Depositary Receipts: A Critical Direct Bridge Between Crypto and TradFi

In this episode we discuss depositary receipts (DRs) as a mechanism to bridge traditional finance (TradFi) and the cryptocurrency market, focusing particularly on Bitcoin (BTC) DRs and proposed XRP DRs. Receipts Depositary Corporation (RDC) is highlighted as a key player launching these products for qualified institutional buyers, aiming to provide a regulated and familiar way for institutions to gain exposure to digital assets through existing infrastructure. The sources emphasize the potential for increased institutional adoption and liquidity in the crypto space due to the ease of use and regulatory compliance offered by DRs, while also noting potential risks like market exclusivity for accredited investors. Furthermore, the development of XRP DRs by RDC, with backing and custodial solutions from traditional financial entities, signifies a move towards greater integration of cryptocurrencies within established financial systems.

How do depositary receipts bridge the gap between traditional finance and the cryptocurrency market?

Depositary Receipts (DRs) bridge the gap between traditional finance (TradFi) and the cryptocurrency market by providing a familiar, regulated, and accessible framework for institutional investors to gain exposure to digital assets.

Here's how they achieve this:

•Mimicking Traditional Securities: DRs follow the established structure of traditional securities like American Depositary Receipts (ADRs), which have been used for nearly a century to allow U.S. investors to own foreign assets as easily as domestic ones. Crypto-focused DRs adopt this tried and true structure for digital assets.

•Utilizing Existing Infrastructure: Crypto DRs operate within the US-regulated market infrastructure and are cleared through The Depository Trust Company (DTC). This allows institutional investors to use their standard transaction, custody, and settlement operations with digital assets. They can include crypto in funds and hold them at existing banks and brokerage accounts.

•Providing Seamless Access: DRs offer seamless access to crypto by allowing it to be included in funds and held at existing banks and brokerage accounts, unlocking traditional capital markets utility. Qualifying investors onboarded with a depositary like RDC can instruct the issuance and cancellation of digital asset DRs.

•Ensuring Efficient Convertibility: DRs provide efficient two-way convertibility between the underlying crypto assets and the DRs themselves. This fungibility allows asset owners the choice to convert underlying crypto and ADRs in-kind, not being limited to authorized intermediaries. For example, Qualified Institutional Buyers (QIBs) can convert their Bitcoin holdings into BTC DRs and vice versa.

•Offering Cost Efficiency: ADR conversions are simple, same-day processes that do not require a NAV calculation, and fees are never deducted by selling the underlying crypto.

•Ensuring Institutional Workflow Compatibility: Settlement through DTCC via unique identifiers like CUSIP and ISIN ensures seamless alignment with existing institutional workflows.

•Providing Regulatory Oversight: DRs offer U.S. regulatory oversight, making digital assets more palatable for institutions that operate under stringent regulatory requirements. This compliance-friendly structure helps mitigate risks tied to crypto regulations.

•Enabling Direct Ownership (Indirectly): While investors don't directly hold the cryptocurrency on a blockchain, DRs represent ownership of the underlying digital asset held in custody by a regulated custodian (e.g., Anchorage Digital National Association). This provides a form of direct ownership within a traditional securities wrapper.

•Facilitating Institutional Products and Strategies: Crypto DRs allow for the inclusion of digital assets in institutional products like funds, derivatives, and index benchmarks.