Digital assets have evolved into a market worth trillions of dollars, yet they remain largely separate from traditional financial systems. Institutional investors are increasingly eager to possess and capitalize on digital assets; however, most banks, broker-dealers, and asset managers are still utilizing infrastructures that cater primarily to conventional assets like stocks and bonds, rather than blockchain-based currencies. While the introduction of spot crypto exchange-traded funds (ETFs) marks a significant step towards integration, these funds only provide passive exposure to the digital asset realm. For the full potential of digital assets to be realized, there is a pressing need for a system that effectively connects them to the existing structure of capital markets in a regulated and familiar manner.
Introducing American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) have historically acted as a vital link for international stocks, bonds, and commodities, allowing U.S. investors to easily acquire foreign assets just as they would domestic securities. The first ADR was introduced in 1927, paving the way for a robust system that now facilitates trillions of dollars in global investment. ADRs offer several advantages: they ensure fungibility, provide economic and governance rights, and are overseen by U.S. regulations, all while benefiting from efficient settlement processes managed by the Depository Trust & Clearing Corporation (DTCC). This system enhances local liquidity and market access, as evidenced by Chinese firms listing on the London Stock Exchange and U.S. stocks being traded in Brazil.
Crypto as the Contemporary Foreign Market
ADRs focused on cryptocurrencies are set to fulfill a similar function for digital assets. Like foreign markets, the crypto space operates outside the traditional U.S. capital markets, posing challenges for many institutions that lack specialized infrastructure to engage with it. ADRs offer a regulated, accessible, and familiar framework that allows for:
- Seamless access – Digital currencies can be incorporated into investment funds and stored within existing banking and brokerage systems, thereby unlocking the utility of traditional capital markets.
- Efficient two-way convertibility – Unlike systems confined to authorized intermediaries, ADRs give asset holders the flexibility to convert underlying cryptocurrencies and their respective ADRs directly.
- Cost efficiency – Converting ADRs is a straightforward, same-day process that does not necessitate a net asset value (NAV) calculation, with no fees taken from the sale of the underlying crypto.
- Institutional workflow compatibility – Settlements through DTCC using unique identifiers like CUSIP and ISIN ensure a smooth integration with current operational workflows.
Institutional Demand for Crypto
There is a burgeoning institutional appetite for digital assets; however, most traditional market players remain tethered to DTCC’s established systems and lack the capability to interact directly with cryptocurrencies. ADRs cater to these firms by addressing critical regulatory, compliance, and operational challenges:
- Regulation – ADRs are recognized as SEC-regulated securities, complete with CUSIPs, ISINs, and tickers, thereby providing investor safeguards.
- Compliance – Only regulated entities, such as broker-dealers and banks, are permitted to custody and service ADRs, ensuring adherence to stringent compliance standards.
- Operations – ADRs settle through conventional stock clearing systems just like any other security.
Expanding Market Potential
By bridging the $3 trillion cryptocurrency market with the $87 trillion securities market linked to the DTCC, ADRs have the potential to facilitate institutional adoption and create new avenues within traditional markets, including:
- 24/7 trading – While crypto markets operate continuously, traditional securities exchange hours are limited. ADRs facilitate round-the-clock trading of traditional securities, minimizing risks associated with overnight and weekend fluctuations. Following the launch of spot Bitcoin ETFs in early 2024, Bitcoin experienced significant price movements over weekends, which institutional investors could not capitalize on due to market closures.
- Yield, lending & settlement – ADRs could be employed for margin trading, settling spot crypto and futures transactions, collateralized lending, and structured products. Their unique ability to connect ADR and spot crypto liquidity makes them ideal instruments for institutional applications.
- Custody choice – Investors have the option to hold assets either on-chain or within conventional brokerage accounts.
- Fund inclusion – Given their recognized security status, ADRs facilitate crypto ownership within ETFs and institutional investment portfolios.
Conclusion: Laying the Groundwork for Institutional Advancement
ADRs transformed global investing by providing U.S. investors with straightforward access to foreign stocks. Now lies a distinctive opportunity to build on this legacy by enhancing market access. By offering a regulated, efficient, and familiar avenue for institutions to interact with digital assets, ADRs could be crucial in propelling crypto into its next growth phase and ultimately attracting new institutional capital into the digital realm.
