• Kraken’s 2019 acquisition of CF Benchmarks paid off in the Bitcoin ETF boom.
• BlackRock, Ark Invest and other Wall Street giants use the venture’s Bitcoin Reference Rate.
• Kraken is raking in licensing revenue as investors pour money into ETFs.

Sui Chung couldn’t believe what he was seeing.

It was late one night in February, and Chung, CEO of a financial company called CF Benchmarks, was looking at numbers on his laptop.

“I advanced my revenue forecast,” Chung said in an interview at a cafe in the London neighborhood of Soho. “By the time I finished all the math, it was 1am and I was like… damn.”

More than $1.4 billion has been invested in 11 new Bitcoin exchange-traded funds in recent weeks, according to data from Bitcoin Reference Rate, or BRR, an index produced by his firm.

Six of these funds issued by Wall Street giants BlackRock, Ark Invest and Franklin Templeton, among others, track the BRR index.

This meant Chung’s company was about to rake in a lot in licensing revenue.

Within a month, Bitcoin ETFs reached Chung’s one-year goal. And the Bitcoin ETF boom was just beginning.

Eye-watering recipe

The performance also demonstrated the prescience of Kraken, the San Francisco-based cryptocurrency exchange. In 2019, Kraken acquired CF Benchmarks for a nine-figure sum.

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Now, investors have worked almost US$58 billion in Bitcoin ETFs – CF Benchmarks is on a cash cow as license fees accumulate.

Better yet, neither Binance nor Coinbase, Kraken’s archrivals in the crypto exchange space, have index businesses of their own.

And CF Benchmarks has deleted price data from Binance, the world’s largest and most liquid exchange, because it doesn’t meet its criteria.

While CF Benchmarks doesn’t disclose how much it’s earning, it’s poised to generate fees for some time.

S&P Dow Jones, for example, charges clients about 3 basis points, or 0.03%, on assets based on its S&P 500 indexes, according to a 2022 article.

Consider just one of these ETFs – the one State Street – is managing US$541 billion. That means S&P is collecting $162 million in fees from this fund.

In April, Hong Kong approved Bitcoin and Ethereum ETFs and the three issuers – Harvest Global Investments, China AM and Bosera AM – use BRR as a benchmark for their offerings.

US$40 trillion market

Without indices, there would be no ETFs. Companies like BlackRock’s iShares unit manufacture indices to support ETFs. And they monitor everything from stocks to bonds and commodities like gold and oil.

Benchmark indices such as the S&P 500 support a range of ETFs and have become constants in the $40 trillion retirement market.

Somewhere along the way, Chung realized there was an opportunity to create an index for Bitcoin.

With a background in benchmarking, Chung was immersed in the inner workings of the financial data that feeds capital markets.

In 2016, Crypto Facilities, a London-based cryptocurrency derivatives exchange, realized it needed an index to help settle cryptocurrency futures contracts at the right price.

It was also in talks to provide this index to CME, the derivatives trading giant in Chicago, for its upcoming Bitcoin futures product.

‘No plan’

Chung was hired to create the index with just four software developers, eventually creating a business under the Crypto Facilities umbrella in 2018.

At the time there were few Bitcoin indices, so Chung’s team was working “without a plan,” he said.

He thought they might be very similar to the indices from dominant providers S&P or MSCI. But there were important challenges.

Jesse Powell Jesse Powell was the CEO of Kraken when it acquired CF Benchmarks for a nine-figure sum in 2019.

Unlike stocks, crypto is a 24/7 market traded on a variety of global, unregulated exchanges.

S&P only needs to take a snapshot of the price of, say, Apple’s shares all at once and in one place—say, at the close of the day on the New York Stock Exchange.

“But with cryptography, you need to figure out what the price of Bitcoin is at a given time and what the key times of the day are when financial transactions are settled, and build a methodology around that,” Chung said.

“And you must do this in a way that is reliable and consistent with financial regulations for traditional products – even if it is this new asset class,” Chung said.

It was a big challenge. But Chung’s team had a powerful weapon: its relationship with CME.

CME’s Bitcoin futures contracts were among the first regulated products in crypto, and it has licensed BRR since launch at the end of 2017.

And then Kraken came calling.

Supported indexes

In 2019, the exchange bought Crypto Facilities and CF Benchmarks for an undisclosed amount. But it was Kraken’s biggest deal since its exchange went live in 2013.

“At CF Benchmarks, we recognize the central role that an authorized benchmark administrator would have to play” in Bitcoin ETFs, said Tim Ogilvie, head of Kraken Institutional. DL News.

“Fast forward to today, CF Benchmarks is now the largest crypto index provider in the world,” Ogilvie added. “They will play an important role in the proliferation of the crypto product space.”

Producing compatible indexes is not easy. Index providers must input prices from heavily regulated exchanges, such as the NYSE and Nasdaq, to ​​ensure data integrity and reliability.

Regulators don’t want investors to buy ETFs based on flawed indexes.

BlackRock CEO Larry Fink has embraced Bitcoin ETFs and now the asset management giant relies on the Bitcoin Reference Rate. (Darren Joseph/Darren Joseph)

But it is difficult for a crypto index provider to enter similar types of prices in a market where regulation and reliability remain patchy.

As a result, CF Benchmarks maintains rigorous selection criteria exchanges must comply to be considered for inclusion in the benchmark, Chung said.

For example, the exchange must prove that it prevents fraud and carries out rigorous know-your-customer processes and anti-money laundering checks.

No Binance

BRR aggregates price data from six constituent exchanges, including Kraken, Gemini, and Coinbase. Binance, however, is not taken advantage of due to its regulatory issues.

After the exchange paid a $4.3 billion fine and pleaded guilty to violating US banking law in November, Binance CEO Richard Teng is working to comply with regulations. But it has been a slow process.

Chung admitted that he did not have price data for an exchange that now has 200 million global users It’s a huge data gap.

However, it is more important that it is able to defend the integrity of the benchmark.

“If that means I have a smaller business, so be it,” Chung said.

New wave

Now, Kraken’s deal for CF Benchmarks has positioned it to profit from a new era in crypto – the advent of Bitcoin and Ethereum ETFs.

As they are affordable and easy to trade products, ETFs promise to open the cryptocurrency market to a new wave of investors.

Although the receipt of funds from Hong Kong was warm Compared to the US, analysts say the offers could raise a billion dollars between them.

Chung is now defining his views over South Korea, where authorities are discussing whether spot Bitcoin ETFs should be allowed.

Contact the author at joanna@dlnews.com

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