The Bitcoin ADR Moment: Rewiring Global Market Access

All right. Good afternoon, everyone. My name is Tyler Evans. Today we're here to talk about ADRs, another nice three-letter acronym. Ishaan, I'd love to start with you. What is an ADR, and why should people care? Why are we talking about it today?

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Absolutely. Thanks, Tyler, and thank you all for being here today. ADRs are effectively a wrapper. They've been used for almost 100 years to wrap foreign stocks into the U.S. stock market. Before that, they stemmed from receipts that were used to connect commodities like gold into the traditional banking system. So the idea of a receipt has a long history in connecting markets. The whole point of an ADR is to allow folks who own a particular asset to bridge it into another market, continue to own the asset, and then use it in the market they bridged it into. That is conceptually what an ADR is.

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I know you spent a lot of time at Citibank working on the ADR team there. What are some examples of ADRs that people may be familiar with, or that a traditional investor would have access to in the U.S.?

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From a stock market perspective, a typical ADR is when you as an investor want to buy Alibaba, Nokia, Nestlé, or Sony. These are all foreign-issued stocks that you, as a U.S.-based investor, want to own and be able to hold in your brokerage account. But you may not want to set up a brokerage account in those markets, you may not want to deal with the market regulations, or you may have restrictions on what you can hold. An ADR gives you the ability to own and hold those assets in your U.S. account and treat them like any other U.S. stock.

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David, from the banking side with Clear Street, what are the things that holding an ADR enables an investor to do on your platform or in their brokerage account?

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If you think about the construct, an ADR is a wrapper. In crypto, we talk a lot about tokenization of stocks and moving them on chain. This is a version of wrapping an asset so that it fits within a framework. From Clear Street's perspective as a prime broker, we can hold in custody any asset, and we're able to help service customers that are trying to bring foreign stocks onto U.S. soil, just like Ishaan mentioned.

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In addition to that, particularly as we're talking about the crypto space, one of the biggest issues is that operationally, the infrastructure systems are not talking together and they're not connected. Taking Bitcoin or crypto and putting it into a depositary receipt framework allows you to hold it within your prime broker or custody account, so you don't have to do anything special. There's nothing additional that needs to be done except for the DR conversion. Now you've converted it, which enables you to have access to things that a prime broker gives you, primarily margin trading, and the use case of being able to trade it alongside any other asset.

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Ishaan, we're here at a Bitcoin conference. We're talking about Bitcoin. Where does Bitcoin fit in with depositary receipts?

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It's a great question. I laid out the history of the ADR being used and constantly innovated to allow different assets to integrate into different markets. Now the moment has come to integrate Bitcoin into the traditional stock market directly, and that's what we're doing with an ADR. The idea is that Bitcoin can sit within an ADR framework where owners of the underlying bitcoin can deposit their bitcoin, get an ADR in return, continue to own the underlying bitcoin, and now use Bitcoin in the traditional stock markets.

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When we bring Bitcoin into an ADR, we bring Bitcoin into the traditional stock market, with the choice for that holder to always be able to redeem back to the underlying. This bridge is what we've built. We want to help integrate Bitcoin into traditional markets so that not just existing bitcoin holders can access traditional markets, but also traditional investors can have a tool to get closer to Bitcoin and the Bitcoin ecosystem, with the goal eventually to get them to the underlying ecosystem directly.

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I understand RDC has been working on this Bitcoin concept for a long time. Why isn't this already a thing? We're more than a decade into Bitcoin's history. We have Bitcoin ETFs. Why hasn't this construct existed historically?

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ADRs are typically issued by banks when it comes to the traditional stock market. As Tyler mentioned, we came from one of those banks, and we realized that in order to really connect markets, you do have to step outside the existing system, observe it, and realize there's an opportunity, which is what we were able to do when we left the bank to start this business.

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Part of it is also making sure there was market structure clarity and regulatory clarity. As regulators have understood and appreciated that Bitcoin is an asset that should be part of the traditional markets, we've been able to follow along that path to build this bridge. This is the time for this bridge to expand.

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Today we are offering this solution, but under certain restrictions. We do this for accredited investors and up, but we are working on a path to further expand this to everybody. That's one of our goals for the year, so that everyone can benefit from this product and solution.

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David, from the Clear Street perspective, how do you interface with this? How does the plumbing actually work? How can you transform your Bitcoin into something the traditional finance system can understand, lend against, and utilize?

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If we take the traditional finance concept, there are a handful of shops, and Ishaan used to work at one of them, where they basically do the conversion for you and issue the note on a transfer agent. This fundamentally works the same way. If a client wants to create the depositary receipt, they'll come to the desk and either deliver it to us and we'll convert it, or they'll give us cash and we can buy Bitcoin.

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The next step is to send it into a qualified custodian that is going to hold the underlying bitcoin under safekeeping. Then a notification gets sent to a transfer agent. The transfer agent matches the trade on DTCC, and those shares are then received by Clear Street. There are a couple of different steps that happen pretty quickly, but the underlying technology is the same tech that is being used in TradFi for trillions of dollars of stock settlement on a regular basis.

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This is really a format for taking something that is unique and putting it into a framework that already exists. One of the biggest things that we see at Clear Street is that people want to get access, and I believe a lot of the adoption of cryptocurrency in general has been hampered by operational infrastructure as well as the regulatory landscape. We've gotten updates on both of those things over the past few years. This is a step in the right direction to be able to very simply hold your Bitcoin in a prime broker account and get the benefits of having it all integrated with one system that financial systems already work on today. It makes it a lot easier for people to drive adoption, as well as get more fungibility and use cases out of the underlying asset that are not necessarily available to them today.

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What you're describing sounds a lot like a Bitcoin ETF, which has been one of the fastest-growing ETF products ever launched on Wall Street. Is it the same? Is it different? What's the nuance here?

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There are a couple of different things. When I'm talking to prospective clients about it, number one is that a lot of funds, if you run an active ETF or a mutual fund, you're capped at how much capital you can put into other vehicles and other funds. Depending on the underlying structure, that can be really complicated for somebody to get Bitcoin, because most funds or ETFs aren't going to own Bitcoin outright. The next reaction is, great, I'll buy IBIT, but then it counts against the cap of me holding other funds.

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Also, from a manager's perspective, you're managing capital. Your investors don't want you putting your money into somebody else's vehicle. They want you to manage capital appropriately. Aside from better capital efficiency and other things like that, the number one thing that really resonates is that this is the purest form of representation of Bitcoin in traditional finance, because you're holding the underlying instead of shares in a trust vehicle.

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Just to add to that, if you think about what the ADR enables, it aligns really directly with the ethos of Bitcoin, because Bitcoin is about ownership, choice, and freedom. When you decide as an asset owner to wrap your Bitcoin into an ADR, you continue to be the owner of the bitcoin. You're just reformatting it so you can use it in the stock market, because the stock market isn't there yet when it comes to directly dealing with Bitcoin, based on what we've been saying. But you are still the owner of the underlying, and you still have a choice in the future to go back to the underlying bitcoin when you're ready. That is not a feature of a fund or another product like that. This is limited to a product like an ADR.

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You mentioned getting your Bitcoin back in the future. I think that's something this audience probably cares very much about. How does that differ from the in-kind redemptions we've heard about in the Bitcoin ETFs? Is it the same thing?

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That's a great question. Taking a step back, with ETFs the primary purpose of creation and redemption is to make sure the ETF is efficiently tracking the underlying from a performance perspective. The primary goal of creation and redemption is for authorized participants contracted with the ETF, typically broker-dealers, to be able to create and redeem all the time to make sure the ETFs efficiently track the underlying.

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Sometimes certain clients do get the ability through the APs to create and redeem, but there are certain nuances there. One, it's not available to everybody. It's only available to certain clients of the APs. Two, every day the underlying bitcoin held by the ETFs is being sold to cover the expenses of the ETFs. Theoretically, there is less bitcoin per share than when you started off if you had initially created.

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In the case of an ADR, we don't touch the underlying. The underlying just sits in custody for the benefit of the ADR holder. There's a fixed ratio of Bitcoin to ADR. You can always redeem for that exact amount of bitcoin whenever you want. That doesn't change regardless of the price of bitcoin, and it's open to anyone to create or redeem. There is no concept of an AP because this is not a fund. The entire product is designed for asset owners to be able to move back and forth between the two markets based on choice.

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The way I think about this product is like when Bitcoin first got wrapped with WBTC, and obviously there have been a handful of other DeFi wrappers to get Bitcoin on a variety of different chains. That was a really critical moment for crypto because it integrated Bitcoin with the decentralized ecosystem. The way this product works, in my mind, is that it takes Bitcoin, wraps it, and puts it into the traditional financial system so you can access traditional products and traditional rails, as well as have more fungibility and use, like putting it in a margin account or using it as collateral for repo transactions. It's the same premise of what wrapping Bitcoin onto a chain like Ethereum unlocked for the DeFi ecosystem.

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You mentioned the repo market, which I think is a really interesting one. If we zoom out to a future where Bitcoin ADRs hold billions of dollars of bitcoin, what does this enable in terms of capital markets?

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The repo market is the most liquid market in the world. It's fungible. You post assets as collateral and borrow cash, or vice versa. The critical point right now is that there are a lot of people in the room and at this conference working on different use cases for Bitcoin. There have been a handful of projects rolled out around generating yield on Bitcoin, and this potentially is another way for you to enact that using the traditional financial system.

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Repo markets work by posting assets and borrowing cash. They are extremely liquid. You get to work with the largest banks in the world. Typically, that means cash financing rates are going to be open, available, and cheaper than what you can normally get within the crypto ecosystem. If you think about a platform like Aave, Compound, Kamino, or anything like that, you're segmented by the amount of capital that is provided within that market, which has grown tremendously over the past few years. It's awesome to see. But being able to have an asset like a Bitcoin ADR potentially eligible to post into repo unlocks all the capital in the entire world held by every single bank.

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That's a pretty big deal.

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Backstage you were talking not just about the U.S. market opportunity, but really the global opportunity. What does that unlock for ADRs specifically?

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That's a very interesting question. ADRs, as we mentioned initially, have primarily been used to connect markets, especially cross-border markets. We've taken that concept and applied it to Bitcoin. We've started to see this trend in the Bitcoin space where there are treasuries and other companies that hold Bitcoin globally. Bitcoin is, after all, a global asset. It's not meant to be held within a particular border. It's meant to be accessible across borders. Similarly, ADRs are meant to connect markets across borders. There is a natural alignment with the purpose of the ADR and what Bitcoin as an asset represents.

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There is an opportunity to connect treasury companies from different markets to the U.S. market, for example, and bring that corporate entity and corporate strategy into the U.S. market so U.S. investors can access it. There's a similar opportunity to take U.S. treasury companies and take them abroad, so other investors in local markets can access them. ADRs enable that at the security level, which goes beyond what we've been talking about in terms of wrapping Bitcoin into the ecosystems directly. There's a two-layer play here, which really helps recognize that borderless concept of Bitcoin across markets, and that's where we think the ADR further adds value.

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Unfortunately that's all we have time for, but thank you both for sharing about the most direct way to own Bitcoin in the traditional financial system. Thank you.