Citigroup is rushing to leap ahead of its Tier I banking rivals across the globe by getting a Bitcoin trading product to market. Based on sources inside Citigroup and in and around crypto hedge funds it has become apparent that Citigroup is getting legally ‘creative’ to serve its customers with a tradeable, physical (digital/custody/warehouse’d) Bitcoin asset.
The intelligence that we’ve been passed sheds light on the strategy that has been proposed within the hallways of Citigroup and shown to a select few institutional clients. As per sources inside Citigroup, the product is being discussed as a ‘digital’ ADR. Effectively functioning as a foreign security product.
**A note about ADR’s – the acronym represents American Depository Receipt. An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange.**
With that explanation out of the way, Citigroup is floating a concept that takes the principals of the ADR and applies them in a ‘digital’ manner. Treating Bitcoin as a security that can be offered as a certificate in the United States in a digital manner, from a regulatory and legal standpoint.
One source had this to say about the concept of a ‘digital’ ADR connected to physical Bitcoin:
“We expect it would be a security structured so that custody, settlement, etc would fit into existing systems and regimes versus an NDF which is an OTC derivative. Many investors are often more restricted in their use of derivatives versus purchasing securities.”
**A quick note about NDF’s – a non-deliverable forward (NDF) is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. It is used in various markets such as foreign exchange and commodities.**
As a point of reference, Goldman Sachs has familiarized itself, and it’s institutional clients to the Bitcoin NDF concept. Per The New York Times:
“Goldman will begin using its own money to trade Bitcoin futures contracts on behalf of clients. It will also create its own, more flexible version of a future, known as a non-deliverable forward, which it will offer to clients.”
However, Citigroup is focused on taking Bitcoin several steps further and creating a ‘securitized’ product and allowing customers to trade it via the ADR designation. A creative concept that seems to have legs, per another crypto hedge fund source we spoke to earlier today:
“Every institution is faced with one basic problem – clients are increasingly aware of and want a piece of crypto in their portfolios. Whether it is an HNW, UHNW retail client or an institution they can no longer just ignore the chorus of requests to provide solutions. This Citigroup concept is the most creative we’ve seen and could find a foothold quickly, IMO. Using already accepted infrastructure plays well with regulators and further moves the ball down the field on the issues of custody, settlement. Ultimately those have been the markers that the SEC has laid out as needing to be solved. This is one solution that had people talking this weekend.”
And another source inside Citigroup said the following (short and sweet):
“This is serious and what you’ve heard is true. Has been discussed for about 60 days. Yes, there is a document that outlines how/what it would entail, but you can’t have it. Yes, it would be a security product.”
And even more intel from another crypto hedge fund source that was passed to us a few hours ago:
“Citi is circulating a plan that will make it the first bank to (nearly) trade physical Bitcoin. The vehicle that is being proposed is a digital ADR with the bank acting as agent. The info is being passed around, internally, as part of an investor presentation of some sort. Very interesting concept.”
The financial minds attached to solving client needs at the absolute highest levels have been grappling with cryptos and Bitcoin in particular. And the only reason they are doing so is that clients and clamoring for it. Banks, in general, aren’t interested in innovating and pushing the boundaries of regulatory bodies unless they are forced to do so.
The untold story of adoption and the ever-increasing delta between traditional finance and emerging finance (crypto) is that it is being driven by individual clients forcing these institutions to give them what they want – Bitcoin.
Given the narrative from banking executives across Wall Street just 18 months ago, this ‘new normal’ is remarkable and a testament to the power of what Bitcoin represents. Every investment bank on the street is deep in discussions about their own ‘solve’ to the crypto questions being asked by hordes of clients.
Sounds like Citigroup already has an answer.