Crypto ETNs: Key building blocks

Crypto exchange traded notes (‘crypto ETNs’) have grown in popularity in recent years, with a steadily increasing range of features and underlying cryptoassets being brought to market.

In simple terms, Crypto ETNs are debt instruments linked to one or more specified cryptoassets – the linkage means that the value of crypto ETNs will rise and fall in-line with the underlying cryptoassets, subject to the deduction of fees and expenses. This gives investors exposure to the changing value of the underlying cryptoassets but, crucially, without needing to hold the cryptoassets themselves. This may appeal to investors that do not wish to deal in cryptoassets directly, manage wallets and/or transact on unregulated crypto exchanges.

While performance of most cryptoassets remains volatile, interest in crypto ETNs and other crypto linked structures has renewed in recent months, in anticipation of the SEC’s decision on whether to approve spot bitcoin and ether exchange traded funds in the US (and the more recent bounce in cryptocurrency prices).

In our below briefing, we explain what crypto ETNs are and examine some of the key structural and legal issues that may arise when establishing a programme for the issuance of crypto ETNs. We look at the following issues, amongst other things:

• Jurisdiction of incorporation
• Underlying assets
• Cash or physical redemption
• Custody and security
• Disruption and adjustment events
• Regulatory issues
• Fees and expenses
• Certain additional product features: staking, leverage and securities lending