Kraken backs Lombard's shift to a covered-call Bitcoin yield

Kraken Institutional is stepping into a dual role as custodian and options execution venue as Lombard moves its LBTC token away from Bitcoin staking toward a covered-call yield strategy, the exchange said in a blog post published August 13.

Lombard has spent roughly two years building infrastructure to bring Bitcoin onchain at scale, with LBTC as its flagship token. The shift described in Kraken's post moves that product's yield source away from staking-style mechanics toward an options-based strategy run by Bitwise Asset Management, which executes a covered-call program against Bitcoin reserves. Kraken plays two roles in the arrangement: it holds the underlying Bitcoin as a qualified custodian in segregated, bankruptcy-remote accounts, and it separately serves as one of the venues where Bitwise executes the options trades that generate the yield.

The target return is 2.5% net APY paid in Bitcoin terms, according to the announcement, which is the only yield figure disclosed. Kraken frames the custody and execution structure as designed to satisfy institutional allocators who need assurance that the Bitcoin backing a yield product isn't exposed to counterparty risk simply by generating that yield. Tri-party agreements between Kraken, Lombard, and Bitwise are meant to keep the Bitcoin within qualified custody throughout the strategy's operation, rather than moving it into a less regulated venue to execute the options legs. Neither Kraken's post nor Lombard's own materials disclose the total amount of LBTC or Bitcoin expected to move into the new strategy at launch.

“Bitcoin backing this strategy is held in segregated, bankruptcy-remote accounts at qualified custodians including Kraken. Tri-party agreements mean Bitcoin deployed in this strategy remains within qualified custody throughout, meeting the requirements of institutional allocators. Kraken also serves as one of the execution venues for the strategy's options trading, reflecting our role across both custody and execution for institutional Bitcoin.”

— Gurpreet Oberoi, Head of Kraken Institutional

• Lombard's LBTC token is shifting its yield source from Bitcoin staking to a covered-call options strategy
• Bitwise Asset Management manages the strategy and executes the options trades
• Kraken holds the underlying Bitcoin as qualified custodian and separately serves as an execution venue for the options
• Target yield: 2.5% net APY in Bitcoin terms

The arrangement extends a pattern Kraken has been building across its institutional business: custody as the entry point, with execution, financing, and yield products layered on top for clients who are already parking assets there. Kraken has run a similar Bitcoin-yield partnership with Bitwise before, and it has separately built out its own USD-settled Bitcoin and Ether options market, the kind of venue infrastructure this Lombard arrangement now draws on. Bitwise's own CIO has argued that revenue-generating crypto products deserve a valuation re-rating, and a covered-call strategy that turns idle Bitcoin reserves into a fee-bearing product fits that thesis directly: it's a bet that yield-bearing, revenue-backed crypto assets attract a different class of institutional buyer than the underlying asset alone. Moving LBTC off a staking-based yield source also sidesteps some of the regulatory scrutiny that's landed on crypto staking products in various jurisdictions, since an options-based strategy run through licensed custodians and exchanges sits closer to traditional derivatives infrastructure than a validator-based mechanism does.

This article is for informational purposes only and does not constitute investment advice.