Cryptocurrencies were built to route around the traditional banking system. Yet for most digital asset products today, and for structured products on digital assets above all, parts of the old financial infrastructure remain indispensable.
The Summit’s second session looked at where that infrastructure stands on the border between the digital and traditional worlds, and at what an asset manager needs to understand before building on it. Our guest was Roman Wildhaber of Bank Frick, one of the first regulated banks to move into crypto.
Roman Wildhaber is Head of Capital Market Solutions at Bank Frick, responsible for all of the bank’s capital markets activity, including its digital asset business.
Early Mover
Bank Frick was founded in 1998 and, for its first two decades, was a small private bank in Liechtenstein. This changed in 2018 when, against a backdrop of rising regulation and shrinking margins that was making life hard for smaller banks, its management chose to move into crypto. It was one of the first regulated financial institutions globally to do so.
At the time that took some nerve, because there was no clear regulatory framework to move into. There was also a lot to do. “We provided banking services and fiat rails for crypto brokers, exchanges, and liquidity providers,” Wildhaber said. “We launched one of the first actively managed certificates (AMCs) on Bitcoin and Ether, issued through our own balance sheet, and we became the banking partner for two of the largest ETP programs in Europe.”
We launched one of the first actively managed certificates (AMCs) on Bitcoin and Ether, issued through our own balance sheet, and we became the banking partner for two of the largest ETP programs in Europe.Roman Wildhaber
Not that Bank Frick became exclusively a crypto shop. “We’re still a traditional bank with strong expertise in classic banking and capital markets, and that’s the real benefit of working with us,” Wildhaber said. “We connect the traditional financial world with the digital one.” It was this bridging function, above all, that we had wanted to explore during our session.
Why You Still Need a Bank
One obvious question, given that crypto was built to route around banks, is why a structured product on a digital asset needs one at all. “Blockchain made it possible to do payments between two parties without a bank, that’s true,” Wildhaber said. “But then asset managers wanted to offer their clients investment solutions including crypto assets, and that created a need for exchanges, brokers, custodians, and liquidity providers, all of whom still need banking partners. Most investment flows start with fiat money, and fiat money means banks.” Many people from the digital asset world underestimate that aspect.
While many of the roles needed in a digital asset-based structured product can be handed to a specialist crypto provider, one important one cannot.
“For a bankable and clearable product, which is probably the most important feature, the paying agent is one of the most central parties, and that role has to be performed by a bank, because only the paying agent can create security positions in the clearing system. That’s what makes the product bankable, so investors can buy it, hold it in their securities accounts, and settle it through the traditional banking system.”
Without a bank, you can still create a token or some other digital instrument, but traditional banks and investors will not be able to hold or settle it.
Following the Money
To understand the value chain better, we followed a single subscription from the investor’s point of view. In this case the product was an AMC on a digital asset underlying.
In the standard process, once structuring is done, the paying agent or the issuer drafts the term sheet, and the investor or their asset manager receives it and places the subscription with their house bank. That bank’s trading desk contacts the paying agent’s trading desk. Once the paying agent confirms the details, trade dates, settlement dates, and NAV, the order executes on a delivery-versus-payment basis. The investor’s account is debited with cash and credited with the AMC notes, and the cash always lands at the paying agent bank, on the issuer’s account.
From there the money has to be put to work, and the cleanest route is to invest it where it arrives, with the paying agent also acting as execution desk and custodian. That requires the bank to run its own execution and custody desk, and the asset manager to accept the bank’s pricing and range of coins. When it comes to crypto, banks are however not usually the right venue for this.
“As a banker I’d love to say we’re also the best execution desk for digital assets, but honestly that’s usually not the truth,” Wildhaber said. Banks are slower and more expensive than crypto-native providers, so in practice most crypto AMCs execute through venues such as Kraken, Bitstamp, Hidden Road, or Crypto Finance, which means the paying agent has to forward the proceeds to them.
Pricing then travels back the other way. The calculation agent collects the price feeds from the custodians, deducts the fees, and divides by the number of notes outstanding to reach an NAV per unit, which it reports to price providers such as SIX Telekurs. The investor’s own bank imports that price and updates the custody position.
Two points in that journey tend to slow things down. The first is execution, since the funds usually have to leave the bank for a third-party venue. The second follows from it: the payment itself.
“Sending crypto-related fiat money is complex and slow, because the bank has to interact with the platform’s banking partner and their correspondent banks. That takes time, costs money, and involves several risks.”
The Four Roles
Next we took a closer look at the roles involved in building such products. Behind any crypto AMC, or any certificate at all, sit four roles: the issuer, the paying agent, the broker-custodian, and the calculation agent.
The issuer provides the balance sheet and the directors, issues the debt instruments, takes responsibility for the offering documents, and normally appoints the other service providers. The paying agent is a bank participating in SIX or another clearing system. It reserves the ISIN, registers the product at the central securities depository and with the price providers, and then handles the ongoing work, primary and secondary market transactions, corporate actions, and capital distributions and repayments. Where the product holds a basket, an execution desk implements the strategy and buys and sells the underlyings and a custodian stores them, which can be a bank or a third-party provider, Kraken, OKX, or Bitstamp for digital assets, Interactive Brokers or TradeStation for traditional strategies. The calculation agent values the certificate daily, weekly, or monthly, reports the price to the vendors the product requires, and may also have to supply tax data, cost information, and PRIIP KID data.
Wildhaber pointed out two things that are particularly important in this regard.
The first is quality, because the roles fail the same way regardless of which one is wrong. Pick the wrong partner anywhere and the result is “poor quality, failed transactions, wasted time, miscommunication within the structure, higher costs, and unhappy investors.” So the decision should not be made on price alone.
The second is that in the crypto world there is a case for spreading the roles across specialists rather than buying them from one shop. Bank Frick can provide all four roles for both traditional and digital assets. Clients can choose which services they use from the bank and which they source from specialist providers.
Nobody is the best at everything in the digital assets space. GenTwo may be the best off-balance-sheet issuer provider. Kraken may then be the best execution venue, and thanks to its crypto expertise, Bank Frick is the ideal bank for paying agent services. Bring all these best-in-class providers together and you get the best possible crypto AMC.Roman Wildhaber
Two Rulebooks
We also talked about regulation.
A crypto structured product answers to two regulatory regimes at once. First there are the well-established regulatory regimes for traditional assets. As an EEA institution Frick follows these rules, MiFID II among them, for everything around the product, the investment service, the management, and the distribution. The EU has also introduced MiCAR for crypto assets and crypto services on top of this. Both now apply to different layers of the same product. “MiFID II regulates the structured product offered to investors,” Wildhaber said, “while MiCAR regulates the crypto infrastructure underneath the product.”
Which license each party needs follows from what it does. The investment manager needs its investment management license to run the strategy, plus the relevant MiCAR permission if it also provides regulated crypto portfolio management. Every other party that executes, holds, or transfers crypto assets needs the relevant MiCAR authorization, which is why Bank Frick holds one.
The requirement also works as a gate: Binance is not part of Frick’s network, for instance, simply because it does not hold the relevant MiCAR authorization, and membership is limited to MiCAR-licensed brokers.
Wildhaber’s advice to asset managers is to stop trying to track all of it. “It’s very complex, too complex for most asset managers to keep track of every rule. They should know what license they need, but beyond that they should focus on their own areas of expertise: knowing the markets, knowing what and when to invest, and above all knowing their clients and keeping their trust.” For the regulatory machinery, they should lean on an experienced partner that understands the whole structure.
xPULSE
The session ended with a discussion of Frick’s xPULSE service and how it supports digital asset-based products. As Wildhaber explained, xPULSE is a payment service within Bank Frick’s network. Every Bank Frick client can use it to transfer fiat money within the network around the clock, 23/7, even outside normal business hours. Because the payments stay within Bank Frick, no correspondent banks are involved, so transactions complete in a very short time and without additional cost. That is especially valuable in the digital asset space, where you often need to send dollars or other fiat to crypto exchanges, and where anyone who has ever tried to make that kind of payment has probably lost their patience during the process.
The specific problem it solves comes up when an asset manager creates a crypto AMC and wants to implement the strategy through their preferred trading venue rather than through the paying agent bank. The subscription proceeds always arrive on the issuer’s account at the paying agent, and they have to move from there to that venue as quickly as possible, otherwise the manager loses valuable time before trading can start. With xPULSE the fiat can reach the broker within seconds, as long as the broker is also connected to the network. More than 50 crypto brokers, exchanges, and liquidity providers already are, among them Kraken, OKX, Hidden Road, Bitvavo, FalconX, Bitpanda, Circle, and Bitstamp. These providers are already onboarded with Bank Frick and hold their fiat accounts with the bank. This established network, combined with Bank Frick’s paying agent and calculation services, allows asset managers to connect their preferred trading venue to the traditional securities infrastructure.
In terms of use cases, the asset manager generally has two options. The best theoretical solution is to trade and store the assets directly where the cash arrives, since it always lands on the issuer’s account at the paying agent. If a manager can find a bank that acts as paying agent and also provides broad trading and custody at good conditions, that is the best setup, and xPULSE is not needed.
Many asset managers running these strategies come from the crypto space and are not used to working with banks. They want a large coin universe, the best fees, and a system they already know, so they prefer to run the strategy through a third-party broker. That is where xPULSE comes in, letting them send fiat straight to their preferred broker and start investing immediately, which makes the setup more flexible and more liquid and helps keep the AMC competitive.
xPULSE itself is only the payment service. The larger coin universe, the better trading fees, and the better interface come from the chosen platform, for example Kraken. xPULSE simply makes it possible to use these brokers within the product in the best possible way. Because fiat can move between the bank and the broker even at night or on weekends, it also cuts counterparty risk at the venue. Imagine selling a large Bitcoin position on a Saturday, which a normal bank might not allow but a crypto broker probably would. You would otherwise be holding that value, say 10 or 50 million, at the broker over the weekend. With xPULSE you can send the money back to Bank Frick in the very same moment.