that. We're not seeing many teams do it, but there are a select few, maybe the more forward thinking wealth managers out there, they're saying we should have clients consider a 1% allocation. Whereas we've had other teams, they're still in this, I'd say research and review phase, trying to evaluate, does this sit in one of our models that we're then offering to clients?

So I think we sit in that operationalized bucket and we can talk more about it, I'm sure, as we go through the panel, but that's really where we're probably touching most of the wealth managers, how they then facilitate this access to clients for spot exposure.

Jenna Dagenhart: Kyle, what are you seeing in terms of adoption from financial advisors and institutional investors?

Kyle DaCruz: I love this question because I think it's, depending on the news source you select, one article could be saying, adoption is really just the tipping point and we're not close to mass adoption. And then another could be saying the opposite, and that adoption is here. I think it's interesting. I would say my takeaways are, it's certainly trending up. The point I would make is I think conversations have evolved. So from years prior, the conversations were predominantly educational in nature. Education them, what is Bitcoin? What is the blockchain? And now conversations have evolved to shifting to, well, how can we allocate to this space? How do we get invested in this space?

I think with those channels you referenced, the US is really hamstrung by the spot ETF rejections in the US, unfortunately. And so that leaves a limited option set, or opportunity set, for investors to get access to the space. And they can do that through equities or direct crypto investing, but not in a regulated ETF like product. Kind of circling back to the beginning, I would say we are still early. And in fact, I would point to a survey that Chris and his colleagues at Fidelity did in 2021, that said that only 3% of pensions and endowments are actually in on crypto. So as much as it's trending positive and conversations are evolving, I think we're still early. And I think until we have a major potential catalyst, I think we're likely to kind of inch up that frame.

And I would say what could be a potential catalyst? I think pro crypto regulation could be a major catalyst that could really broaden and open the floodgates as far as advisors.

Jenna Dagenhart: Chris, what are you seeing in terms of scope and scale?

Chris Baker: Yeah, I think Kyle hit on it really well there. The regulatory piece seems to be an area that I think it just puts advisors and wealth managers in a spot where they have to consider, how does this fit into our business. And I think there is some thoughtful work being done behind the scenes, and regulators are trying to come forward with regulation that fits around digital assets.

But from a scale and kind of scope perspective, I would agree with Kyle. We've done three years now, on the Fidelity side, we've done an institutional survey. And while you do hear that headline, oftentimes institutions are coming into the space. I would agree with that, but I think it's a very methodical coming into the space, if you will. And so what we've seen in the last three years is the trend continues to go up and to the right. There is more adoption. There is more comfort. There's a greater level of education around what blockchains are, what Bitcoin is, where it fits in a portfolio potentially. And that allows people then to facilitate these conversations with clients.

And so that, I think, from what we're seeing from a scale perspective, there's probably that early majority, maybe 10, 20% of wealth managers that are getting ahead of this. They feel very comfortable with the conversations. So they'll go to clients and say, "Do you have a strategy or an opinion around digital assets?" Or the inverse of that, clients are coming to them, and they're coming to wealth management teams and saying, "What's your strategy around digital assets?" And they're actually going, think of generationally. You have younger generations that are getting ahead of this and saying, "I would like to work with a wealth management team that has a future outlook on digital assets." And it may not be the only thing they're weighing when comparing wealth managers to work with, but it is a piece of that picture.

And so I think we're seeing that. That's definitely evolved dramatically over the last few years where teams are recognizing it as an opportunity, to then offer it to clients rather than, I think more of a scarier unknown asset class. Now I think they're seeing it as a generational wealth transfer opportunity. And also just a greater, as I was saying earlier, kind of a holistic approach to clients, even if it is one or 2% of the portfolio. They can now manage potentially more of a client's overall net worth.

Jenna Dagenhart: Payal, what would you say are some of the headwinds and challenges that you see in the development of the crypto derivatives market. And building off of our conversation around adoption, what's needed to ensure greater participation?

Payal Shah: So, I mean, there's already been so much development, for example, with the futures based ETF. And that was a really cautious first step from the regulator, but a really exciting one. It validates the space and it enables market participants and asset managers to do what they do best, like structuring products or creating ETFs around futures.

And there's obviously been a lot of turbulence in the broader crypto market of late, but one thing we're noticing, despite that turbulence, is the activity in our crypto product suite. And that continues to be a safe haven of liquidity, continued volume, and open interest growth. In fact, this last quarter, in Q2 of this year, we saw record trading in terms of open interest, and that's the number of contracts that are held overnight. So over 100,000 contracts were held and it was the second best in terms of average daily volume with nearly 60,000 contracts traded across all of those crypto products.

And so those turbulent times have also meant more participants with a need for risk management. And we also launched in direct response to that, micro Bitcoin and micro Ether futures last year, and micro Bitcoin and micro Ether options this year. And so that micro product suite really gives clients the choice of size, the choice of flexibility, and the precision of hedging because they are 1/10th the size of one Bitcoin or 1/10th the size of one Ether. So for the Ether contract, you're talking around about a notional value of around $200 a contract. So that precision is key, precision in hedging an ETF if they want. And we've already seen close to 10 million micro contracts traded since launch for both.

And in terms of greater participation, and speaking really generally, I think robust and fair regulation in global financial markets is essential for protecting market integrity. And so in our experience, there are a lot of market participants out there, particularly on the institutional side, who are looking for exposure to crypto, and having clearer regulation that allows for participation is certainly one factor.

And I think the other thing is having guardrails. So it's especially important during these turbulent market times, and especially when crypto is such a nascent and volatile asset class, as it still is today. And so throughout our 180 year old history in financial markets, it's that certainty that helps. And it helps clients take assurance that we have all the checks and balances in place to offer efficient markets. So things like circuit breakers that prevent the price from moving too far or too fast.

Jenna Dagenhart: No, I think last time, I checked Bitcoin is down about 50% or so year to date. Kyle, would you say now is a buying opportunity?

Kyle DaCruz: I think always now is a buying opportunity for Bitcoin. And of course it depends on your investment horizon. But what I would say is, I think there's both convincing arguments from both bull cases and bear cases, particularly right now. The bull case is that there's global instability. The base is building. There are fiat crackdowns and control of the fiat is escalating globally. And the adoption is continuing on crypto. And whether that's through large institutions buying or offering more to their clients, or retail investors getting access to this space.

The alternative side of that is the macro headwinds. And I think right now, the Fed is signaling kind of a hawkish view, which can tend to pull value out of things like Bitcoin, which as I alluded to earlier, are trading like risk assets at the time.

Having said that, I think timing, bottoms is very hard in traditional financial markets. I think it's nearly impossible in crypto. So it's a new asset class, it's nascent, and very subject to headline risk. And so I think the smart play is really, we always convince our clients to dollar cost average in as a better way to allocate to BTC versus attempting to try to time a market bottom.

Jenna Dagenhart: And of course, Bitcoin gets a lot of attention, but Payal, how would you describe the digital assets marketplace on the whole?

Payal Shah: Yeah, so I mean, Bitcoin underneath it is still dominant forces, right? They represent about 80% of the total crypto market cap. And although the interest in Eth is really growing, you see that really accelerating over recent months when you look at the backdrop of decentralized finance, or defi, and the growing adoption there. There's also demand for Ether from some of the layer two solutions, which are bringing scalability and efficiency.

Payal Shah: ... which are bringing scalability and efficiency, and also from the, what, 300, 400 Ether projects that are currently in the works. Then when you add in the developments on stablecoins, that excitement really starts to heat up. All of those stablecoins are mostly anchored around the Ether network. We're fast approaching one of the most highly-anticipated events of 2022, the Ether merge. All digital currencies are built upon widely-agreed consensus rules used to evaluate whether the transactions on their blockchains are valid and to secure the network. The Ether merge is really exciting. It's the first time we've seen a blockchain change its consensus mechanism going from the energy-intensive proof-of-work to the more efficient proof-of-stake consensus mechanism. This should set the stage for future scaling that's not currently possible under proof-of-work. Hopefully, it should also mean faster and cheaper transactions. What's for sure is that it will reduce Ether's energy consumption by around 99%. It will be much more environmentally-friendly.

We're already seeing investors starting to position themselves for the potential price impact. What we are seeing is record OI and volume across our Ether features and options. Ether futures actually achieved an average day volume in Q2 of six and half thousand contracts. That was up 30% compared to Q1. Also, 26 and a half thousand contracts were traded on June 15th, making that the most traded day of the year to date.

As Chris mentioned, in dealing with some of the risks associated with the Ether merge and for allowing others to speculate on technology plays, we are also launching Ether options in the next few weeks. This rounds out the offering, as we all already have Bitcoin options, Micro Bitcoin and Ether options, and a choice of monthly and weekly expiries as well.

Jenna Dagenhart: Now, Kyle, how can investors generate income from the digital assets ecosystem?

Kyle DaCruz: There are two primary ways that investors can generate income from the digital asset's ecosystem. One of which is staking. Staking is part of a consensus mechanism that blockchain uses to validate and ensure that the blockchain is working efficiently. One way to do that is to incentivize the users of that blockchain, or the validators. In this case, you're able to stake some amount of digital assets and lock that up over a period of time, which varies based on each blockchain. Investors are given some sort of yield generation from that activity.

The other type is lending. There are really two primary ways to do that. There's CiFi lending, or centralized finance lending, and there's DeFi lending, or decentralized finance lending. Today investors could either, on the CFI side, can lend to a large counterparty or company in the space that subsequently either lends to others or uses that capital for various business activities and pays a yield back to the investor. Or the latter, which is DeFi lending, is to actually lend into a pool or protocol on the blockchain, which is not run by a company, but typically a DAO, a decentralized autonomous organization. In that way, the risks are they're quite different. Obviously, in the case of the former, centralized, your risks are really the counterparty risk of the company you're engaging in doing business with. Whereas on the DeFi lending, a lot of the operations are automated through smart contract technology and the risks are rather more of either defaulting on the borrower side or on the technology risk of hacking.

Jenna Dagenhart: Chris, you're having a lot of conversations with wealth managers looking to allocate to digital assets. What seems to be working well?

Chris Baker: I think maybe the path that Kyle was mentioning right there is one of the main considerations for wealth managers is how do we model the risk, not only on an investment side of things, but also our counterparties, right? Who are service providers in this space? Oftentimes people will take headline risks that they hear or those that are on the peripheral witnessing the crypto markets, they might say, "Well, Bitcoin was hacked," or something like that. Oftentimes more it's an ill-willed counterparty that people, on a retail basis, maybe are working with. I think that's where wealth managers are looking for. How do we really make sure we're protecting client's assets.

As a registered investment advisor, regulated under SEC, they're looking for, and are required to use a third-party custodian. Therefore, they then have to go and essentially find someone that they can feel very comfortable with both on an audit level, looking at insurance levels, balance sheet, who is the auditor? How do we know that it's credible in the sense that they're looking at the blockchain and understanding it and really going through that entire due diligence process?

I think that's where we've seen success on our end just from adding an educational and comfort gap to bringing that knowledge to advisors and saying, "This is where we sit in space. This is where others sit. This is how the framework of what Fidelity's trying to accomplish." I think represented on this call today is great. We have very different, but maybe some overlapping work that each of our teams are doing, but they're all very integral parts of the capital market structure. People are trying to get exposure to what we would consider a new asset class and really show different pathways that advisors and wealth managers can do so.

I think that's where we've had success. It's not the majority of wealth managers now that are already allocated, but it is a greater amount than there were a few years ago. I think a lot of that is due in part to closing the educational gap, creating a roadmap and a runway for advisors to feel comfortable starting to allow clients to allocate to the space. A lot of that comes back to the way that we structured the business on the onset was Fidelity said, "This is a Fidelity business. We need to check all of the Fidelity standards. Then by the way, the asset that we're working with, we need to also educate around that and make sure there's comfort and understanding, but also take a very conservative approach on the assets that we cover."

I think Kyle was touching on it earlier how many different assets there are in the space. It can be mind-boggling at times to try to keep track of the amount of crypto assets out there. If you listen to the conversation today, it's mostly been centered around Bitcoin and Ethereum. That's particularly probably purposeful in the scope of what each of our business is doing. It's the largest market caps. At the same time, it's the most well understood. You have to also look at the scope of time.

One of the things we hear often is while Bitcoin has been around for a while, it still is relatively young compared to other asset classes. But as we get into the later years and building up a track record, people are starting to understand and be able to really build frameworks around it. Again, coming back to where each of us fit into this space, it's that investment case, but also the operational use case of how they can do it, even if they have that desire to make an allocation.

Jenna Dagenhart: I mean, to your point, there's so many different choices out there. Kyle, with more than 10,000 coins, what's your strategy for classifying and categorizing?

Kyle DaCruz: It's funny. I think it's alluding to my conversation earlier. Investors always start with Bitcoin, understanding what Bitcoin is, and they evolve into Ethereum. Then they look what's next and they see this list of 10,000 plus coins. It can become a little daunting. One of the first tasks we put forth for our digital assets research team was really creating a classification scheme, similar to a GICS sector-type framework to help us better analyze the trends in this space. What that process looks like is effectively a research team digging into the nitty gritty of reading the white papers for each of these crypto projects. It's using third-party research. It's consulting with venture capital partners, industry partners, service providers in the space to really help validate the scheme or create it.

Once that rationale was determined for each classification, then, of course, it's debated internally here at VanEck, and then again put forth back to our partners in this space. The result of that project was creating eight mutually-exclusive crypto sectors. Store value, smart contracts, platform, stablecoins, infrastructure, exchange tokens, payments, DeFi, and media and entertainment. Once we had this classification scheme put forth, we said, "Well, what is the next step? What do we do with data and information?" Really, the answer was two parts.

It was one, through our index subsidiary market sectors indexes, we launched eight digital asset indices based around these sectors, which are available through Bloomberg. By using this data provider Bloomberg, we're able to offer this categorization scheme to investors in this space.

The second part of this was to launch products centered around these classifications. What we did was we launched a private fund around the smart contract leaders sector. The reason for that is we felt out of the eight sectors, this seemed to be the one with the short-term best growth story over time.

Jenna Dagenhart: Payal, anything that you would like to add about the work that you're doing over at CME Group and what you're offering to investors?

Payal Shah: I think thinking back to 2015 or 2016, when we first got into the space, it started when our clients were asking about the price of Bitcoin. If you think back to 2015, 2016, the price divergence was enormous across the various venues and the spot exchanges. There was a real need for price transparency and creating the reference rates was our first step. It's those reference rates that our Bitcoin futures and Ether futures saddle to.

Now as the digital market continues to expand, there's an increasing demand for reliable crypto pricing on many, many more tokens. We don't cover the full thousand. We look at a number of things. We look at things like use case, utility, how many spot exchanges are covering those tokens. Back in April, we actually launched 11 additional reference rates in realtime indices. Together with Bitcoin and Ether, that represents over 90% of the total investible crypto market that's captured by our reference rates and realtime indices.

We have reference rates on Solana, Cardano, Polka, Stellar, just to name a few, but it covers, as I say, the top 90% of the investable market cap. All the reference rates are regulated by the FCA and are EU BML compliant. As we continue to see more institutional clients create products like ETFs and ETNs and ETCs, or indeed structured products, we think that these rates will be especially useful.

Jenna Dagenhart: Now, Chris, what are some of the most important considerations for wealth managers as they consider offering a solution to clients? There's obviously a lot to sift through.

Chris Baker: I think one of the biggest areas that we see is really what are clients looking for? Obviously, they're looking to potentially get exposure, but I think digging into that a little bit more is how? What satisfies that exposure within a portfolio? Is it derivatives? Is it direct spot exposure? Is it an investment vehicle? Then thinking about the evolution of where the market is today.

I think that's what we've witnessed. Early on, I think it was easier for wealth managers, and particularly institutional investors, to evaluate and build a risk model around, call it, VC infrastructure-type of investments maybe than it was to understand a protocol and actually own the underlying asset. It was mixed opinions, but I think earlier in the life cycle of Fidelity's digital asset business, a lot of times we saw investors go that route, "Hey, we actually think that we can model VC crypto exposure and feel comfortable with that."

But ultimately what happened was a lot of it got bucketed into, "Hey, we're holding Bitcoin, we're holding Ethereum. Then we also have some direct exposure into ..."

Chris Baker: And then we also have some direct exposure into certain equity stakes in crypto, infrastructure, trading firms, exchanges, whatever it might be. And I think investors started to decouple that a bit and say, "There are now new avenues" whether through Fidelity, through companies like VanEck and others to say, "I can now get my passive exposure for Bitcoin and Ethereum at maybe a lower cost than having it wrapped into more of a VC wrapper, but I would still like that broader exposure." And so I think we've seen this evolution of decoupling. People still like the VC infrastructure play, but also being able to hold and get that passive exposure to more of the blue-chip, larger market cap digital assets. And I think that's kind of where we are in the marketplace now. And I think as we go forward, one of the things that Fidelity and many others I think are continuing to build out, and look at, and research is more of an active strategy. So how do we overlay more active strategies?

Fidelity's ethos, much of it was built on active management. You go back to Peter Lynch and many other very successful portfolio managers. Can we have a next evolution of that where we have crypto managers specifically looking at the marketplace and making, I'd say, active selections on which assets to include and which to exclude in a portfolio? Fidelity continues to evolve. As I said earlier, we take a methodical approach, but as teams are considering it, we're definitely taking that feedback that many wealth managers would love to see a more robust ecosystem of investment vehicles, but then also have that coupling of direct spot exposure for those clients that truly have the thesis that they want to own the underlying asset. And oftentimes clients will go back to, you can own a gold bar but you can also own GLD, which is an ETF, obviously, to get exposure to gold.

And I think that's the decision points that advisors and wealth managers are having. And the conversations with clients is, what really are you trying to accomplish here? And then going through the operational components to get there. And so it circles back to those buckets that advisors have to work through as the educational gap, the operational, and then, obviously, the actual investment case of where they want to send that capital in the portfolio. I think it's an ever-evolving, it's still a small ecosystem that's growing very rapidly, but I think we're seeing some things happen in front of our eyes year over year. There's quite a fast-paced level of maturation for the overall ecosystem.

Jenna Dagenhart: And Kyle, how do you think the economy around digital assets and cryptocurrencies will continue to evolve?

Kyle DaCruz: It's really around the evolution from Web 2.0 to Web 3.0, or the evolution from content generators and users and creating and their content being sold or shared for the benefit of centralized entities. Whereas Web 3.0, it's more democratizing. Its content owners can benefit and value from their own content. And so when I look at digital assets in the ecosystem, the last few years has been a lot about layer ones, and building the technology, and understanding what the technology is, and making sure it works. I'm thinking now we need to move on to the phase where end-use cases start to become very apparent so apps that are useful. So whether that's blockchain-based social media, blockchain-based web browsing like what Brave browsing is, Pay-to-Earn Games. I think that's really the next step of getting adoption in the space end users. The first apps to get 100 million users, as opposed to just additional layer ones being generated without maybe not as clear of an end-use case.

Jenna Dagenhart: Payal, turning to you, what kind of innovations should investors expect to see in the crypto derivatives market moving forward?

Payal Shah: I mean, this year has been super busy for us already. We've brought to market a new product, a new trading mechanism, or a new reference rate every month since January. So that includes the micro futures for Bitcoin and for Ether, the options. We announced the Ether options. BTIC, so basis trade on index close. The new reference rates. So as I say, it's been incredibly busy already for us. Within our Bitcoin and Ether contract, the USD version, we're seeing a lot of strong global participation with approximately 40% of that flow coming from outside of the U.S. with trade submitted from over 120 different countries. And actually, half of the trading is before the US Open with Europe accounting for about 30% of that and steadily growing.

And so even in the spot markets, we're seeing more and more activity in the Bitcoin to Euro or Ether to Euro pair. And so we have launched, or we've announced the Bitcoin Euro and Ether Euro features coming later in August. And so these contracts will be sized at five Bitcoin and 50 Ether per contract, the same as their USD counterparts or their USD cousins. And we hope that creating localized products and localized features products for localized markets will really help drive this market forward.

Jenna Dagenhart: And Kyle, building off of something you said earlier, what's your outlook for payment infrastructure in the metaverse?

Kyle DaCruz: I think it's iterative. So what I mean by that is, I think if we look at payments in the metaverse now it's split between the crypto native, where those are using crypto wallets integrated with the metaverse worlds, and rather traditional payment systems like those that meta is planning on working on, or say Apple Pay, for instance. I think for now it's split. And for the foreseeable future, it'll likely be a combination of the two. Primarily because for new users to these metaverse worlds, whether it's gaming or media or whatever the reason for those users to be onboarded, they're much more likely to spend, and integrate, and interact with the world if they're using the traditional payment system they're used to.

However, I think the end game is to get them onboarded with the crypto native type integrations. So one great example is Transac, who along with their MetaMask integration, they've actually set up ATMs in Decentraland, which is a metaverse, and it allows users to directly purchase crypto or other digital goods with their credit card in the metaverse itself. So I think it'll be an evolution over time. And eventually, the Fiat on-ramps will be just that, just on-ramps to get people access to the assets or the native assets of these metaverse worlds.

Jenna Dagenhart: Well, as we wrap up this panel discussion, I want to go around the room and give everyone a chance to share their final thoughts with our viewers. Payal, why don't you kick us off? Any conclusions you'd like to share?

Payal Shah: Yeah. So I think moving forward as the market continues to develop with more products coming online, we already have the regulated derivatives, we have CME futures and options, we have OTC derivatives, we have the spot markets, the advent of future space ETFs in the U.S., we have ETNs and ETCs in Europe. And I think with all of these different access points and vehicles to access crypto exposure in really a interrelated fashion, I think going forward we will see tighter markets and really a growth versus growth story. I'm really excited about what comes next and how we continue to innovate as we have done for the past number of years in the crypto space.

Jenna Dagenhart: Chris, over to you.

Chris Baker: I would echo that. It's an exciting space to be a part of. And I think those that are stepping into it and starting to ... Trying to wrap their minds around what is happening in the crypto ecosystem, I would just say ... And maybe speaking for all represented here, I think people can rely on firms that are in the space already to be somewhat of that bridge, right? From the traditional markets bringing crypto and digital assets to be a little bit more attainable and understandable. I know from the Fidelity style, we're here to help educate and really help people understand what is this entire ecosystem looking like today, but even more importantly, what could it look like in the future? And then from there, if there's a desire, how do we make that an easy pathway forward to bring that forward for your firm and for your clients?

I think that's really our case, is this is here to stay. If you look at any of the news recently, in the future, we're definitely looking at this as a secular trend. And so I think those that are starting to adopt it are on the earlier side, but I think we're not seeing that pace really slow down. I would just offer our hand if we can help in any way from education or really just understanding ... Getting a grasp on what's happening across the entire ecosystem.

Jenna Dagenhart: Kyle, I will give you the final word.

Kyle DaCruz: Thank you, Jenna. Again, echoing what my co-panelists have said is, very excited for the space going forward for a variety of reasons. What I would say is, the need to help investors understand that it's okay to come off zero, it's okay to be a 1%, 2%, 3% allocation, whatever is appropriate for them, as long as they understand the risks and have the appropriate sizing. And the third point of that I would make is that it's investor education. And even during this call, we might have mentioned a few jargonish types of terms. So it's important for asset managers and others who are trying to educate the space to understand how to provide content and education in a non-jargon way.

And so it's one of the initiatives we've taken at VanEck is to write many blogs and articles that try to simplify and not use these jargony terms to really help educate clients on what the space is and where it's going. And for those watching in this space, I think the Eth merge and the transition ... And again, I'm going to use some jargon here. But transition from proof of work to proof of stake could be a really big catalyst for the space, even beyond just its impact to Ethereum going forward.

Jenna Dagenhart: And for those who aren't familiar, do you mind just defining that for everyone?

Kyle DaCruz: Absolutely. The proof of work and the proof of stake are two consensus mechanisms blockchains can use to secure their blockchain. Proof of work being what you most often refer to as Bitcoin mining or crypto mining, right? It's computers doing work to process. And proof of stake, which we alluded to earlier, is which investors can absorb a yield out of by staking assets which again, commits those assets, and validating the blockchain, and putting that up as collateral as a way.

Jenna Dagenhart: Well, everyone, really great to have you. Thank you so much for joining us today. And thank you for watching this digital assets masterclass. Once again, I was joined by Chris Baker, Director, Business Development at Fidelity Digital Assets. Kyle DaCruz, Director, Digital Assets Product at VanEck. And Payal Shah, Director of Equity Research and Product Development at CME Group. And I'm Jenna Dagenhart with Asset TV.

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