WEBVTT - No US Spot Bitcoin ETF For You

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<v Speaker 1>I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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<v Speaker 1>And this is Bloomberg Crypto, a daily Bloomberg I Heart podcast.

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<v Speaker 1>It's Friday, July one. One of the most closely watched

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<v Speaker 1>fights in crypto. Might sound a little obscure, but it's

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<v Speaker 1>really important. It pits a company called gray Scale Investments

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<v Speaker 1>against the U S Securities and Exchange Commission, a crucial regulator,

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<v Speaker 1>and it involves so called exchange traded funds, or e

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<v Speaker 1>t s, which are a very popular type of investment vehicle.

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<v Speaker 1>Gray Scale has been lobbying regulators to allow it to

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<v Speaker 1>convert one of its existing crypto products, one of the

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<v Speaker 1>biggest in the market, into an e t F. This week,

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<v Speaker 1>the SEC rejected their petition. Gray Scale has been very

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<v Speaker 1>clear that they've been preparing for a fight and that

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<v Speaker 1>they intend to take that fight to court. They've geared

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<v Speaker 1>up accordingly. Earlier this they hired Donald Varelli, a top

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<v Speaker 1>White House lawyer during the Obama administration. Bloomberg reports that

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<v Speaker 1>Kasey Greifeld joins me to examine why this fight is

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<v Speaker 1>so important to cryptozy. Thank you so much for joining us.

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<v Speaker 1>Please explain what is going on here? So we're talking

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<v Speaker 1>about e t F. My favorite topic are exchange traded funds,

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<v Speaker 1>and it's basically packaging an entire portfolio into a fund

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<v Speaker 1>that port of bonds. Everything basically except physical bitcoin can

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<v Speaker 1>be put into an e t F. It's a great question.

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<v Speaker 1>Everyone in the crypto ecosystem wants to know that answer,

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<v Speaker 1>and there's not a good one. So when you think

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<v Speaker 1>about the SEC, they let the first derivatives backed crypto

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<v Speaker 1>funds launched in October, they haven't approved a physically backed

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<v Speaker 1>bitcoin e t F. Uh, It's unclear why. It could

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<v Speaker 1>have to do with the fact that if you think

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<v Speaker 1>about bitcoin derivatives, for example, they oversee the CME, the

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<v Speaker 1>Chicago Mercantiles Exchange theme. Yeah, the SEC oversees the CME

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<v Speaker 1>where these derivatives trade, but the SEC doesn't have any

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<v Speaker 1>oversight into crypto exchanges. That could be a reason, but

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<v Speaker 1>it is a real frustration point for the industry. But

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<v Speaker 1>there's a slightly wild thing that you said, which is

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<v Speaker 1>like physical bitcoin literally impossible in the digital asset context.

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<v Speaker 1>So when we're talking about the difference between you know,

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<v Speaker 1>when we say a physical bitcoin back to e t F,

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<v Speaker 1>versus a derivative bitcoing back BTF, Like, how does that

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<v Speaker 1>really shape out in practice? Right? So in e t F,

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<v Speaker 1>which again it hasn't been approved, it would be basically

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<v Speaker 1>the e t F holding x amount of bitcoin to

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<v Speaker 1>back up x amount of assets, similar to the gray

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<v Speaker 1>skilled bitcoin trust, which we'll talk about because you haven't

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<v Speaker 1>seen these physically backed e t F could to prove basically,

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<v Speaker 1>these frank and funds have sprung up where you have

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<v Speaker 1>a bunch of trusts, for example, that hold crypto that

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<v Speaker 1>own a certain amount of coins, whereas these derivatives backed

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<v Speaker 1>e t f s obviously they hold derivatives and in

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<v Speaker 1>so in this case, futures on on crypto prices, bitcoin

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<v Speaker 1>prices specifically, so great scale has this trust, it is

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<v Speaker 1>a non trivial market player, and that it is the

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<v Speaker 1>single largest crypto slash bitcoin holding trust listed in the

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<v Speaker 1>United States. They really want to convert it to an

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<v Speaker 1>e t F. Why is that conversion so important to them?

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<v Speaker 1>So it gets into obviously how an e t F

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<v Speaker 1>is set up, and it's a little bit nitty gritty,

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<v Speaker 1>but basically e t F s you're able to create

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<v Speaker 1>and redeemed shares to sort of shift with market demands.

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<v Speaker 1>So you have these specialized traders. They're known as authorized

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<v Speaker 1>participants and as demand cools. They can destroy shares and

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<v Speaker 1>that keeps sort of the price of the bitcoin, or

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<v Speaker 1>rather the price of the e t F, inline with

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<v Speaker 1>the net asset value. What it truly holds that entire

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<v Speaker 1>process doesn't exist when it comes to these trusts. These

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<v Speaker 1>trusts can't redeem shares, they can only create shares, So

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<v Speaker 1>as you can imagine, sort of the price of these

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<v Speaker 1>trusts can get way out of whack with the actual

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<v Speaker 1>net asset value, which is exactly what's happened here. And

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<v Speaker 1>when we're talking about the net asset value, we're talking

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<v Speaker 1>about the value of the underlying stuff exactly that's that's

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<v Speaker 1>in the trust. And in the case of gray scales,

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<v Speaker 1>where what has happened there, It's like, is their net

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<v Speaker 1>asset value bigger than where they're trading, is it smaller?

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<v Speaker 1>Like what's the direction. It's so interesting if you look

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<v Speaker 1>at the long term chart, because for years, the price

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<v Speaker 1>of the trust traded at this enormous premium to the

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<v Speaker 1>net asset value of the actual coins and gray scale.

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<v Speaker 1>As a result, there were a bunch of shares created.

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<v Speaker 1>Now you're in an environment this dynamic is that you've

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<v Speaker 1>had all this demand. Cool people have sold their GBD

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<v Speaker 1>shares in the secondary market, but those shares that were created,

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<v Speaker 1>hundreds of millions of shares, can't be destroyed. So now

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<v Speaker 1>the price of the trust is trading at an enormous

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<v Speaker 1>discount to the net asset value. The last time I checked,

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<v Speaker 1>it was somewhere between below, which is obviously not something

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<v Speaker 1>they're super happy with and not necessarily something those shareholders

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<v Speaker 1>are super happy with, exactly. And Gray Skill has argued

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<v Speaker 1>if this was converted into an e t F, you'd

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<v Speaker 1>see that discount repaired immediately if you were able to

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<v Speaker 1>have that ap process and I authorized participants exactly, and

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<v Speaker 1>I think they've argued it would unlock something eight billion

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<v Speaker 1>dollars in value if that discount was repaired. That's their position,

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<v Speaker 1>and so that's really why that they were putting so

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<v Speaker 1>much muscle behind trying to get the SEC to approve

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<v Speaker 1>a spot at coin e TF. But of course the

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<v Speaker 1>SEC has now made it clear that they're going to reject,

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<v Speaker 1>and they have rejected that et F application, So it

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<v Speaker 1>sounds like the next step is the lawsuit. Yep, the

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<v Speaker 1>next step is the lawsuit, and they filed that within

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<v Speaker 1>an hour of that SEC denial. They were watching and waiting,

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<v Speaker 1>so suggest that they were expecting a denial. We'll be

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<v Speaker 1>right back with more from Katie Griidfeld talking about gray

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<v Speaker 1>Scale's unsuccessful bid to converse its bitcoin trust into an ETF. So, Kathy,

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<v Speaker 1>what exactly where gray Scale doing to make their case

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<v Speaker 1>to regulate those then? What does that effort look like?

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<v Speaker 1>What what did they do to try to persuade regulators? Well,

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<v Speaker 1>they hired really a rock star legal team for former

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<v Speaker 1>US Solicitor General Don Varilli was part of that effort.

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<v Speaker 1>They hired him in June. They also have motivated this

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<v Speaker 1>letter writing campaign. The SEC has actually received thousands of

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<v Speaker 1>letters from people writing in asking beseeching the SEC to

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<v Speaker 1>convert GBTC into an e t F. Obviously that didn't

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<v Speaker 1>quite make it. Dent on that note, Actually, our colleagues

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<v Speaker 1>at Bloomberg Markets on Bloomberg TV spoke with the ray

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<v Speaker 1>Scale Investment CEO Michael Sonenshein back in March. Let's listen

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<v Speaker 1>to what he had to say. I think all options

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<v Speaker 1>are on the table. I think certainly it's important that

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<v Speaker 1>between now and the end of that two forty day

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<v Speaker 1>process which ends in early July, that the SEC hears

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<v Speaker 1>from as many investors as possible, as well as academics, policymakers,

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<v Speaker 1>everybody has an opportunity to weigh in on this issue,

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<v Speaker 1>and all of that is in fact considered as the

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<v Speaker 1>SEC weighs the issue in front of them. That was

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<v Speaker 1>a pretty explicit warning of what was to come. As

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<v Speaker 1>they've now confirmed that they're absolutely suing the SEC. They're

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<v Speaker 1>not the only people who want this to happen, though.

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<v Speaker 1>There are various other folks who have also tried to

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<v Speaker 1>get US regulators to approve their physically backed bitcoin ECF

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<v Speaker 1>and in each case the regulations has been like no,

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<v Speaker 1>big time. There is a long line of broken hearts

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<v Speaker 1>of you know, the SEC rejecting the spot this coin

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<v Speaker 1>approvals basically since the Winkle Bostwans back in I think

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<v Speaker 1>the first application was filed, so there's there's a pretty

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<v Speaker 1>long history of this. Regulations don't seem to have come around.

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<v Speaker 1>We may be facing some interesting legal challenges from a

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<v Speaker 1>like practical non billionaire, non trust owning perspective, Why do

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<v Speaker 1>other participants in crypto care about this fight, like, what

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<v Speaker 1>does the existence of a spot bitcoin ECF unlock? More broadly,

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<v Speaker 1>the argument that you would hear is that it could

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<v Speaker 1>potentially bring more people into the industry. I mean, at

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<v Speaker 1>this point, probably everyone who wants to buy bitcoin has

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<v Speaker 1>probably found a way too. But think about, you know,

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<v Speaker 1>retirement accounts, for example, they probably don't want to set

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<v Speaker 1>up crypto wallets and the likes and have to deal

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<v Speaker 1>with keys, etcetera, etcetera. Buying an e t F is

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<v Speaker 1>much easier. And then you think about, you know, your

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<v Speaker 1>average investor who maybe doesn't want to deal with all

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<v Speaker 1>of that. Either, they can buy and trade e t

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<v Speaker 1>f s on their brokerage platforms, So that's an argument.

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<v Speaker 1>And also if you think about the different ways that

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<v Speaker 1>retail and normal investors can get access right now, they

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<v Speaker 1>can go to coin base and somewhat are you get

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<v Speaker 1>ripped off on the fees? Whereas e t s they

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<v Speaker 1>tend to have lower costs their tax efficient that enables

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<v Speaker 1>them to have lower expense ratios than other types of

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<v Speaker 1>products for example. So the argument that folks might make

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<v Speaker 1>here is, even if you are not a highly motivated billionaire,

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<v Speaker 1>you as a retail investor would potentially benefit from having

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<v Speaker 1>more access to these kinds of financial products exactly. And

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<v Speaker 1>I mean you've seen e t F expand that access

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<v Speaker 1>in the past. If you think about the commodity markets,

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<v Speaker 1>for example, you know a normal person really can't four

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<v Speaker 1>gold bars exactly, or by barrels of oil. And for

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<v Speaker 1>the fixed income markets too, I mean, getting that access

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<v Speaker 1>through e t F s is easier if you are

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<v Speaker 1>a normal person. So they file this lawsuits, as you say,

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<v Speaker 1>within an hour of the rejection. What are the next

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<v Speaker 1>steps from here? It's a great question. So we actually

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<v Speaker 1>spoke to Gray Scale CEO Michael Sonenshine on TV on

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<v Speaker 1>Thursday asking him that question. What is your end game?

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<v Speaker 1>The end game of course being E t F conversion

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<v Speaker 1>if they win, that's assuming what would happen. The timeline

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<v Speaker 1>there is interesting. It could be nine to twelve months,

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<v Speaker 1>could be longer, could be shorter, but they've been guided

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<v Speaker 1>to expect that this will be a nine to twelve

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<v Speaker 1>month process. Who knows where bitcoin will be trading in

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<v Speaker 1>ninth to twelve months, Oh my gosh, who knows where

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<v Speaker 1>any of us will be in nine to twelve months,

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<v Speaker 1>But it should be a really interesting ride, and I

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<v Speaker 1>don't know, we'll see there is there is talk of

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<v Speaker 1>perhaps the shareholders of GBTC filing a regulation and lawsuit

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<v Speaker 1>to try to force redemptions changes so that GBDC actually

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<v Speaker 1>could redeem. But again that's a hypothetical and it's a

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<v Speaker 1>long shot. Well that's definitely something we would be watching

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<v Speaker 1>and reporting on if that does actually happen. Oh yeah,

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<v Speaker 1>I'm all on it. Is there any sense of you know,

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<v Speaker 1>I don't know whether this is like class action e

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<v Speaker 1>in the sense that we've seen in other parts of

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<v Speaker 1>crypto where just grunt oled investors get together and they're like,

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<v Speaker 1>we're all in this, we have complaints. Is the gray

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<v Speaker 1>scale lawsuit against the SEC just them? Are they joined

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<v Speaker 1>by any other parties? I believe it's just them, But

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<v Speaker 1>if you sort of look at the public opinion court

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<v Speaker 1>that is Twitter, it seems like a lot of people

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<v Speaker 1>are applauding their efforts, you know, having a crypto firm

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<v Speaker 1>actually sue a US regulator. I mean, this is something

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<v Speaker 1>that I was talking about with my editors on Wednesday

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<v Speaker 1>night as this news was breaking. You know, we've gotten

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<v Speaker 1>a lot of spot bitcoin application rejections. We haven't seen

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<v Speaker 1>someone go all the way and actually sue the SEC. So,

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<v Speaker 1>I mean, to their credit, they're they're backing up their talk.

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<v Speaker 1>And you haven't heard from any of your other sources

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<v Speaker 1>that other firms may be considering either joining that legal

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<v Speaker 1>action or making you know, legal maneuvers of their own.

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<v Speaker 1>Haven't heard that yet. And sort of conversations about what

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<v Speaker 1>a reg M lawsuit would look like that would be

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<v Speaker 1>more of a class action feeling, where it would be

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<v Speaker 1>probably a group of investors, gray scale bitcoin trust shareholders

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<v Speaker 1>getting together and ailing that. When you interviewed Sunenshine, was

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<v Speaker 1>there anything that he said that sounded like surprising to you?

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<v Speaker 1>You know, this is this is a story that you've

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<v Speaker 1>been covering for a long long time at this point.

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<v Speaker 1>What was his vibe? Uh? Definitely not thrilled with the SEC.

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<v Speaker 1>That was number one. I would say. We asked him

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<v Speaker 1>a lot of questions that he did not answer on

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<v Speaker 1>live television, But I mean questions I have that I

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<v Speaker 1>would love answered. Is whether three Hours Capital, whether they're

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<v Speaker 1>still the biggest institutional shareholder. That's a big one. Also,

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<v Speaker 1>is there any situation in which they would liquidate liquidate GBTC,

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<v Speaker 1>Because if the goal is shareholder value. At this point,

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<v Speaker 1>obviously the SEC is digging in here and not going

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<v Speaker 1>to approve a conversion. I mean, your shareholders are just

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<v Speaker 1>left in this sort of broken fund trading at a

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<v Speaker 1>thirty percent discount. So how long that can continue or

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<v Speaker 1>how patient shareholders can be? Uh, it's an open question.

0:12:57.000 --> 0:12:59.480
<v Speaker 1>I think it's a sort of a final question. Are

0:12:59.520 --> 0:13:03.640
<v Speaker 1>there other countries that have already allowed retail investors to

0:13:03.679 --> 0:13:06.520
<v Speaker 1>get access to bitcoin through e t F s? Yes,

0:13:06.600 --> 0:13:09.720
<v Speaker 1>and that is a very annoying fact to both the

0:13:09.760 --> 0:13:12.600
<v Speaker 1>cryptal and the e t F industry participants. Do you

0:13:12.640 --> 0:13:16.080
<v Speaker 1>have physically backed bitcoin and crypto et f s in Europe?

0:13:16.120 --> 0:13:19.440
<v Speaker 1>For example, end In Canada launched their first series of

0:13:19.520 --> 0:13:23.240
<v Speaker 1>funds I think it was last February. Breaking news this week,

0:13:23.280 --> 0:13:26.040
<v Speaker 1>which is really exciting to the crypto community. You would

0:13:26.080 --> 0:13:30.280
<v Speaker 1>issue a purpose Investments say that Canadian regulators have approved

0:13:30.320 --> 0:13:33.240
<v Speaker 1>their bitcoin e t F. These products have existed in

0:13:33.280 --> 0:13:36.120
<v Speaker 1>other parts of the world for years now. How are

0:13:36.120 --> 0:13:39.920
<v Speaker 1>they performing? Not great as you would imagine, because think

0:13:39.960 --> 0:13:42.600
<v Speaker 1>of what they are. I mean, the e t F product,

0:13:42.640 --> 0:13:44.320
<v Speaker 1>at the end of the day, it's just a rapper.

0:13:44.559 --> 0:13:47.959
<v Speaker 1>So they haven't been doing great, I would say, and

0:13:48.000 --> 0:13:50.200
<v Speaker 1>if you look at in the US, you don't have

0:13:50.840 --> 0:13:52.680
<v Speaker 1>a spot bitcoin et F. Again, you have sort of

0:13:52.679 --> 0:13:55.080
<v Speaker 1>these frank and funds. You also have crypto linked equity

0:13:55.160 --> 0:13:59.280
<v Speaker 1>e t f s, which are actually far underperforming bitcoin itself.

0:13:59.320 --> 0:14:02.000
<v Speaker 1>And those so linked equity et f s are things

0:14:02.040 --> 0:14:05.560
<v Speaker 1>like here's coin Base, here's micro Strategy, here's other crypto

0:14:05.640 --> 0:14:09.200
<v Speaker 1>related companies in a pile. Essentially you have you know,

0:14:09.360 --> 0:14:15.800
<v Speaker 1>the minors ETFs, you have blockchain technology exactly exactly, and

0:14:16.000 --> 0:14:18.000
<v Speaker 1>n f T e t f s, which again don't

0:14:18.000 --> 0:14:20.200
<v Speaker 1>hold actual n f t s right, so they merely

0:14:20.720 --> 0:14:24.440
<v Speaker 1>have abstract thoughts about them, just the idea. Thank you, Katy.

0:14:24.680 --> 0:14:27.400
<v Speaker 1>You can find more of Katie's reporting on the Bloomberg terminal,

0:14:27.760 --> 0:14:31.600
<v Speaker 1>on Bloomberg dot com and on Twitter at k Greifeld.

0:14:32.080 --> 0:14:35.280
<v Speaker 1>That's k g r e I F e l D.

0:14:38.240 --> 0:14:42.040
<v Speaker 1>In June, Senators Christian Gillibrand and Cynthia Loomas introduced a

0:14:42.120 --> 0:14:47.200
<v Speaker 1>sweeping Senate bill that would regulate crypto assets. Influential crypto

0:14:47.240 --> 0:14:51.320
<v Speaker 1>insiders hailed the proposal as a great starting point, a

0:14:51.440 --> 0:14:55.640
<v Speaker 1>reception which suggests it might be perceived as relatively friendly

0:14:56.040 --> 0:14:59.880
<v Speaker 1>to the digital asset community. Hilary Allen, a law pro

0:15:00.040 --> 0:15:04.040
<v Speaker 1>ustler at American University, is a critic of the proposed legislation.

0:15:04.680 --> 0:15:07.520
<v Speaker 1>She doesn't think it goes far enough, especially when it

0:15:07.520 --> 0:15:11.480
<v Speaker 1>comes to consumer protection. Professor Allen will join me next Tuesday,

0:15:11.640 --> 0:15:18.000
<v Speaker 1>after the July fourth holiday. Here in the US, I'm

0:15:18.040 --> 0:15:21.520
<v Speaker 1>Stacy Marie Ishmael and this is Bloomberg Crypto, a daily

0:15:21.560 --> 0:15:24.800
<v Speaker 1>podcast from Bloomberg and I Heart Radio. For more shows

0:15:24.800 --> 0:15:27.160
<v Speaker 1>from I Heart Radio, visit the I Heart Radio app,

0:15:27.400 --> 0:15:31.880
<v Speaker 1>Apple Podcasts, or wherever you get your podcasts. Email your questions, comments,

0:15:31.920 --> 0:15:34.800
<v Speaker 1>or suggestions for the show to Crypto at Bloomberg dot

0:15:34.800 --> 0:15:39.320
<v Speaker 1>net and you'll find us on Twitter at Crypto. The

0:15:39.360 --> 0:15:43.160
<v Speaker 1>supervising producer of this episode is Vicky ver Galina. Associate

0:15:43.240 --> 0:15:47.720
<v Speaker 1>producer is moses On, Associate producer is thy Butler. Dest

0:15:47.720 --> 0:15:51.320
<v Speaker 1>To wonder At is our engineer. Original music by Leo Sidron.

0:15:51.760 --> 0:16:02.680
<v Speaker 1>Bloomberg's Head of Podcasts is Frances Galvi. He ai acts

0:16:02.880 --> 0:16:05.520
<v Speaker 1>as a sending a SI