Austria’s Bitpanda, one of the more respected cryptocurrency exchanges in Europe, has just listed its first security token, Steelcoin. Given Bitpanda is the crypto partner of state-owned German bank LBBW, we decided to check it out.
In an ideal world, securities issuers and intermediaries should go out of their way to be transparent with potential investors so they come away with a positive experience. Most securities carry risks. That’s not a problem in itself, so long as intermediaries are upfront about what they are.
In a new sector such as security tokens which overlaps with crypto (and its less than stellar reputation), there’s an even greater need to go that extra mile.
That’s especially the case where the security is repeatedly described as being regulated because of the existence of a prospectus. Unsuspecting retail investors often believe prospectuses that are ‘approved’ by regulators means that the investment itself is approved. Unfortunately, retail investors often don’t look at the prospectus, they just read the website blurb.
In fairness, several of the ‘novel’ features described below are alluded to in the very first paragraph of the prospectus. However, the website pages on both the Steelcoin and Bitpanda website omit critical Steelcoin features.
We contacted both parties, and Bitpanda addressed some of our concerns. While the novel investment is not restricted to accredited investors, Bitpanda said that investors have to answer an appropriateness test before investing in security tokens. They also have to acknowledge reading the prospectus before investing. In addition to the prospectus, they make available a Key Information Document, and Cost Transparency Document. They’re linked at the very bottom of the page and we missed them the first few times we visited the public Steelcoin web page.
What is Steelcoin?
As the name implies, Steelcoin is a security used to track the price of steel. That was clear from both the Bitpanda and Steelcoin websites. The crypto crowd is quite familiar with tokenized assets, particularly gold tokens. In the case of gold stablecoins, the precious metal that backs the asset is held in a vault and is backed one to one. Some of the Steelcoin wording made us wonder whether this was the case.
Is a Steelcoin backed by steel?
Well, yes and no. There’s no contractual requirement to do so. When we asked the issuer if they had sufficient steel stocks to redeem all tokens, they said they do. Technically, the coins can be redeemed from the issuer in cash or kind. However, the security is an unsecured liability of the issuer, rather than promising one-to-one ring-fenced backing. So if the issuer went bust, the coin holders would be at the back of the queue, behind any secured creditors. That’s clearly stated in the prospectus.
Bitpanda’s summary doesn’t explicitly mention this, but then it also didn’t say it was backed one-to-one. However, it states, “Behind Steelcoin lies a real world value – the value of steel, one of the most important materials for industries that contribute to shaping the world.”
OK, so if Steelcoin is essentially debt, then what is the return? It’s the price movement in steel. Well, sort of.
Steel prices are sometimes quoted in metric tonnes or 1,000kg. In the US they also use short tons which are 2,000 pounds or 907.19kg. However, one Steelcoin equates to the value of 1,721.28 kg of steel, which seems a little unusual.
At least 1,721.28 kg is what a Steelcoin represented on September 24. The amount that the coin represents declines by 3% per year, calculated on a daily basis. So yesterday, October 14, the value only represented 1,718.45 kg.
Bitpanda’s web page for Steelcoin has a section on tokenomics, which fails to mention this important point.
We subsequently clarified with Steelcoin that when it launched in 2022 the weight was 1,814.39 kg which is equivalent to two short tons.
A security resembling a derivative
We asked Bitpanda if they agreed with us that Steelcoin resembles a structured product, a kind of bespoke perpetual derivative. Steelcoin acknowledged it has similarities to a perpetual future. In our view, the price quote could hardly be more confusing.
A Bitpanda spokesperson responded, “Steelcoin is a transferable bearer security issued in the form of ERC-20 tokens on the Ethereum blockchain with no maturity date or interest-bearing capabilities. Steelcoin’s value is linked to the price development of certain steel products through tokenizing real-world assets. Therefore Steelcoin provides investors with a unique opportunity to participate in the performance of specific steel prices – and in a broader sense the tokenization of essential materials. We want to highlight again that the prospectus, which was approved by the Austrian Financial Market Authority, contains all details and explains the product in depth.”
We’re probably being conservative, but we’re note entirely convinced this sort of product is appropriate for anyone that is unwilling to read the prospectus.
Bitpanda deserves credit for having an investor appropriateness test and attempting to encourage investors to read the prospectus. But we’d like to see an upfront mention of the absence of 1-to-1 backing and the 3% weight decline on the Bitpanda and Steelcoin websites.
Update: We updated the paragraph about whether or not a steelcoin is backed. We previously stated it was not, but the issuer requested we change this.
