Crypto Assets index ETF is here! 21Shares breaks through the 1940 Act to launch as the world's first under strict regulations.

The asset management company 21Shares has launched the 21Shares FTSE Crypto 10 Index ETF (TTOP) and the 21Shares FTSE Crypto 10 ex-BTC Index ETF (TXBC), both tracking the FTSE Russell cryptocurrency index, holding a portfolio of crypto assets ranked by market capitalization, regulated under the Investment Company Act of 1940.

Key Differences Between the 1940 Act and the 1933 Act

The Investment Company Act of 1940 serves as the regulatory framework for mutual funds and most traditional ETFs in the United States, imposing strict requirements on custodian and investor protection. This contrasts with the Securities Act of 1933, which applies to trust structures holding physical commodities — regulators have primarily applied this model to U.S. spot Crypto Assets products to date.

So far, the U.S. Securities and Exchange Commission (SEC) has mainly approved products developed under the Investment Company Act of 1933 related to spot BTC and ETH, rather than investment company ETFs fully regulated under the Investment Company Act of 1940. According to Cointelegraph, the U.S. Securities and Exchange Commission has approved a Crypto Assets ETP under the '33 Act—the Rex-Osprey Doge ETF, which was launched in September.

Differences between the 1940 Act and the 1933 Act in Crypto Assets ETF

Regulatory Intensity: The 1940 Act requires independent boards of directors, regular compliance reviews, and strict conflict of interest regulations; the 1933 Act primarily focuses on disclosure obligations.

Structural Design: The 1940 Act allows for the investment company structure, which can hold multiple assets and conduct rebalancing; the 1933 Act is typically limited to client trusts holding a single asset.

Investor Protection: The 1940 Act provides more layers of fiduciary responsibility and transparency requirements, with stricter custody standards.

Flexibility: The 1940 Act products can manage investment portfolios more flexibly, suitable for index products.

21Shares has chosen to adopt the framework of the 1940 Act, which means that these Crypto Assets index ETFs will undergo the same regulatory scrutiny as traditional mutual funds. This choice could bolster investor confidence, particularly among institutional investors who are accustomed to traditional financial products and have concerns regarding the lack of regulatory protection in the Crypto Assets market.

From a historical perspective, the SEC's regulatory attitude towards crypto assets in the United States has always been cautious. After years of application rejections, the Bitcoin spot ETF was only approved in early 2024, using a relatively simple framework of the 1933 Act. 21Shares' groundbreaking use of the 1940 Act may indicate that regulators' recognition of the maturity of the crypto assets market is on the rise.

TTOP and TXBC Product Design Analysis

(Source: LSEG)

21Shares FTSE Crypto 10 Index ETF (TTOP) and 21Shares FTSE Crypto 10 ex-BTC Index ETF (TXBC) are two new products that track the FTSE Russell Crypto Assets Index, holding a portfolio of crypto assets ranked by market capitalization, rather than investing in a single coin, thereby providing investors with broad digital asset exposure.

Federico Brokate, Global Head of Business Development at 21Shares, stated that index funds allow investors to gain diversified exposure to traditional assets, particularly stocks. “The same logic applies to Crypto Assets investments,” he said. This concept introduces the risk diversification principles of traditional finance into the Crypto Assets space, offering significant appeal to investors looking to participate in the Crypto Assets market without taking on the volatility risks associated with a single coin.

TTOP tracks the top 10 Crypto Assets, including Bitcoin, providing the most comprehensive market exposure. This configuration is similar to tracking the traditional ETF of the S&P 500 index, allowing investors to gain overall exposure to blue-chip crypto assets with a single purchase. TXBC, on the other hand, excludes Bitcoin, focusing on other top 10 Crypto Assets such as Ethereum, providing supplementary configuration options for investors who already have Bitcoin exposure.

The FTSE Russell Crypto Assets Index serves as an underlying asset, providing an objective and transparent methodology for component selection and weighting calculation. FTSE Russell is a leading global index provider, and its reputation in traditional financial markets adds credibility to these crypto assets index products. The index methodology is typically based on objective criteria such as market capitalization, liquidity, and trading volume, and is regularly rebalanced to reflect market changes. This mechanized management approach reduces the risks associated with subjective judgment.

For crypto assets investment, index products have multiple advantages. First, it eliminates the complexity of selecting coins, allowing investors to participate in the market without needing to research thousands of crypto assets. Second, it provides an automatic rebalancing mechanism that reduces holdings when an asset performs too well and increases holdings when it underperforms, achieving a disciplined approach of buying low and selling high. Third, it reduces the risk of a single project failing; even if a particular crypto asset in the portfolio goes to zero, its impact on the overall investment portfolio is limited.

21Shares' market position and FalconX acquisition

21Shares is very active in the Crypto Assets exchange-traded products market and was recently acquired by FalconX, with the acquisition amount undisclosed. The company will continue to operate independently under FalconX. This acquisition demonstrates the accelerating trend of consolidation in the Crypto Assets financial infrastructure sector. FalconX is a company focused on institutional-grade Crypto Assets trading and settlement services, and its acquisition of 21Shares may be aimed at vertically integrating product issuance and trading execution capabilities.

21Shares has established a strong ETP product line in the European market, covering single asset products for Bitcoin, Ethereum, and various altcoins. The launch of index products under the 1940 Act in the U.S. market marks a strategic breakthrough in the world's largest capital market. Unlike Europe's relatively open regulatory environment, the U.S. market has stricter scrutiny for crypto assets products, and the ability to launch 1940 Act products in the U.S. demonstrates 21Shares' expertise in compliance and product design.

From the perspective of the competitive landscape, 21Shares is challenging the leading position of traditional asset management giants like BlackRock. Since the launch of the spot Bitcoin fund at the beginning of 2024, the demand for Crypto Assets ETFs has remained high. BlackRock has been in the lead: its IBIT Bitcoin ETF has reached an asset management scale of approximately 70 billion USD in just a year and a half since its listing. This figure shows that there is significant demand from institutional and retail investors for regulated Crypto Assets investment instruments.

However, BlackRock's IBIT and other mainstream Bitcoin ETFs are single-asset products, operating under the 1933 Act framework. 21Shares' TTOP and TXBC offer a differentiated value proposition: a stricter regulatory framework combined with a diversified portfolio. This combination may appeal to investors who have concerns about the volatility of single assets but still wish to benefit from the overall growth opportunities of the crypto assets market.

The Future Trends of Crypto Assets Index Investment

The products launched by 21Shares may open a new chapter in the Crypto Assets ETF market. If these 1940 Act products succeed, it could encourage more asset management companies to follow suit, launching similar index and thematic Crypto Assets products. This trend will bring Crypto Assets investment closer to the investment logic of traditional financial markets.

From an investor's perspective, index products lower the threshold for participating in the crypto assets market. There is no longer a need to open a crypto exchange account, manage private keys, or worry about hacking attacks; investors can purchase these ETFs through traditional brokerage accounts, just as easily as buying stocks or bonds. This convenience is especially important for institutional investors, as they are often restricted by strict investment policies and custody requirements, making it impossible for them to hold crypto assets directly.

More importantly, the adoption of the 1940 Act framework may pave the way for more complex Crypto Assets investment products. Actively managed Crypto Assets funds, leveraged and inverse ETFs, as well as hybrid products that combine Crypto Assets and traditional assets may emerge in the future. These innovations will further enrich investors' choices and drive the transformation of Crypto Assets from a fringe speculative tool to a mainstream asset class.