• This article reveals what a cryptocurrency ETN is and its characteristics, as well as its differences from an ETF.
• The information is aimed at asset managers looking to expand their strategies by including cryptocurrencies in an optimized way.
• FlexFunds offers an asset securitization program to improve the distribution capacity of any ETN. For more information, do not hesitate to contact our experts.

With the evolution of digital asset markets, cryptocurrency ETNs emerge as a regulated and accessible alternative for investing in crypto assets without the complexity of operating exchanges or managing private keys.

What is a cryptocurrency ETN and how does it apply to the crypto asset market?

An ETN is a debt financial instrument whose price replicates the behavior of an underlying asset.

Rather than directly owning the asset (e.g., bitcoin), the investor acquires a security issued by a financial institution that guarantees payment of the variation in the price of said asset.

Basic principles of exchange-traded notes

ETNs are part of the exchange-traded products (ETPs) and replicate the price of an underlying asset while carrying issuer risk.

Unlike an ETF, whose assets are segregated from the manager’s balance sheet and backed by the fund’s asset portfolio, an ETN is a debt instrument in which the security holder does not own the underlying asset and bears the issuer’s credit risk.

Being listed debt securities, ETNs behave and trade like common shares: they trade on regulated stock exchanges throughout the full trading day.

For example, the VanEck Bitcoin ETN is a German bearer security held in custody at Clearstream Frankfurt and backed by a portfolio of real Bitcoin.

Adaptation of the ETN format to the crypto market

Cryptocurrency ETNs adapt this traditional structure to digital assets. They are designed to be backed by real cryptocurrencies held by regulated custodians, depending on the issuer’s model.

For example, a Bitcoin ETN uses bitcoins stored in cold storage controlled by supervised entities (such as banks or specialized custodians) that comply with local regulations.

The investor, in turn, does not receive coins but a security whose value fluctuates according to the price of the reference crypto asset. Since there is no need to directly transfer the cryptocurrencies, risks inherent to direct investment, such as wallet hacking or loss of private keys, are mitigated.

Advantages of cryptocurrency ETNs over direct cryptocurrency purchases

In terms of custody, compliance, and regulation, these products combine the best of both worlds: on one hand, they connect with the crypto asset ecosystem; on the other, they operate within the regulated framework of the traditional financial system.

Custody, compliance, and regulation

In an ETN structure, there is no need to manage private keys or deposit coins into a personal wallet, as the underlying cryptographic asset is held in custody by regulated entities (such as specialized banks) under advanced security protocols.

Additionally, as a listed product, transaction clearing is centralized, which reduces counterparty risk in trades.

Listed ETNs also comply with the financial regulations of the countries where they are issued and traded. They are supervised by authorities such as BaFin (Germany) or CNMV (Spain, through the EEA passport) and must meet transparency and governance requirements.

This gives institutional investors full investment traceability, clear rules on margins and liquidity, and reporting mechanisms to the regulator.

Access through traditional brokerage accounts

Another benefit is access through conventional brokerage accounts.

Cryptocurrency ETNs trade on exchanges just like common shares or ETFs. These instruments can be acquired through traditional brokers, without the need for specialized platforms.

This facilitates their adoption by investment funds, asset managers, and advisors, as they require no special license or technical adaptation. Likewise, listing and settlement follow standard market schedules and rules, simplifying portfolio management and asset valuation.

How are these products structured in the current market?

Cryptocurrency ETNs are structured following a traditional listed products logic, adapted to the crypto economy.

They are essentially nominal securities (often bearer notes) issued by a bank or investment manager. The typical elements of their structure are detailed below:

• Real asset backing: The issuer must physically acquire the underlying cryptocurrencies in proportion to the notes issued.
• NAV and secondary market: When listed on an exchange, the ETN has a market price that may differ slightly from its net asset value (NAV), although market makers (APs) correct significant premiums or discounts.
• Trading and maturities: Although many ETNs have no fixed maturity date (or periodically extend their term), some do establish a long-dated maturity.

Key considerations for including cryptocurrency ETNs in an institutional strategy

While crypto ETNs present opportunities, institutional managers must evaluate several factors before incorporating them.

• Issuer risk: As debt securities, the primary risk is the solvency of the issuing entity. If the issuer faces financial or regulatory difficulties, the ETN could lose value regardless of the underlying asset.
• Liquidity: Although ETNs typically have market makers to facilitate transactions, actual liquidity depends on the product’s size and market interest. Some newer or smaller ETNs may initially show wider spreads or low volumes. 
• Taxation: Generally, cryptocurrency ETNs are taxed like any other financial instrument. In Spain, for instance, gains are considered capital income or capital gains, taxed between 19% and 28% depending on the income tax bracket.
• Differences from crypto ETFs or digital funds: Compared to a cryptocurrency ETF, an ETN has a debt structure rather than being a fund. This means that in a classic ETF (where it exists), the underlying assets are owned by the fund, whereas in an ETN they are owned by the issuer. 

It is worth noting that ETFs and ETNs can be securitized for better distribution through companies like FlexFunds.

To learn more about FlexFunds’ products, do not hesitate to reach out to our executives. We will be glad to assist you!.

Sources:

• https://bitcoinmagazine.com/business/bitcoin-tracker-one-etn-starts-trading-nasdaq-stockholm-1431980156
• https://zenledger.io/blog/what-will-the-london-stock-exchange-crypto-etn-approval-mean-for-crypto-and-the-markets/
• https://beincrypto.com/learn/crypto-etn-vs-crypto-etf/
• https://www.rankia.com/blog/etf/1792813-diferencia-etfs-etcs-etns
• https://www.vaneck.com/es/en/crypto-etn/
• https://www.bitpanda.com/en/academy/what-is-an-exchange-traded-cryptocurrency-note-etn