Paul: [00:00:00] Welcome to Index Ideas from FTSE Russell. I'm Paul Amery, your podcast host. In the podcast, we explore index ideas that can help you address real-world investment themes and challenges. The concepts that we discuss in Index Ideas are not investment advice. They represent transparent, systematic approaches that may be developed into indices and made available for broad public use. So any reference to potential strategies is intended for informational and educational purposes only. In this episode, I'm joined by Kristen Barrie Mierzwa, who is Head of Digital Assets at FTSE Russell. Kristen, welcome to the podcast.
Kristen: [00:00:39] Thanks for having me.
Paul: [00:00:41] So, Kristen, the cryptocurrency and digital asset universe is often quite bewildering to the outside observer. So let me start with a basic question. How do we at FTSE Russell define digital assets?
Kristen: [00:00:53] Great question. So for us, a digital asset is everything from bitcoin and ethereum and solana, which are some of the kind of blue chip assets that I think people have probably heard of. And we also cover things like stablecoins. That's a digital asset in our definition. And then there's a long tail of other assets that we cover that – you may know these names – meme coins and all kinds of other projects. So today we've got over 500 assets in our crypto universe.
Paul: [00:01:27] Right. So cryptocurrencies and digital assets are pretty much the same thing from our perspective?
Kristen: [00:01:32] Well, everyone would debate that. But what we're not covering –
just so people know, but we will do at some point – are real-world assets that have been tokenised. So I think sometimes that gets confusing. Like is that a digital asset? What's going on? So today we don't have that but we're working on it.
Paul: [00:01:48] Okay, great. So when did FTSE Russell decide to get involved in the indexing of digital assets.
Kristen: [00:01:54] So we started thinking about this space in 2017 and trying to think through okay, how are we going to offer an institutional quality product to our client base? And at that point in time, you know, 2017, there wasn't the same kind of activity that you're seeing today. We ended up partnering with a company called Digital Asset Research, and they helped us with our pricing feed. So the first thing you need to do when you're building indices is figure out, how are we going to get a price feed for this, because we want to offer a product that -- unlike maybe private equity or something, where it's a little bit hard to value on a consistent basis -- it turns out that with digital assets, we can get a price for them 24/7. So in 2017, we started thinking about this space. And then we launched our product set January 1st, 2019. And what that includes is a 15-second price 24/7 for all those assets. And then we also offer multiple reference prices that we fix once an hour, again 24/7. So, we've had a pretty robust history with this asset class, and we've stayed fully committed to it since that point in time where we thought in 2017, let's do this.
Paul: [00:03:10] So you've mentioned that the digital asset markets operate 24/7, but what is distinctive about this asset class from a structural perspective or from an indexing perspective?
Kristen: [00:03:21] Yeah. So when I first started getting into this space, I didn't realise how do these assets trade and they actually trade more like FX. So what that means is an asset like FX trades over the counter (OTC). You can do person to person swaps on FX. There's lots of different quoted pairs with FX. And the same thing happens in digital assets. So we can see digital assets trading on centralised exchanges or decentralised exchanges or wallet-to-wallet or OTC. So price discovery is actually very important in an asset class like this that doesn't trade exactly like equities. So, again, back to those trading pairs, there's multiple trading pairs. So when we were setting this up we thought what are the most likely trading pairs that institutional clients would be using. And I think it's actually quite interesting. It's not just fiat pairs. So bitcoin to dollar or bitcoin to euro, bitcoin to pound. We also include a couple of pairs that are two stablecoins. So a lot of crypto trades with stablecoins. So bitcoin to USDC, bitcoin to USDT. And then we also see crypto trading bitcoin to ethereum or bitcoin to solana. So there's lots and lots of pairs out there that you have to capture and bring in. And what we're looking at are executed trades from centralised exchanges where all that economic activity is happening with clients who have been KYC-ed. So we're really holding the highest standards to where we're collecting our pricing data from.
Paul: [00:05:02] So you talked about obtaining reference prices and some of the challenges in doing that, given it's a global market trading 24/7, a lot of bilateral trades as well as exchange trades. Could you talk a bit about the indices that FTSE Russell offers? And so what's the next step. What indices do we offer and why have we built them that way?
Kristen: [00:05:19] So after we built our pricing feed then the fun starts, right? Now we can build indices. And so today we run hundreds of indices, but all based off of that universe of 500 assets. We started where you would think with very simply single digital asset indices. So the FTSE Bitcoin Index, the FTSE Ethereum Index. And then after you accomplish single digital asset indices, the next step, of course, is -- let's build some baskets. So we did a lot of top 50, top ten, top five. Then we started to incorporate things like staking yield with our proof of stake assets, so you can think of that as a total return index. We went back to doing just a single digital asset index that includes staking. And the sky's the limit. But some of the fun things that we've been working on are adding fundamentals to this asset class, mixing bitcoin with gold. So you've got two asset classes coming together. We're starting to see lots of equity indices where you pull out a thematic, where maybe companies have exposures to digital assets on their balance sheet, or they're holding stablecoins on their balance sheet or they're miners. So we at FTSE Russell can combine equity, who have a thematic in the digital asset space, with actually also including bitcoin or ethereum in that play as well. You get the futures involved and you can do all kinds of interesting option strategies. You can do momentum, target vol. I mean, it's really getting exciting in the index space with this asset class because we're just moving forward and innovating because there is client demand to get different types of exposure to the asset class.
Paul: [00:07:09] You partly answered my next question, but I wanted to ask you, you know why someone in the market would need an index provider to get exposure to digital assets? Because most of these prices are available very easily. I've just gone to Google or Yahoo Finance or any other kind of open-access websites and get prices for all these individual assets. What's the value added of an index provider?
Kristen: [00:07:33] So again, we're measuring that market rate of executed trades with KYC-ed clients. So we're looking at a professional user base. And this is exactly what you would expect if you were buying an ETF, a mutual fund, an SMA that was professionally managed. Because these are the venues where those asset managers would be executing their trades. And you want to make sure that your fund is tracking an executable benchmark. So again, like highest standards of governance and quality have been put into our process of where do we collect this data. And then again to the assets themselves. Which assets do we include? This is a fun fact. There's about 15,000 digital assets that get launched on a daily basis. That's a lot. So why do you want to work with an index provider, is, we're sorting through massive amounts of data and finding the top 500 assets that are appropriate to be included in an investable product.
Paul: [00:08:38] So how do we vet and monitor those tokens that we're selecting for the indices or the trading platforms we use to generate the price feeds?
Kristen: [00:08:47] With FTSE's know how, because we've been in the index business for decades. We’ve learned a lot, and we're taking that knowledge and putting it into the digital asset class. So we replicated what we do with country classification in terms of figuring out which venues are appropriate for us to use and the assets themselves. So on a quarterly basis, we follow a published rulebook, which is on our website, and it talks about how we vet the exchanges and vet the assets themselves, every quarter. So what we're doing is if the token is no longer really being traded, we'll remove that from our universe, so our clients don't have to worry about, do I have something in my index that's actually not tradeable anymore? We're putting all of those screens in place to ensure the assets are investable.
Paul: [00:09:33] You mentioned earlier that there are many thousands of digital assets being launched every day, because there are almost no or zero barriers to entry, so that sounds like a headache for anyone designing a classification system. How did we approach it?
Kristen: [00:09:46] So we're classifying the assets that are in our world, and our world are assets that are listed on central exchanges. Now, those 15,000 assets that I was talking about, they're not all getting listed on centralised exchanges. So someone can launch an asset and then just trade it with their friend wallet to wallet. There's very high criteria from these centralised exchanges to have an asset list. It's a long process. It can take months. And so the centralised exchanges in a way, are our first line of defence in terms of they've done a lot of vetting and in order to allow that asset to be on their platform. And we also look for multiple sources. So FTSE Russell wants at least three sources for pricing data before we'll allow an asset into our universe. So that means it needs to be listed on three of those centralised exchanges in one of the 11 trading pairs that we have. And we're trying to make sure we're capturing the price and volume data that's really representing the best of the best in terms of who's trading on these platforms.
Paul: [00:10:53] What technological challenges do we face in developing indices, and how do we address them?
Kristen: [00:10:59] This is the first time we did anything that was 24/7. So that was really interesting. And figuring out, okay, when do we rebalance? Most of our clients aren't working on Saturdays and Sundays, so let's make sure we rebalance on a date that everybody's actually in the office. So that was interesting to tease out and figure out. And we wanted to sync it. So we always knew people would be blending digital assets with other asset classes. So we had to sync it to rebalance dates of our global equity index series, so you could rebalance all at once and cannot have too much turnover in your portfolio because you're doing two separate rebalances.
Paul: [00:11:36] I noticed that for a single digital asset indices or reference prices, we, we provide a 4 p.m. daily snapshot. And that seems to mirror the way that we measure the FX markets for example through the WMR indices was that a deliberate design choice?
Kristen: [00:11:54] Oh, yes. And there seems to be three standard end-of-day official end-of-days for the crypto assets. So 4:00 pm Eastern, we're seeing 17:00 Central European time and then 4:00 pm Hong Kong. But again we calculate this every hour on the hour based on that 15 second price that's coming through. The other thing that you were asking about on data, and what's kind of unique in this space or been interesting for us to tackle, is that digital assets don't have corporate actions, the way we think of corporate actions in the equity world where something's going to happen, like we're going to have a split and it's going to get announced, and everybody knows the effective date. In the digital asset world, things are often promoted that they will happen at a certain block time. So whenever block 1562 happens, that's when this thing is going to happen. So you don't know what time of day that could be. It just depends. So you have to watch it. And it's really interesting getting information from non-traditional sources. So it may be on X. It may be on, you know a discord channel. It might be on a foundation, the foundation of the protocol's website. We may need to look at a different source from the centralised exchanges. So it's been a fun challenge of pulling together multiple sources so that we can correctly reflect if there's any changes to a protocol in our indices in the correct, timely manner that our clients would expect.
Paul: [00:13:26] Thank you for explaining all that. It sounds like a very interesting challenge. There must be some analysts who are becoming very expert in these areas. What oversight is there of the digital asset index range? Who has a kind of a top-down view on how this is all evolving?
Kristen: [00:13:41] From the FTSE Russell side we've got various committees, including an external advisory committee that we work with. We ourselves have operational forums, index governance boards, all the things that you would expect from our other asset classes. It is interesting because it is a global asset class, right? So there's regulators across the world that are looking at it and defining rules differently depending on what they want to have happen in their jurisdiction. So that's another fun, interesting challenge is interpreting many regulators for a global asset class. So what might be okay in the US may not be okay in Europe. So we have to build indices that are compliant to the regulations in the jurisdiction where the end product would be offered. So you can see these like nuances in the top ten index might be based on what assets are allowed to be included in investable products in different geographies.
Paul: [00:14:42] And finally, looking forward into 2026, what areas of product development are you focusing on and why?
Kristen: [00:14:48] I'd like to talk about stablecoins, which I mentioned earlier today, and it has become increasingly apparent that stablecoins are going to be the foundation for the financial markets for all asset classes. And quite quickly, and most of that's around tokenisation. So FTSE Russell calculates right now 12 different stablecoin prices every 15 seconds. And what's interesting is I think people think – oh stablecoins. They must trade at one because that's the purpose of them. It’s a 1-to-1 to the defined fiat that they're representing. But in the secondary market, stablecoins never trade at one. So if you're in the future, if you're doing some sort of smart contract that has settlement instantaneously, you're going to want to know what that stablecoin rate actually is at. And we have that data. So I'm very, very excited to be participating in the new world that's coming. And I think a lot of that will be through our stablecoin offering.
Paul: [00:15:52] Great Kristen. Well, thank you very much for that very comprehensive overview of the digital asset index range. That's it for this episode of Index Ideas. If you've enjoyed the conversation, then please do follow us and give us a like or a review on your podcast app of choice. If you'd like to get in touch with the show, you can do that via the email
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[email protected], but for now from me, Paul Amery, goodbye.
