ETFs
How Kraken’s Index Wizard Beats Coinbase and Binance in the $58B Bitcoin ETF Race – DL News
- Kraken’s acquisition of CF Benchmarks in 2019 bore fruit in the Bitcoin ETF boom.
- BlackRock, Ark Invest and other Wall Street giants use the company’s Bitcoin benchmark rate.
- Kraken rakes in licensing revenue as investors pour money into ETFs.
Sui Chung couldn’t believe what he saw.
It was late at night in February and Chung, CEO of a financial company called CF Benchmarks, was looking at the numbers on his laptop.
“I raised my revenue forecast,” Chung said in an interview at a cafe in London’s Soho district. “By the time I did all the calculations, it was 1 a.m. and I was like… holy hell.”
More than $1.4 billion has been invested in 11 new Bitcoin exchange-traded funds in recent weeks, according to data from the Bitcoin Reference Rate, or BRR, an index produced by his company.
Six of these funds issued by Wall Street giants BlackRock, Ark Invest and Franklin Templeton, among others, track the BRR index.
This meant that Chung’s company was poised to rake in huge licensing revenue.
In one month, Bitcoin ETFs reached Chung’s one-year goal. And the Bitcoin ETF boom was only just beginning.
Mind-blowing income
The performance also demonstrated the prescience of Kraken, the San Francisco-based crypto exchange. In 2019, Kraken acquired CF Benchmarks for a nine-figure sum.
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Now the investors have plowed nearly $58 billion in Bitcoin ETFs – CF Benchmarks is sitting on a cash cow as licensing fees pile up.
Better yet, neither Binance nor Coinbase, Kraken’s main rivals in the crypto exchange space, have their own indexing business.
And CF Benchmarks excluded price data from Binance, the world’s largest and most liquid exchange, because it did not meet its criteria.
Although CF Benchmarks does not disclose how much it earns, it is poised to generate fees for a while.
S&P Dow Jones, for example, charges its clients about 3 basis points, or 0.03%, on assets based on its S&P 500 indexes, according to a 2022 article.
Consider that only one of these ETFs – that of State Street – manages $541 billion. That means S&P collects $162 million in fees from this fund alone.
In April, Hong Kong approved Bitcoin and Ethereum ETFs and all three issuers – Harvest Global Investments, China AM and Bosera AM – use the BRR as a benchmark for their offerings.
A $40 trillion market
Without indices, there would be no ETF. Companies such as BlackRock’s iShares unit make indexes to support ETFs. And they track everything from stocks to bonds to commodities like gold and oil.
Benchmarks such as the S&P 500 support a range of ETFs and have become market staples. 40 trillion dollars retirement market.
At some point, Chung realized there was an opportunity to create an index for Bitcoin.
With a background in benchmarking, Chung was familiar with the inner workings of the financial data that powers capital markets.
In 2016, Crypto Facilities, a London-based crypto derivatives exchange, realized it needed an index to help settle crypto futures at the right price.
It was also in talks to provide this index to CME, the Chicago derivatives trading giant, for its upcoming Bitcoin futures product.
“No plan”
Chung was brought in to create the index with just four software developers, eventually establishing a company under the Crypto Facilities umbrella in 2018.
Few Bitcoin indexes existed at the time, so Chung’s team was working “without any plan,” he said.
He thought it might look a lot like the indexes of the dominant providers S&P or MSCI. But there were major challenges.
Unlike stocks, crypto is a 24/7 market that trades on various unregulated global exchanges.
S&P simply needs to take a snapshot of the price of, say, Apple shares at a specific time and place, such as the close of the day on the New York Stock Exchange.
“But with crypto, you have to figure out what the price of Bitcoin is at any given time and what are the key times of day when financial transactions are settled, and build a methodology around that,” Chung said.
“And you have to do it reliably and in compliance with financial regulations for traditional products, even though it’s this new asset class,” Chung said.
It was a big challenge. But Chung’s team had a powerful weapon: its relationship with the CME.
CME’s Bitcoin futures were among the first regulated products of its kind in crypto, and it authorized BRR upon launch. end of 2017.
And then Kraken arrived.
Compliant indexes
In 2019, the exchange purchased Crypto facilities and CF referrals for an undisclosed amount. But this is Kraken’s biggest transaction since its exchange went live in 2013.
“In CF Benchmarks, we recognized the central role that a licensed benchmark administrator should play” in Bitcoin ETFs, said Tim Ogilvie, head of Kraken Institutional. DL News.
“Fast forward to today, and CF Benchmarks is now the largest crypto index provider in the world,” Ogilvie added. “They will play an important role in the proliferation of the crypto products space.”
Producing compliant indexes is not easy. Index providers must capture prices from heavily regulated exchanges like the NYSE and Nasdaq to ensure data integrity and reliability.
Regulators don’t want investors buying ETFs based on flawed indexes.
But it’s difficult for a crypto index provider to offer similar types of pricing in a market where regulation and reliability remain spotty.
As a result, CF Benchmarks maintains strict rules selection criteria exchanges must meet the necessary conditions to be considered for inclusion in the benchmark index, Chung said.
For example, the exchange must demonstrate that it prevents fraud and runs strict know-your-customer processes and anti-money laundering controls.
No Binance
The BRR aggregates pricing data from six constituent exchanges, including Kraken, Gemini and Coinbase. Binance, however, is not leveraged due to its regulatory issues.
After the exchange paid a $4.3 billion fine and pleaded guilty to violating U.S. banking law in November, CEO Richard Teng is scrambling to comply with regulations. But the process has been slow.
Chung admitted that not having price data from an exchange that now has 200 million users worldwide There is a major gap in the data.
Yet, it is more important that it is able to respect the integrity of the benchmark.
“If that means I have a small business, so be it,” Chung said.
New wave
Now, Kraken’s deal for CF Benchmarks allows it to take advantage of a new era of crypto: the advent of Bitcoin and Ethereum ETFs.
As affordable and easy-to-trade products, ETFs promise to open the crypto market to a new wave of investors.
Even though the receipt of funds from Hong Kong was lukewarm compared to the United States, analysts estimate that bids could total $1 billion.
Chung is settling his tourist attractions on South Korea, where the authorities are discussing whether to allow spot Bitcoin ETFs.
Contact the author at joanna@dlnews.com