Blockchain technology will change everyone’s life – FTSE Russell’s Kristen Mierzwa

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(Kitco News) – As blockchain technology gains wider adoption worldwide, institutional investors and traditional financial institutions continue to look for ways to enter the cryptocurrency market and offer new products designed to capitalize on the growing popularity of digital assets.

One such firm is FTSE Russell, an index provider owned by the London Stock Exchange that has historically served more traditional stock market investments – such as the Russell 2000 and FTSE 100 indices – but has begun to wade into the realm of cryptocurrency.

At the recent Consensus conference in April, Kitco Crypto sat down with Kristen Mierzwa, Head of Digital Assets at FTSE Russell, to discuss their latest developments on the blockchain front.

Most recently, the firm launched FTSE Bitcoin Index futures on the Eurex exchange, becoming the first exchange in Europe to offer Bitcoin index futures. The service was launched on 17 April and offers cash settlements in USD and EUR.

FTSE Bitcoin Index futures “are an ecosystem play for us,” Mierzwa said. “Derivatives are very important and fundamental, and once you have that product established, it’s easier for others to build other products that might want to use that futures contract to hedge positions.”

FTSE Russell first began looking into the blockchain space in 2017 and formed a partnership with Digital Asset Research (DAR) in 2019, which acts as the firm’s pricing provider, she said. Together, the two companies created a common methodology for assessing the stock exchanges as price sources, and also for controlling the assets.

“Each quarter, we look at the universe of exchanges to find exchanges that meet our criteria. We will then use them as a price source, and we aggregate their prices in real time, using volume, weight and trade price to determine our benchmark price.”

Since FTSE Russell specializes in indices, the digital asset space is particularly attractive because of the 24/7 nature of cryptocurrency markets, Mierzwa said. “We looked at private equity and it turned out that digital asset indexing was an easier business to get into because of the 24-hour nature of the prices. In private equity, it’s very difficult to get a good price.”

While digital asset products have begun to roll out for FTSE Russell, “the process took us a long time,” Mierzwa said, largely due to the uncertain regulatory environment surrounding the asset class. “We followed the EU’s BMR regulations, so we worked with regulator lock before entering the room.”

Unlike the experience that many US blockchain firms have had in working with regulators, FTSE Russell’s experience was quite smooth, she said, with EU regulators helping throughout the process. The firm also met with the FCC and CFTC, which Mierzwa called “a great process.”

“We used the same principles as we do for all the other established asset classes in this area, so it was a little bit easier for us because we knew what you had to do to get that status,” she said.

Future plans for FTSE Russell

As for future plans in the digital asset arena, Mierzwa said FTSE Russell is considering several options.

“We have standalone digital asset indices, and that’s great, because you need them for derivatives, contracts and things like that,” she said. “But right now we have a basket of assets that have passed all of our criteria. There are 65 assets in it out of a universe of 350 assets. Once you have that universe of assets, you can do anything.”

FTSE “circulates supply-weights” these indices, she said, but added that they could also be equal-weighted, which they are working on. She has also received several requests from clients asking for ESG in digital assets. “It’s very difficult, but we’ll get there one day,” she said.

Other options include taking the FTSE 100 and valuing it in Bitcoin, or using the FTSE Emerging Index to hedge into Bitcoin. “If you really think about Bitcoin as a global currency, then it’s a great play, especially in emerging markets,” she said. “So I think the sky’s the limit. It’s not just Bitcoin.”

Staking and sector indices

Another popular topic among clients is betting returns because institutions are always interested in passive income. “What’s interesting about stakes is that we don’t call it a return on our end because returns imply a guarantee,” she said. “It’s really more of a reward because if you’re available to be a validator, you’ll be the one who gets the stake reward. Not all token holders receive the rewards, only those who participate in the validation process.”

As the cryptocurrency ecosystem continues to expand, FTSE Russell will monitor the various sectors to see what additional types of products may be successful.

“It’s time to do some sector indices,” Mierzwa said. “I think what’s so great is when someone doesn’t know about digital assets and I show them our product files with everything, suddenly it comes to life.” Some sectors currently being explored by the company include decentralized finance, smart contracts and gaming.

Asked if FTSE Russell had plans to launch any of its products on the chain – similar to what Franklin Templeton did when it launched FOBXX, a US-registered money market fund that records transactions and provides transparency to investors – Mierzwa said she would love to do it, “but it’s hard to do it from a regulatory standpoint.”

“We’re not a regulated entity like Franklin is,” she said, “but I think it would be so cool to put our indexes on the blockchain. Then you kind of just manage everything there, and I think that’s the future, but it’s coming to take a long time to get there.”

On artificial intelligence, Mierzwa noted that one application of AI that FTSE Russell is exploring is the possibility of using ChatGPT to come up with interesting index ideas. “We’ve played with it, but again, it’s a regulated thing.” She said ChatGPT can also be used as part of their risk control process.

FTSE Russell has also been able to launch products that combine precious metals with cryptocurrencies, such as their Bitcoin Gold index, which is designed to help investors determine risk weighting.

Institutional adoption is slow

Mierzwa said interest from institutional players has slowly picked up over the past couple of years, but “it’s a long journey.”

“The conversion I hear most from the institutional side, who are confident that we all know this is disruptive technology, is what’s happening, it’s going to change everybody’s life,” she said. “And if you ignore the disruptive technology, you’re kind of taking a bet. So why would you do it without learning about it and understanding the kind of effort you are taking? You still can’t distribute, but then at least you’ve evaluated that risk and made an informed decision.”

Mierzwa said regulation is slow, especially in the U.S., “but many asset managers in the U.S. will wait for approval for an exchange-traded product. Others have separately managed accounts, and they find ways to access the assets in an approved way.”

Currently, FTSE Russell is monitoring how the Securities and Exchange Commission decides to classify various cryptocurrency tokens going forward, but that is not the primary focus of the company.

“Is it a commodity or a security? How we’re going to navigate that is the question, especially when you factor in things like striking,” she said. “We’re very much just looking at whether the protocol is built on blockchain technology, so that’s really what we’re trying to find out. Not whether it’s a security or not.”

Mierzwa said that if a token becomes a security in the United States, it does not necessarily become a security in another jurisdiction. “So what we have to do is be very nimble and have them in our universe, but we have to limit access for certain products in specific jurisdictions.”