The appeal of ETP Operating Model 

The concept of a digital asset ETP might appear counterintuitive to those immersed in the digital asset space, as it introduces intermediaries that the technology itself aims to eliminate. Nevertheless, by adopting the well-established and regulated framework of investment products, ETPs present an avenue to expose digital assets to a significantly broader investor base. This expansion is particularly vital for individuals who, due to various reasons, might face challenges accessing the digital asset class directly. For example, retail investors may lack the necessary tools, time, risk tolerance, and technical know-how for direct digital asset investments. The conventional securities structure of ETPs also extends accessibility to institutional investors, whether constrained to these types of instruments or desiring to avoid direct ownership of digital assets for reasons such as regulatory compliance, technical considerations, or other factors.

Digital asset ETPs are organized as debt securities. The initiation of an ETP involves the issuer, typically an investment company or trust, drafting a prospectus document for regulatory approval. Once approved by the regulatory authority and after securing the necessary service providers, the issuer proceeds to apply for listings on desired stock exchanges. The eligibility criteria for listing, including the types of products (e.g., asset-backed or futures) and underlyings (e.g., digital assets), vary among exchanges. The operational model and selection of service providers can differ based on the product type, jurisdiction, and the issuer’s program design.

In the case of physical digital asset ETPs, they function as secured debt obligations, fully supported by holdings of the underlying digital asset y they mirror. These digital asset assets are physically acquired and held by independent third-party custodians, overseen and controlled by a designated trustee. The trustee assumes responsibility for managing the rights and entitlements on behalf of ETP holders and coordinating redemptions in the event of issuer insolvency.

On the other hand, synthetic ETPs operate as unsecured debt obligations, meaning the issuer isn’t obligated to hold the underlying assets tracked by the product. Instead, derivatives and swaps are employed to replicate performance (specific structure and terms may vary). Consequently, synthetic ETPs carry higher counterparty risk, as there is no legal mandate for the products to be fully backed by the underlying physical asset in a 1-to-1 ratio.

 In general, the majority of digital asset ETPs available in the market are physical products, driven by the preference of many investors for the transparency and diminished counterparty risk offered by this particular structure.

• On the primary market, the Issuer exchanges shares of the product with the authorised participant (“APs”) in return for either the underlying digital assets (“in-kind”) or the cash equivalent, with underlying digital assets delivered to and from the designated custodians as required. Depending on the structure, a transfer agent and trustee may be involved in liquidating the collateral and transferring funds.
• As the APs manage primary market creation and redemption, market makers provide liquidity in the secondary market, ensuring continuous, efficient trading.
• Investors buy and sell the products on the secondary market, typically placing their orders via their bank or broker, who in turn execute their orders on the relevant stock exchange, either directly or via other intermediaries.

The technical issuance will be operated by the Swiss team of Apex Group, covering all regulatory, reporting and administration requirements, necessary for the ETP Products to be admitted to trading on major Swiss and European stock exchanges.