Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,
Speaker 1: And this is Bloomberg Crypto, a daily Bloomberg I Heart podcast.
Speaker 1: It's Friday, July one. One of the most closely watched
Speaker 1: fights in crypto. Might sound a little obscure, but it's
Speaker 1: really important. It pits a company called gray Scale Investments
Speaker 1: against the U S Securities and Exchange Commission, a crucial regulator,
Speaker 1: and it involves so called exchange traded funds, or e
Speaker 1: t s, which are a very popular type of investment vehicle.
Speaker 1: Gray Scale has been lobbying regulators to allow it to
Speaker 1: convert one of its existing crypto products, one of the
Speaker 1: biggest in the market, into an e t F. This week,
Speaker 1: the SEC rejected their petition. Gray Scale has been very
Speaker 1: clear that they've been preparing for a fight and that
Speaker 1: they intend to take that fight to court. They've geared
Speaker 1: up accordingly. Earlier this they hired Donald Varelli, a top
Speaker 1: White House lawyer during the Obama administration. Bloomberg reports that
Speaker 1: Kasey Greifeld joins me to examine why this fight is
Speaker 1: so important to cryptozy. Thank you so much for joining us.
Speaker 1: Please explain what is going on here? So we're talking
Speaker 1: about e t F. My favorite topic are exchange traded funds,
Speaker 1: and it's basically packaging an entire portfolio into a fund
Speaker 1: that port of bonds. Everything basically except physical bitcoin can
Speaker 1: be put into an e t F. It's a great question.
Speaker 1: Everyone in the crypto ecosystem wants to know that answer,
Speaker 1: and there's not a good one. So when you think
Speaker 1: about the SEC, they let the first derivatives backed crypto
Speaker 1: funds launched in October, they haven't approved a physically backed
Speaker 1: bitcoin e t F. Uh, It's unclear why. It could
Speaker 1: have to do with the fact that if you think
Speaker 1: about bitcoin derivatives, for example, they oversee the CME, the
Speaker 1: Chicago Mercantiles Exchange theme. Yeah, the SEC oversees the CME
Speaker 1: where these derivatives trade, but the SEC doesn't have any
Speaker 1: oversight into crypto exchanges. That could be a reason, but
Speaker 1: it is a real frustration point for the industry. But
Speaker 1: there's a slightly wild thing that you said, which is
Speaker 1: like physical bitcoin literally impossible in the digital asset context.
Speaker 1: So when we're talking about the difference between you know,
Speaker 1: when we say a physical bitcoin back to e t F,
Speaker 1: versus a derivative bitcoing back BTF, Like, how does that
Speaker 1: really shape out in practice? Right? So in e t F,
Speaker 1: which again it hasn't been approved, it would be basically
Speaker 1: the e t F holding x amount of bitcoin to
Speaker 1: back up x amount of assets, similar to the gray
Speaker 1: skilled bitcoin trust, which we'll talk about because you haven't
Speaker 1: seen these physically backed e t F could to prove basically,
Speaker 1: these frank and funds have sprung up where you have
Speaker 1: a bunch of trusts, for example, that hold crypto that
Speaker 1: own a certain amount of coins, whereas these derivatives backed
Speaker 1: e t f s obviously they hold derivatives and in
Speaker 1: so in this case, futures on on crypto prices, bitcoin
Speaker 1: prices specifically, so great scale has this trust, it is
Speaker 1: a non trivial market player, and that it is the
Speaker 1: single largest crypto slash bitcoin holding trust listed in the
Speaker 1: United States. They really want to convert it to an
Speaker 1: e t F. Why is that conversion so important to them?
Speaker 1: So it gets into obviously how an e t F
Speaker 1: is set up, and it's a little bit nitty gritty,
Speaker 1: but basically e t F s you're able to create
Speaker 1: and redeemed shares to sort of shift with market demands.
Speaker 1: So you have these specialized traders. They're known as authorized
Speaker 1: participants and as demand cools. They can destroy shares and
Speaker 1: that keeps sort of the price of the bitcoin, or
Speaker 1: rather the price of the e t F, inline with
Speaker 1: the net asset value. What it truly holds that entire
Speaker 1: process doesn't exist when it comes to these trusts. These
Speaker 1: trusts can't redeem shares, they can only create shares, So
Speaker 1: as you can imagine, sort of the price of these
Speaker 1: trusts can get way out of whack with the actual
Speaker 1: net asset value, which is exactly what's happened here. And
Speaker 1: when we're talking about the net asset value, we're talking
Speaker 1: about the value of the underlying stuff exactly that's that's
Speaker 1: in the trust. And in the case of gray scales,
Speaker 1: where what has happened there, It's like, is their net
Speaker 1: asset value bigger than where they're trading, is it smaller?
Speaker 1: Like what's the direction. It's so interesting if you look
Speaker 1: at the long term chart, because for years, the price
Speaker 1: of the trust traded at this enormous premium to the
Speaker 1: net asset value of the actual coins and gray scale.
Speaker 1: As a result, there were a bunch of shares created.
Speaker 1: Now you're in an environment this dynamic is that you've
Speaker 1: had all this demand. Cool people have sold their GBD
Speaker 1: shares in the secondary market, but those shares that were created,
Speaker 1: hundreds of millions of shares, can't be destroyed. So now
Speaker 1: the price of the trust is trading at an enormous
Speaker 1: discount to the net asset value. The last time I checked,
Speaker 1: it was somewhere between below, which is obviously not something
Speaker 1: they're super happy with and not necessarily something those shareholders
Speaker 1: are super happy with, exactly. And Gray Skill has argued
Speaker 1: if this was converted into an e t F, you'd
Speaker 1: see that discount repaired immediately if you were able to
Speaker 1: have that ap process and I authorized participants exactly, and
Speaker 1: I think they've argued it would unlock something eight billion
Speaker 1: dollars in value if that discount was repaired. That's their position,
Speaker 1: and so that's really why that they were putting so
Speaker 1: much muscle behind trying to get the SEC to approve
Speaker 1: a spot at coin e TF. But of course the
Speaker 1: SEC has now made it clear that they're going to reject,
Speaker 1: and they have rejected that et F application, So it
Speaker 1: sounds like the next step is the lawsuit. Yep, the
Speaker 1: next step is the lawsuit, and they filed that within
Speaker 1: an hour of that SEC denial. They were watching and waiting,
Speaker 1: so suggest that they were expecting a denial. We'll be
Speaker 1: right back with more from Katie Griidfeld talking about gray
Speaker 1: Scale's unsuccessful bid to converse its bitcoin trust into an ETF. So, Kathy,
Speaker 1: what exactly where gray Scale doing to make their case
Speaker 1: to regulate those then? What does that effort look like?
Speaker 1: What what did they do to try to persuade regulators? Well,
Speaker 1: they hired really a rock star legal team for former
Speaker 1: US Solicitor General Don Varilli was part of that effort.
Speaker 1: They hired him in June. They also have motivated this
Speaker 1: letter writing campaign. The SEC has actually received thousands of
Speaker 1: letters from people writing in asking beseeching the SEC to
Speaker 1: convert GBTC into an e t F. Obviously that didn't
Speaker 1: quite make it. Dent on that note, Actually, our colleagues
Speaker 1: at Bloomberg Markets on Bloomberg TV spoke with the ray
Speaker 1: Scale Investment CEO Michael Sonenshein back in March. Let's listen
Speaker 1: to what he had to say. I think all options
Speaker 1: are on the table. I think certainly it's important that
Speaker 1: between now and the end of that two forty day
Speaker 1: process which ends in early July, that the SEC hears
Speaker 1: from as many investors as possible, as well as academics, policymakers,
Speaker 1: everybody has an opportunity to weigh in on this issue,
Speaker 1: and all of that is in fact considered as the
Speaker 1: SEC weighs the issue in front of them. That was
Speaker 1: a pretty explicit warning of what was to come. As
Speaker 1: they've now confirmed that they're absolutely suing the SEC. They're
Speaker 1: not the only people who want this to happen, though.
Speaker 1: There are various other folks who have also tried to
Speaker 1: get US regulators to approve their physically backed bitcoin ECF
Speaker 1: and in each case the regulations has been like no,
Speaker 1: big time. There is a long line of broken hearts
Speaker 1: of you know, the SEC rejecting the spot this coin
Speaker 1: approvals basically since the Winkle Bostwans back in I think
Speaker 1: the first application was filed, so there's there's a pretty
Speaker 1: long history of this. Regulations don't seem to have come around.
Speaker 1: We may be facing some interesting legal challenges from a
Speaker 1: like practical non billionaire, non trust owning perspective, Why do
Speaker 1: other participants in crypto care about this fight, like, what
Speaker 1: does the existence of a spot bitcoin ECF unlock? More broadly,
Speaker 1: the argument that you would hear is that it could
Speaker 1: potentially bring more people into the industry. I mean, at
Speaker 1: this point, probably everyone who wants to buy bitcoin has
Speaker 1: probably found a way too. But think about, you know,
Speaker 1: retirement accounts, for example, they probably don't want to set
Speaker 1: up crypto wallets and the likes and have to deal
Speaker 1: with keys, etcetera, etcetera. Buying an e t F is
Speaker 1: much easier. And then you think about, you know, your
Speaker 1: average investor who maybe doesn't want to deal with all
Speaker 1: of that. Either, they can buy and trade e t
Speaker 1: f s on their brokerage platforms, So that's an argument.
Speaker 1: And also if you think about the different ways that
Speaker 1: retail and normal investors can get access right now, they
Speaker 1: can go to coin base and somewhat are you get
Speaker 1: ripped off on the fees? Whereas e t s they
Speaker 1: tend to have lower costs their tax efficient that enables
Speaker 1: them to have lower expense ratios than other types of
Speaker 1: products for example. So the argument that folks might make
Speaker 1: here is, even if you are not a highly motivated billionaire,
Speaker 1: you as a retail investor would potentially benefit from having
Speaker 1: more access to these kinds of financial products exactly. And
Speaker 1: I mean you've seen e t F expand that access
Speaker 1: in the past. If you think about the commodity markets,
Speaker 1: for example, you know a normal person really can't four
Speaker 1: gold bars exactly, or by barrels of oil. And for
Speaker 1: the fixed income markets too, I mean, getting that access
Speaker 1: through e t F s is easier if you are
Speaker 1: a normal person. So they file this lawsuits, as you say,
Speaker 1: within an hour of the rejection. What are the next
Speaker 1: steps from here? It's a great question. So we actually
Speaker 1: spoke to Gray Scale CEO Michael Sonenshine on TV on
Speaker 1: Thursday asking him that question. What is your end game?
Speaker 1: The end game of course being E t F conversion
Speaker 1: if they win, that's assuming what would happen. The timeline
Speaker 1: there is interesting. It could be nine to twelve months,
Speaker 1: could be longer, could be shorter, but they've been guided
Speaker 1: to expect that this will be a nine to twelve
Speaker 1: month process. Who knows where bitcoin will be trading in
Speaker 1: ninth to twelve months, Oh my gosh, who knows where
Speaker 1: any of us will be in nine to twelve months,
Speaker 1: But it should be a really interesting ride, and I
Speaker 1: don't know, we'll see there is there is talk of
Speaker 1: perhaps the shareholders of GBTC filing a regulation and lawsuit
Speaker 1: to try to force redemptions changes so that GBDC actually
Speaker 1: could redeem. But again that's a hypothetical and it's a
Speaker 1: long shot. Well that's definitely something we would be watching
Speaker 1: and reporting on if that does actually happen. Oh yeah,
Speaker 1: I'm all on it. Is there any sense of you know,
Speaker 1: I don't know whether this is like class action e
Speaker 1: in the sense that we've seen in other parts of
Speaker 1: crypto where just grunt oled investors get together and they're like,
Speaker 1: we're all in this, we have complaints. Is the gray
Speaker 1: scale lawsuit against the SEC just them? Are they joined
Speaker 1: by any other parties? I believe it's just them, But
Speaker 1: if you sort of look at the public opinion court
Speaker 1: that is Twitter, it seems like a lot of people
Speaker 1: are applauding their efforts, you know, having a crypto firm
Speaker 1: actually sue a US regulator. I mean, this is something
Speaker 1: that I was talking about with my editors on Wednesday
Speaker 1: night as this news was breaking. You know, we've gotten
Speaker 1: a lot of spot bitcoin application rejections. We haven't seen
Speaker 1: someone go all the way and actually sue the SEC. So,
Speaker 1: I mean, to their credit, they're they're backing up their talk.
Speaker 1: And you haven't heard from any of your other sources
Speaker 1: that other firms may be considering either joining that legal
Speaker 1: action or making you know, legal maneuvers of their own.
Speaker 1: Haven't heard that yet. And sort of conversations about what
Speaker 1: a reg M lawsuit would look like that would be
Speaker 1: more of a class action feeling, where it would be
Speaker 1: probably a group of investors, gray scale bitcoin trust shareholders
Speaker 1: getting together and ailing that. When you interviewed Sunenshine, was
Speaker 1: there anything that he said that sounded like surprising to you?
Speaker 1: You know, this is this is a story that you've
Speaker 1: been covering for a long long time at this point.
Speaker 1: What was his vibe? Uh? Definitely not thrilled with the SEC.
Speaker 1: That was number one. I would say. We asked him
Speaker 1: a lot of questions that he did not answer on
Speaker 1: live television, But I mean questions I have that I
Speaker 1: would love answered. Is whether three Hours Capital, whether they're
Speaker 1: still the biggest institutional shareholder. That's a big one. Also,
Speaker 1: is there any situation in which they would liquidate liquidate GBTC,
Speaker 1: Because if the goal is shareholder value. At this point,
Speaker 1: obviously the SEC is digging in here and not going
Speaker 1: to approve a conversion. I mean, your shareholders are just
Speaker 1: left in this sort of broken fund trading at a
Speaker 1: thirty percent discount. So how long that can continue or
Speaker 1: how patient shareholders can be? Uh, it's an open question.
Speaker 1: I think it's a sort of a final question. Are
Speaker 1: there other countries that have already allowed retail investors to
Speaker 1: get access to bitcoin through e t F s? Yes,
Speaker 1: and that is a very annoying fact to both the
Speaker 1: cryptal and the e t F industry participants. Do you
Speaker 1: have physically backed bitcoin and crypto et f s in Europe?
Speaker 1: For example, end In Canada launched their first series of
Speaker 1: funds I think it was last February. Breaking news this week,
Speaker 1: which is really exciting to the crypto community. You would
Speaker 1: issue a purpose Investments say that Canadian regulators have approved
Speaker 1: their bitcoin e t F. These products have existed in
Speaker 1: other parts of the world for years now. How are
Speaker 1: they performing? Not great as you would imagine, because think
Speaker 1: of what they are. I mean, the e t F product,
Speaker 1: at the end of the day, it's just a rapper.
Speaker 1: So they haven't been doing great, I would say, and
Speaker 1: if you look at in the US, you don't have
Speaker 1: a spot bitcoin et F. Again, you have sort of
Speaker 1: these frank and funds. You also have crypto linked equity
Speaker 1: e t f s, which are actually far underperforming bitcoin itself.
Speaker 1: And those so linked equity et f s are things
Speaker 1: like here's coin Base, here's micro Strategy, here's other crypto
Speaker 1: related companies in a pile. Essentially you have you know,
Speaker 1: the minors ETFs, you have blockchain technology exactly exactly, and
Speaker 1: n f T e t f s, which again don't
Speaker 1: hold actual n f t s right, so they merely
Speaker 1: have abstract thoughts about them, just the idea. Thank you, Katy.
Speaker 1: You can find more of Katie's reporting on the Bloomberg terminal,
Speaker 1: on Bloomberg dot com and on Twitter at k Greifeld.
Speaker 1: That's k g r e I F e l D.
Speaker 1: In June, Senators Christian Gillibrand and Cynthia Loomas introduced a
Speaker 1: sweeping Senate bill that would regulate crypto assets. Influential crypto
Speaker 1: insiders hailed the proposal as a great starting point, a
Speaker 1: reception which suggests it might be perceived as relatively friendly
Speaker 1: to the digital asset community. Hilary Allen, a law pro
Speaker 1: ustler at American University, is a critic of the proposed legislation.
Speaker 1: She doesn't think it goes far enough, especially when it
Speaker 1: comes to consumer protection. Professor Allen will join me next Tuesday,
Speaker 1: after the July fourth holiday. Here in the US, I'm
Speaker 1: Stacy Marie Ishmael and this is Bloomberg Crypto, a daily
Speaker 1: podcast from Bloomberg and I Heart Radio. For more shows
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