As crypto ETFs become reality, benchmark providers take center stage

On May 29, 1953, New Zealand’s Edmund Hillary accomplished the dangerous and harrowing feat of successfully climbing Mount Everest. There had never been a documented, successful climb, and mystery surrounded the fate of mountaineers who never returned. When Hillary finally reached the peak of the Earth’s highest mountain above sea level, he had a witness. 

His companion was Tenzing Norgay, a Nepali Sherpa mountaineer. Norgay had already been to Everest six times when he joined the Hunt expedition, offering to lead the climbers as a local guide and playing a pivotal role in the group’s success.

It’s this tale that Sui Chung retells when he explains the role of his company, CF Benchmarks (CFB), in the growing regulated crypto world. He sees his company as the sherpa, and the likes of BlackRock, Franklin Templeton and WisdomTree, to name only a few, as Edmund Hillarys. 

This is really dangerous territory that needs to be navigated very carefully

Sui Chung, CF Benchmarks

CFB, a provider of index and benchmarks for the world of digital assets, distributes the benchmarks for six of the new bitcoin exchange-traded funds (ETFs) approved by the US Securities and Exchange Commission (SEC) in January. In what has been called a “watershed” moment for crypto markets, ETFs from BlackRock, Fidelity, Grayscale, and others are now listed at Nasdaq, the New York Stock Exchange, and Cboe. 

Like traditional ETFs, which bundle together securities and track their price movements, the spot bitcoin ETFs will allow investors exposure to bitcoin prices without directly holding the volatile currency. The SEC’s long-awaited green light will allow greater retail participation in the crypto market, while giving institutional investors who may have been barred from investing in alternative assets permission to dip their toes into the asset class.

Chung and CFB had been waiting for this moment since 2016.

Back then, the company went by the name Crypto Facilities and operated as a cryptocurrency derivatives exchange under founder Timo Schlaefer in London. In dealing with derivatives contracts, the exchange needed an index to settle them, so it designed the Bitcoin Reference Rate (BRR) index. At the same time, CME Group had shown interest in a potential bitcoin futures contract and was searching for an index provider. 

The exchange asked CFB if it could license the BRR.

“So there’s a cryptocurrency exchange, finding itself accidentally becoming an index provider,” Chung says. It was then that Schlaefer realized he needed someone to run what was becoming an index business. Through his venture capitalist investors, Schlaefer found Chung, who had been working for Euromoney Institutional Investor. In those early days, he cobbled together a small team of four, comprising himself and three software developers. They had a dream of becoming what he calls “the MSCI of crypto.” 

“We collect our own data. We process, calculate, publish, administrate, manage, and maintain it—we do everything, so we don’t outsource to anyone else,” Chung says. “We are not using a Thomson Reuters/Refinitiv data feed. We are collecting our data from source—i.e., cryptocurrency exchanges.” 

Because the crypto world still resembles the Wild West, Chung says CFB maintains strict criteria for the exchanges from which it sources data. The first requirement is that bitcoin must be traded against the dollar. Not all venues follow this practice, with some trading against other cryptocurrencies or stablecoins.

“It seems a very esoteric and slightly academic sort of nuance, but to ensure the integrity of the benchmark, and to make sure that investors are getting a representative net asset value (NAV) strike, and that the dollar value of bitcoin holdings is representative, robust, and resistant to any potential manipulation, we only take bitcoins for dollar,” Chung says.

The exchanges must also have policies, processes, and systems in place “to monitor and impede any market manipulation.” They must also adhere to jurisdictions’ anti-money laundering (AML) and know-your-customer (KYC) laws in any place where the benchmark is being used. These considerations slimmed the number of exchanges to six: Kraken, Coinbase, Bitstamp, Gemini, itBit, and LMAX Digital. CFB never included the fallen FTX or Binance in its data collection. 

Following the BRR release, CFB created the BRTI, or Bitcoin Real Time Index, which offers a real-time, per-second index in comparison to a daily one. “We created the BRTI to give futures traders an indication of where spot bitcoin is at any moment in time,” Chung says. “When they’re trading the futures contract, they have an idea of what the basis that is embedded into the contract looks like.” The Ether Dollar Reference Rate and Ether Real-Time Index were then created for Ethereum.

For a long time, CFB was made up of four employees and four products, and Chung admits there was limited sleep and resources. “These are 24/7 markets,” he says. 

But in 2019, the tide started to change. Kraken, a US-based spot cryptocurrency exchange, bought both Crypto Facilities (the precursor to CFB) and its index business. “Its main objective was to acquire Crypto Facilities, the UK multilateral trading facility, to become a regulated MTF here in the UK because it wanted to enter the crypto derivatives venue space,” Chung says. That acquisition brought resources and CFB became an independent entity with capital provided by Kraken. 

That same year also brought a “crypto winter,” a period where both trading volumes and cryptocurrency prices go low and stay low. Bitcoin was trading at around $6,000, and institutional interest had essentially evaporated. But the team of four got to work and built out systems and distribution capabilities, spun out new products, and started covering a wider array of cryptocurrencies with reference rates and real-time indices. “We sort of stick to our knitting,” Chung says. At the same time, they made attempts to market to firms inside the crypto space, as well as traditional finance firms, which were largely unsuccessful. 

By 2020, the market had started to pick up and CFB started to bring in more clients in the crypto space, allowing the team of four to grow to seven. Meanwhile, the price of bitcoin was rising. In October 2020, it moved to $15,000, and the following month saw $20,000. “And then almost every single contact I had in traditional finance, who I had left voicemails and emails with, all of a sudden I’m getting responses,” Chung says. 

By the end of the year, CFB was engaging with ETF issuers in Canada, Brazil, and Europe, and it has become clear that the provider’s early relationship with CME was giving their offerings legitimacy across the market. 

By February 2021, CFB expanded to 13 people, which included software engineers, salespeople, and marketing staff. “It’s no longer me doing seven jobs at the same time,” Chung says. Also, some bigger names were stepping into the picture with interest in filing bitcoin ETF applications in the US with the SEC. One of them was WisdomTree, one of the largest ETF providers in the country. But it wasn’t the first to give it a shot. In 2013, the Winklevoss twins of Facebook fame and co-founders of exchange Gemini, filed an application, which was rejected. 

WisdomTree filed its own application in 2021, writing that, “In seeking to achieve its investment objective, the Trust will hold bitcoin and will value its Shares daily based on the CF Bitcoin US Settlement Price (the “Reference Rate”), which is an independently calculated value based on an aggregation of executed trade flow of major bitcoin spot exchanges.” 

WisdomTree’s application would be rejected twice, once in 2021 and again in 2022. In its 2022 amended application, additional language was included, referencing CFB’s involvement. A few months later, Chung received an email in his personal inbox from BlackRock. To this day, he isn’t sure how the world’s largest asset manager got his personal email address, but nevertheless, it marked the beginning of a relationship that would stay solid amid turbulent times for crypto. Prices fell, and by the end of 2022, the world had watched the chaotic and dramatic end for one of the space’s biggest names. 

But BlackRock kept in touch and expressed interest in bringing CFB on as a potential vendor, which meant performing due diligence, a process he likens to the length of Leo Tolstoy’s War and Peace. BlackRock would go on to launch a private bitcoin trust for institutional investors in 2022, and it chose CFB as its index provider. 

“Even though it’s a private fund, it’s indicative of what’s to come,” Chung says. CFB turned back to the task of helping interested ETF providers get approval from the SEC on the spot bitcoin ETFs, working through concerns raised when initial issuers had filed applications. By June 2023, BlackRock filed its application with the SEC, and just as WisdomTree had before, stated its intention to use the CME CF Bitcoin Reference Rate. 

Today, CFB’s BRRNY (CME CF Bitcoin Reference Rate–New York Variant) is the benchmark for the iShares Bitcoin Trust ETF, Franklin Bitcoin ETF, Bitwise Bitcoin ETF, Valkyrie Bitcoin Fund, ARK 21Shares Bitcoin ETF, and WisdomTree Bitcoin Fund. The New York Variant refers to a synchronized closing time of 4 pm, New York local time in line with traditional financial markets. 

“At the end of the day, you need to be able to determine what the NAV of that fund is in US dollar terms. And hence you use a benchmark bitcoin price,” Chung explains. “You take the number of bitcoins, you multiply that by the benchmark bitcoin price, and then you get $1 value of that fund, and that is the NAV.” In determining the NAV per share, you would divide the NAV by the number of shares in circulation. 

With these ETFs trading on traditional exchanges, the NAV becomes an indicative NAV. So, when the equity markets open, the shares start trading, and they will trade in accordance with the fluctuations of the bitcoin price in real-time, he says. 

The work that CFB has put into its indices and benchmarks over the years means that when a stakeholder has a question, it is answerable by CFB. Other index providers in this space may be outsourcing their operations, creating a complicated communication pathway. “I think that’s very, very important to the traditional financial institutions,” Chung says. “This is really dangerous territory that needs to be navigated very carefully.”