What happens to a crypto ETP if the issuer fails?

What happens if the issuer fails?

If Virtune becomes bankrupt, its ETPs become due for redemption. The underlying crypto-assets held as collateral can be used to meet what Virtune owes investors, through enforcement by a collateral agent. Recovery depends on what those assets can be sold for after costs. These are the redemption and collateral arrangements for Virtune's ETPs; other issuers' notes can have different terms.

An investor holding Virtune Bitcoin Prime ETP at a broker owns a security issued by Virtune AB. Virtune owes the payment defined by the product's terms. The Bitcoin backing that security is held with a custodian, rather than in a personal wallet belonging to the investor.

What does physically backed mean?

Physical backing means that actual crypto-assets are held as collateral for the ETP. Virtune holds at least 100% of the corresponding underlying crypto-assets with its custodians. For Virtune Bitcoin Prime ETP, that asset is Bitcoin and the custodian is Coinbase Custody Trust Company LLC. BitGo Europe GmbH also provides custody for some other Virtune products.

The assets are held as collateral for the ETP holders. They back Virtune's payment obligation to investors, rather than simply being assets held for the company's own business.

Who acts when Virtune cannot pay?

The Law Debenture Trust Corporation plc is the collateral agent. It represents investors in matters concerning the collateral. If Virtune cannot meet its payment obligations, the agent can act on investors' behalf under the product agreements to arrange for the underlying assets to be sold and the proceeds used to pay investors.

This process can take time. Virtune remains the company responsible for payment under the security.

Can the collateral fall short?

Yes. Physical collateral reduces investors' exposure to Virtune failing to pay, because assets are available to meet what they are owed. This is a reduction in credit risk. The collateral covers those amounts only to the extent that the sale proceeds, after enforcement costs, are sufficient.

The crypto-assets can fall in value before they are sold. Theft, hacking or fraud can reduce the assets available; for products with staking, slashing can do the same. Slashing is a network penalty that removes some staked assets. A failure by the custodian, the collateral agent or an intermediary in the payment chain can also prevent or delay recovery. These recovery risks explain why backing does not remove every possibility of a shortfall.

How is issuer risk different from a fall in Bitcoin?

A fall in Bitcoin's price changes the value of a Bitcoin ETP even when Virtune and its service providers meet their obligations. That is market risk. Issuer risk concerns whether Virtune can make the payment it owes under the security.

Virtune's ETP value follows the underlying crypto-assets, with the management fee deducted daily. The exchange price can also reflect the difference between buy and sell quotes and the exchange's opening hours. The costs of a crypto ETP are separate from a failure to pay.

What does an approved prospectus mean?

Finansinspektionen reviews and approves the base prospectus under the Prospectus Regulation. The document must contain information that enables an investor to assess the issuer and the security. Prospectus approval does not mean that Virtune, its ETPs or their custody are under ongoing supervision, or that the investment has been endorsed.

Where do the products trade, and how does a wallet differ?

Virtune's range has listings on Nasdaq Stockholm, Nasdaq Helsinki, Deutsche Börse Xetra, Euronext Amsterdam, Euronext Paris and the Warsaw Stock Exchange, with no UK venue; each product has its own listings.

With a self-custody wallet, the holder controls the keys used to transfer crypto-assets. With a physically backed ETP, the holder owns the security and relies on its custody and collateral arrangements instead.