WisdomTree Digital Assets ETPs | Q&A

June 2021

Custody & Security

The custodians for the WisdomTree Digital Assets ETPs (Exchange Traded Products) are Swissquote, a Swiss Bank regulated by the Swiss Financial Market Supervisory Authority (FINMA) and Coinbase Custody Trust Company LLC, a New York limited purpose trust company which is authorised to provide fiduciary custodial services to institutional customers.

Swissquote is a highly reputable Swiss Bank regulated by FINMA. As such, it undergoes financial health reviews, policy and procedure reviews, and must maintain capital reserve requirements as defined by the Swiss Regulator. Swissquote has the largest online trading platform in Switzerland, and is also authorised by FINMA as a digital assets custodian. Swissquote was the first online bank in Europe to offer digital assets trading and has the most complete digital assets platform available to retail and institutional customers. They have developed an industry-leading, institutional-grade approach to digital asset security, which is audited by PricewaterhouseCoopers (PwC) and compliant with SOC1 – I / II. Additionally, Swissquote has a long history of successfully acting as a custodian for traditional financial assets.

Coinbase Custody is an independent, NYDFS-regulated qualified custodian. They developed best-in-class security and operations to address the security, regulatory, and operational challenges unique to the crypto market. Dedicated on-chain addresses are secured by Coinbase’s battle-tested cold storage. Indeed, Coinbase Custody offers clients access to the secure, institutional-grade offline storage solution that has been used by Coinbase’s exchange business since 2012. All digital assets are segregated and held in trust for the benefit of our clients. In addition, Coinbase’s insurance policy is one of the largest crypto insurance facilities in the industry.

 

1 Service Organization Control

Coinbase and Swissquote both have developed an industry-leading, institutional-grade approaches to digital asset security. They combine institutional-grade hardware, software security, operational policies and procedures, to eliminate single points of failure and protect digital assets against attacks.

Cold Storage: Private keys2 are fully encrypted and kept offline. For any withdrawal / transaction out of the offline wallet3, human intervention is required.

Geographic Distribution of Redundancies: There is device, geographic, environmental and human redundancy allowing constant access. All locations are highly secure with one of Swissquote’s locations being a highly secure former Swiss army bunker in the Swiss Alps.

Robust Approval Process:  There is device, geographic, environmental and human redundancy allowing constant access. All locations are highly secure with one of the locations being a highly secure former Swiss army bunker in the Swiss Alps. Two modules are backed-up in real-time while a third one is periodically backed-up offline.

Robust Approval Process: Coinbase and Swissquote use multi-approval technology. With multi-approval technology, the loss of a single approval key or approver does not put digital assets at immediate risk. Multi-approval security is the industry standard for institutional clients. Multi-approval technology works by an “M-of-N” system, meaning that M approvers out of N known approvers must approve a transaction in order to sign the transaction. The separation of duties for wallet configuration (e.g. setting and approving policies), client communication, transaction initiation, auditing functions is an inherent component of the custodial offering.

Furthermore, redemptions can only be initiated to a predefined immutable set of whitelisted addresses.

 

2 A secret number that allows digital assets to be spent

3 System to store private keys

Cold storage refers to holding private keys in an offline environment, not directly connected to the internet. It is opposed to a "hot wallet", where the private keys are stored on hardware directly connected to the internet, and thus more vulnerable to hacks. The trade-off for more security afforded by cold storage is reduced accessibility through and increased time requirements to transact in coins held in this way. For this reason you typically see hot storage used for transactional coins intended for short term trading where cold storage is suitable for stable, longer term holdings.
Private keys are never directly connected to the internet.
For security reasons, it is not possible to visit the locations where the keys are held.

Legal & Regulation

The WisdomTree Digital Assets ETPs are domiciled in Jersey.

1. Jersey is upheld as a jurisdiction that offers excellent, contemporary corporate laws.
 

2. Jersey has a strong regulatory environment. Jersey is also covered by the Organisation for Economic Co-operation and Development (OECD) Convention, please find the relevant announcement on the OECD website at: http://www.oecd.org/legal/ukdependenciesterritories.htm.
 
3. Jersey has a world-class professional infrastructure. Our legal advisor in Jersey is Mourant Ozannes who have offices in London, Hong Kong and in Jersey amongst other jurisdictions.
 
4. Jersey companies are subject to the ultimate supervision of the Jersey courts. The Jersey courts are independent, and impartial. Many of the judges sitting in the Jersey courts are English-trained lawyers. Moreover, the final court of appeal from the Jersey Court of Appeal is the English Privy Council. 
 
5. The proximity and interconnectedness of Jersey to the UK is convenient for various operational reasons, for example, the CREST settlement system framework extends to securities issued in Jersey and we can use a Jersey based Registrar to interact directly with CREST.
 
6. WisdomTree has a long history of structuring Jersey domiciled products that provide exposure to physically held assets. As such, products structured in this way have a proven track record (over 10 years) as being a suitable and efficient for investors on a Pan European basis.

Clients need to make an assessment of this for themselves however we believe that the treatment here should be the same as for other Exchange Traded Commodities, which are generally considered UCITS Eligible. You can find detailed analysis of the products UCITS eligibility here.

A prospectus in respect of WisdomTree Digital Assets ETPs has been approved by the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) (the “SFSA”), as competent authority under Regulation (EU) 2017/1129.

The prospectus permits offers of WisdomTree Digital Assets ETPs to the public and/or an admission to trading of WisdomTree Digital Assets ETPs on a regulated market in Sweden and in the markets to which the prospectus has been passported.

The Issuer has requested the SFSA to notify the approval of the Base Prospectus to Austria, Belgium, Denmark, Finland, France, Germany, Italy, Ireland, Luxembourg, Netherlands, Norway and Spain.

Applicable regulatory regime in Jersey: WisdomTree Issuer X Limited is not supervised by the Jersey Financial Services Commission however, a copy of WisdomTree Issuer X Limited's prospectus will have been delivered to the Registrar of Companies in Jersey in accordance with Article 5 of the Companies (General Provisions) (Jersey) Order 2002 (the CGPO), and the Registrar of Companies in Jersey will have given his consent to its circulation.

Further, the Jersey Financial Services Commission will have given its consent under Article 4 of the Control of Borrowing (Jersey) Order 1958 (the COBO) to the issue of securities by WisdomTree Issuer X Limited. WisdomTree Issuer X Limited will further rely on the exemption available pursuant to the Collective Investment Funds (Restriction Of Scope) (Jersey) Order 2000 and, on satisfaction of the conditions thereunder, will not constitute a collective investment fund under the Collective Investment Funds (Jersey) Law 1988.

The products are permitted to be offered to the public and/or to be admitted to trading on a regulated market in the following countries:

Austria, Belgium, Denmark, Finland, France, Germany, Italy, Ireland, Luxembourg, Netherlands, Norway, Spain and Sweden. The product is currently tradeable on the Swiss Stock Exchange (SIX), on the Deutsche Börse Xetra, on Euronext Paris and Euronext Amsterdam, or via a broker for those clients with the appropriate market access. For further information, please contact WisdomTree.

This products are available for institutional and professional investors in the following countries:

  • United Kingdom
  • Switzerland
  • Israel
  • Some Latin America countries

This list is not exhaustive. If your region is not in the above list, please contact us.
 
These products are only available to advanced or expert retail investors in certain circumstances, please speak to your advisor or broker for further information. Furthermore, availability can be restricted in some regions.

The custodians do perform checks on coins provenance in order to get reasonable assurance that the coins held by the ETPs have not previously been used for illegal activities.

Structure

Similarly to a physically-backed gold ETP, which is backed by gold bars held in a bank vault, private keys allowing for the transaction of digital assets are held in highly secured locations, and on highly secured hardware.
 
This is generally opposed to synthetics replication, by which a financial instrument like an ETP or an Exchange Traded Fund (ETF) does not actually hold the underlying asset which it is supposed to represent, but achieves representation by other means, usually through holding derivative instruments. 
 
Alternatively there are offerings structured as a note or structured product, where the issuing entity essentially guarantees the performance. However, this introduces counterparty risk to the product with investors taking solvency risk to the issuing entity.

The total coin entitlement refers to the number of digital assets the ETPs are entitled to.
 
The coin entitlement per share can be calculated by dividing the total coin entitlement by the number of shares outstanding.


The exact coin entitlement is published daily can be found on our website.

The total coin entitlement for the ETPs is reduced on a daily basis to represent the fee incurred over a day.
Since the products are completely physically-backed, the primary way we value the shares is in digital assets terms (bitcoins, ether,…), i.e. the coin entitlement per share. However, in order to provide clients with a cash equivalent valuation, we also publish a per-share indicative USD value (‘NAV’) which is calculated using the relevant price index, for example the CME CF Bitcoin Reference Rate (BRR) or CME CF Ether Reference Rate (ETHUSDRR). This is obtained daily simply by multiplying the per-share coin entitlement (available on the website) by the reference price for that day.
The CME CF reference rates were chosen by WisdomTree after reviewing all the leading methodologies for calculating a reference price for digital assets. They were found to be the most robust calculation and further had the advantage of setting the settlement prices for the most liquid futures, traded on the CME.
Our current AP are Flow Traders and Jane Street.
 

The ETPs use “in-kind” redemption/creation process. This means the APs deliver/take delivery of digital assets for shares based on a per-share coin entitlement which is available daily on the website. At launch of the bitcoin ETP each share was worth approximately 0.01 bitcoins so in order to create 100 shares, the AP needed to deliver approximately 1 bitcoin to the ETP. 

The WisdomTree Digital Asset ETPs do not trade digital assets in the creation/redemption process, thus avoiding the use of cash, as well as avoiding transaction costs from being incurred inside the product as part of the creation/redemption process.

The exact coin entitlement can be found on our website on a daily basis. The coin entitlement per share can be calculated by dividing the Total Coin Entitlement by the Shares Outstanding.

Creation / redemptions are usually done with Coinbase.

The products Total Expense Ratio (TER) is 0.95% per annum.
Assets held with Coinbase are covered by Coinbase’s Commercial Crime insurance, protecting assets for asset theft or mysterious disappearance from Hot and Cold Storage, up to $320million (for all of Coinbase Global customers, subject to change). Assets held with Swissquote are not insured.
 
We believe the insurance market for digital assets is not mature enough, and the primary way risks are managed in this space is always going to be predominantly through operationally robust safe keeping procedures. This is the same set-up we see in the metals market – another space requiring robust physical security – with insurance playing a small role in risk mitigation on the edges. 
 
Safekeeping of assets and accessibility are WisdomTree’s primary goal in creating digital asset ETPs. In developing the program, we have gone to great lengths to ensure that the direct holdings are secured using industry leading storage solutions taking in to account the operational and cyber-security considerations, which are of key important to investors entering this asset class. The products offer a simple and cost-efficient way to invest in digital assets with confidence. 
 
The WisdomTree Digital Asset ETPs directly hold the underlying assets in segregated wallets managed through an institutional custody set-up. The custodians we work with are leaders in the field and offer best-in-class storage solutions for digital assets ensuring that we have transparency and control over our holdings in a highly secure, reliable environment. The amount held is monitored and reconciled daily basis between our custodians, the Issuer and the administrator.

WisdomTree will adhere to the custodians fork policy.
 
In the event that a fork is not supported by the custodians, this will be clearly notified to WisdomTree. There will be no be further action required. The existing digital asset will continue to exist with no impact. 
 
If in the event a fork occurs and the custodian is able to support the fork, WisdomTree will likely look to facilitate with the custodian to sell the forked asset and pay the proceeds to the ETP holders, as per the CREST Register and agreed date.
 
The overall process will be communicated in detail with the Custodian, ETP holders and AP as required. 

The forked asset will be transferred in the background to a segregated portfolio linked to the same cold storage account. Swissquote does this to ensure there is no co-mingling with the existing assets, until the WisdomTree advises the course of action (i.e sell or keep). 
 
The forked digital asset will be instructed to the custodian to be transferred to the Issuer trading account. This will take the form of a standard withdrawal request (or Inter Account Transfer one the development is possible for complete).

Once the forked asset hits the trading account this can be sold for USD. Once settled, the USD will be paid to holders as at that date.

The digital assets held in/by the product are solely for the purpose of backing the relevant product. The Issuer is a separate legal entity to and creditors of WisdomTree have no claim to the assets held by this or any other WisdomTree product.

Trading

Investors in the WisdomTree Digital Asset ETPs can buy or sell as little as one share on exchange or directly with their broker over the counter (OTC). The products are currently listing on the SIX, Xetra, Euronext Paris and Euronext Amsterdam exchanges.
Not currently, but CME CF reference rates have an intraday indicative price.

Here is an example for the WisdomTree Bitcoin ETP.


The daily NAV is calculated using per-share coin entitlement and the CME CF Bitcoin Reference Rate (BRR).


The BRR is calculated based on the relevant bitcoin transactions on all constituent exchanges between 3:00 p.m. and 4:00 p.m. London time. The price and size of each relevant transaction is recorded and added to a list which is portioned into 12 equally weighted time intervals of 5 minutes each.
The max size that could be facilitated on a given day would be dictated by the available liquidity. This is due to the in-kind creation/redemption process creating a direct link between the WisdomTree Digital Assets ETPs and the underlying digital assets market. In order to create a given size the AP needs to source the equivalent amount of digital assets (based on the coin entitlement).

This means that any cost associated with sourcing the digital assets, including any market impact, will affect the pricing of a given the WisdomTree Digital Assets ETP trade and therefore the efficient max size. 
 
Whilst market conditions vary and must always be considered when trading, the efficient trade size is typically in the 4-5mn USD range but trades in the 10+mn USD can be accommodated (conditions permitting).

All investors purchase shares in the secondary market (usually on exchange) with two-way liquidity provided by market makers throughout the trading day. The liquidity that market makers are able provide is directly linked to the underlying digital assets market as shares in the products can be created or redeemed on a given day in exchange for digital assets.

If we consider a scenario where an investor is looking to sell shares of the WisdomTree Digital Assets ETP, they would do so at the prevailing market price, either on exchange or via their broker, and will end up trading against an Authorised Participant who will in turn redeem the shares with the Issuer in exchange of digital assets. These can then be liquidated to facilitate payment for the shares being sold by the investor.