Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy UM, A
Speaker 1: lot has gone wrong for crypto in the last year
Speaker 1: or so. I think let's start there. I think that
Speaker 1: is safe to say that. There are many different scandals,
Speaker 1: blow up, disasters, etcetera. So the background to that intro
Speaker 1: was right before Joe said it, he was going, how
Speaker 1: am I going to start this one? And he just
Speaker 1: went with bad things have been happening, right, Like, we
Speaker 1: could go for a lot, we could just list him.
Speaker 1: We don't need to do that, Okay. So one of
Speaker 1: the bad things that has been happening in the crypto
Speaker 1: industry has to do with several high profile entities, and
Speaker 1: I'm still trying to wrap my head around the relationships
Speaker 1: between all of them. But we need to talk about
Speaker 1: what's going on with Grayscale, Genesis and Jeff and I. Right, so,
Speaker 1: for a long time, you know, there's no bitcoin e
Speaker 1: t F in the United States for a long time,
Speaker 1: Like buying bitcoin might have been a little tricky. Maybe
Speaker 1: people didn't want to trust like some of these online exchanges,
Speaker 1: some of them for good reasons. If you were some
Speaker 1: sort of regulated entity like a fund or something, or
Speaker 1: an advisor, you might not be able to get your
Speaker 1: client money into bitcoin itself. But for a long time,
Speaker 1: so GBTC, which is this entity owned by Gray Scale,
Speaker 1: was like one of the regulated vehicles that one could
Speaker 1: get exposure to bitcoin, right but not an exchange traded fund. Importantly,
Speaker 1: it was well the Gray Scale Bitcoin Trust I think
Speaker 1: it's called. And because of its existence, we saw this
Speaker 1: trade that it really seems like a lot of people
Speaker 1: in the crypto world we're doing where they would basically
Speaker 1: borrow bitcoin, deposit those with Gray Scale in exchange for
Speaker 1: GBTC shares, and then eventually they would sort of offload
Speaker 1: those shares to retail investors. But that only works as
Speaker 1: long as there's interest in bitcoin and the price is
Speaker 1: kind of going up, and now that everything seems to
Speaker 1: be going backwards or exploding in various ways, it's become problematic.
Speaker 1: And now we have this huge discrepancy between the value
Speaker 1: of Gray Scales bitcoin and where the shares are actually trading.
Speaker 1: So this is really interesting. For a while, the Gray
Speaker 1: Scale Bitcoin Trust GBTC and it's traded quotes all day.
Speaker 1: It was a large premium to the underlying bitcoin that
Speaker 1: it held, and now there is a big discount. And
Speaker 1: the key thing is is that all of these entities
Speaker 1: that were in some way trying to areb the spread
Speaker 1: or trading bitcoin veras GBTC, etcetera, they've now lost a
Speaker 1: lot of money. And I think, you know, I mentioned
Speaker 1: at the very beginning there have been a lot of
Speaker 1: disasters on crypto, but I think GBTC is at the
Speaker 1: center of many of them. Yes, everyone seems upset about this.
Speaker 1: You know, I've kind of been following it a little bit,
Speaker 1: but not that much, and so I am very interested
Speaker 1: to pick apart the relationships between these various entities, like
Speaker 1: why is Gemini that involved with Genesis and how does
Speaker 1: it involve Gray Scale as well? You know, superficially this
Speaker 1: is a going to be a crypto episode, but really
Speaker 1: it's like a fund structure episode more than anything else.
Speaker 1: It could be anything, but it happens to be a
Speaker 1: trust that owns a lot of bitcoin. Anyway, we need
Speaker 1: an expert here who's going to explain what was the
Speaker 1: g BTC trade that so many different entities get into,
Speaker 1: why it gets so much trouble all these new disputes.
Speaker 1: I'm very excited we're gonna be speaking to Rama Lawalia.
Speaker 1: Here's the founder of Lumeda, which is a private wealth advisor.
Speaker 1: You knows a lot about this stuff. So rong, thank
Speaker 1: you so much for coming out odd lots, thank you
Speaker 1: for having me. What is GBTC. So, g BTC is
Speaker 1: the security issued by gray Scale. It is a security
Speaker 1: that trades on the market, and right now it has
Speaker 1: a discount to the net asset value and that net
Speaker 1: SA values based on the value that bitcoin held by
Speaker 1: the trust. GBTC is issued by gray Scale, which is
Speaker 1: a wholly owned subsidiary of Digital Currency Group. And what's
Speaker 1: the relationship between gray Scale and Genesis and Gemini. Let's
Speaker 1: just do the whole like, let's name all the players
Speaker 1: at the beginning, we'll introduce the cast of character. So,
Speaker 1: first off, you've got Digital Currency Group, founded by Barry
Speaker 1: Silber a was and is a storied institution, really one
Speaker 1: of the blue chip firms that also seed and invested
Speaker 1: in quite a few companies in the category. So DCG
Speaker 1: created a business called gray Scale, and gray Scale was
Speaker 1: the first to issue a publicly exchange traded a security
Speaker 1: that represented access to bitcoin was wildly successful. Also, DCG
Speaker 1: created the first prime brokerage for the category, and that
Speaker 1: prime brokerage is called Genesis. So what does Genesis do?
Speaker 1: It performs custody, enables trading, and also provides financing for
Speaker 1: digital assets, including GBTC. What is GBTC. So it's not
Speaker 1: an e t F. It's an entity that owns a
Speaker 1: bunch of bitcoin and there are shares that want what
Speaker 1: is it? What is it? That's correct, it's not an
Speaker 1: e t F. You can analogize it to a closed
Speaker 1: end fund, although that's not what it is either. But
Speaker 1: essentially it's a security that trades in the market. It's
Speaker 1: issued by a trust and the value of that security,
Speaker 1: in principle should be based on the value of the
Speaker 1: collateral backing the trust, which is about ten billion dollars
Speaker 1: worth the bitcoin. It's not an e t F because
Speaker 1: there's no dynamic, instantaneous what's called the creation redemption mechanism,
Speaker 1: whereby market makers perform open operations to ensure that any
Speaker 1: of you is close to the value of the GBTC.
Speaker 1: So maybe talk to us a little bit more about
Speaker 1: the differences between e t F s and a TRY structure,
Speaker 1: Like what are the key differences and what is it
Speaker 1: that seems to be problematic with a bitcoin based e
Speaker 1: t F but is allowed to happen with a bitcoin
Speaker 1: based trust. Sure, So in an e t F, you
Speaker 1: have market makers that are ensuring that the value, the
Speaker 1: net asset value of the fund matches the tradeable value
Speaker 1: of the security, and arbitrage enforces that the authorized participants,
Speaker 1: so typically banks who are incentivized if they spot a
Speaker 1: discrepancy between the value of the underlying basket of whatever
Speaker 1: in this case bitcoin and the shares, they would buy
Speaker 1: a basket or sell a basket and take it to
Speaker 1: the e t F issuer. Exactly right. Okay, Now the
Speaker 1: SEC was not authorizing e t f s backed by bitcoin.
Speaker 1: So what Gray Scale did was they issued GBTC in
Speaker 1: a trust format. So you can think about a closed
Speaker 1: end fund, which are which are out there, and closed
Speaker 1: end funds generally traded a discount of the net asset value,
Speaker 1: So you have all these antiity everyone. There's been a
Speaker 1: million filings for e t f s and they tend
Speaker 1: to go in waves, it seems like, and then every
Speaker 1: six months or something you get a bunch of denials. Meanwhile,
Speaker 1: GBTC has existed since it looks like early this thing
Speaker 1: has just been like a huge money maker because as
Speaker 1: the one sort of like traded vehicle that's bitcoin ish
Speaker 1: that offers bitcoin exposure almost a monopoly. Like how much
Speaker 1: of a money maker was this business. Yes, GBTC was
Speaker 1: the ultimate carry trade and it generated hundreds of millions
Speaker 1: of dollars over billions of dollars for the issuers and
Speaker 1: parties have participated in the trade. So at the time
Speaker 1: when GBTC launched, it's premium above the value of the
Speaker 1: underlying bitcoin hell in the trust. The premium fluctuated between
Speaker 1: thirty for several years. So if you engage in this
Speaker 1: carry trade like Tracy outline, meaning you buy bitcoin, you
Speaker 1: convey and deliver it to Gray scale in six months,
Speaker 1: but you're wearing the price risk at the time of delivery.
Speaker 1: So if that premium has held firm, then you capture
Speaker 1: the value of the premium relative to the spot price
Speaker 1: of bitcoin. That discount started to appear. Really, the premium
Speaker 1: went to a discount with coin based going public around
Speaker 1: that time. But so just to go back for a second,
Speaker 1: you say, there's there's no like unlike an e T F.
Speaker 1: There's no like automatic redemption back and forth. But traders
Speaker 1: were able to create by bitcoin and then create GBTC,
Speaker 1: so it was like is it it was allowed? There
Speaker 1: was one direction you could take it, but not the
Speaker 1: other way, like this is why I don't get So
Speaker 1: you could create GBTC shares but they can't be destroyed. Correct,
Speaker 1: So GBTC. Gray Scale has this kind of Hotel California dynamic.
Speaker 1: The way it works is you've got to go through
Speaker 1: a deliberate set of procedures to acquire bitcoin, create a
Speaker 1: legal entity, notify gray Scale, and go through a set
Speaker 1: of mechanic X two, then capture the premium on the
Speaker 1: other side and hope it's there. On the redemption side.
Speaker 1: There is a mechanism to redeemount of trusts. It's called REGAM.
Speaker 1: It's one of the statutes in securities laws, and trusts
Speaker 1: have offered liquidity to investors. However, gray Scale received a
Speaker 1: letter from the SEC saying that they cannot engage in
Speaker 1: E t F like practices, and gray Scale interpreter that
Speaker 1: and said, oh, the SEC is telling us we cannot
Speaker 1: utilize REGAM to create liquidity, and then they modified their
Speaker 1: trust to expressly prohibit themselves from invoking REGAM, although other
Speaker 1: parties are saying in don't know, you can actually use REGAM.
Speaker 1: They're reading too much into the sec action and accusing
Speaker 1: Gray Scale of self dealing trying to keep this cash
Speaker 1: cow right. So this is part of the controversy that
Speaker 1: we're seeing unfold now. But setting the controversy aside for
Speaker 1: one second, and who's mad at who? What was the
Speaker 1: exit plan here from a scale itself, Like what exactly
Speaker 1: did they expect to be the outlet for redemptions? If
Speaker 1: there was a bunch of selling pressure, the paths liquidity
Speaker 1: would simply be selling the g PTC, so the secondary
Speaker 1: market would provide the liquidity. There's no mechanism to enforce
Speaker 1: the discount to close because reagam is not utilized. That's it.
Speaker 1: So you're betting that this will trade at some correlation
Speaker 1: to the underlying collateral. You mentioned the perception out there
Speaker 1: of self dealing or reading too much into the SEC
Speaker 1: and I'm not gonna ask you to render a legal judgment,
Speaker 1: but can you clarify when these counterparties are concerned that
Speaker 1: grace L is too conservative about it, and the claim
Speaker 1: is that it's just that this is a huge fee
Speaker 1: collection entity for them, right, Like, what are like the
Speaker 1: I don't know does it have fees in the same
Speaker 1: way a typical fund is? Like how much does gray
Speaker 1: scale get every year from the amount of big Climate.
Speaker 1: Let me walk you through that. So gray Scale files
Speaker 1: quarterly public ten cues and you can see the revenues
Speaker 1: that they generate. And today gray Scale is generating probably
Speaker 1: around three million in run rate revenue based on the
Speaker 1: prevailing price of bitcoin. If you assume a sixty five
Speaker 1: profit margin seems reasonable. They could be clocking it around
Speaker 1: ND seventy million, give or chain, give or take in
Speaker 1: terms of net income. I should also point out that
Speaker 1: the revenue that gray Scale generates is proportional one for
Speaker 1: one with the price of bitcoin. So DCG raised through
Speaker 1: private financing in November at a ten billion dollar valuation.
Speaker 1: They top take the market that was exact month that
Speaker 1: bitcoin hit their peak value as well. And the way
Speaker 1: gray Scale generates revenue is they have a two percent
Speaker 1: management fee, So it's two percent times of value the
Speaker 1: underlying bitcoin collateral, not times the traded value of the
Speaker 1: g BTC right, So I mean they were basically printing
Speaker 1: money when bitcoin was going up, which is kind of
Speaker 1: funny because all the bitcoin purists complain about the FED
Speaker 1: printing money, but they're still printy money. Right, Yes, they
Speaker 1: are making money. Absolutely, it is the cash cow. However,
Speaker 1: than other parts of the d c G business are
Speaker 1: feeling stressed. Right, I think this is the cue maybe
Speaker 1: to talk about Genesis and the relationship with gray Scale,
Speaker 1: because my understanding was that a lot of these market
Speaker 1: participants who were borrowing bitcoin were often doing it through Genesis.
Speaker 1: Absolutely right. So Genesis was the world's leading crypto prime brokerage.
Speaker 1: And what does a prime broker do. They enable lending,
Speaker 1: custody and trading in an institutional man So Genesis enabled
Speaker 1: hedge funds like three RS Capital to borrow bitcoin and
Speaker 1: GBTC and other tokens in size, and Genesis also enabled
Speaker 1: other non banks to participate in the gray scale trade
Speaker 1: was blocked. So Block five one of the entities that
Speaker 1: sort of, I guess, blew up over last year. How
Speaker 1: much was the gray scale trade the business of Block five,
Speaker 1: gray Scale made over a hundred million dollars in revenue,
Speaker 1: and perhaps a lot more than that through the GBTC trade.
Speaker 1: What's really interesting about block fives that on the surface
Speaker 1: it looks like a crypto neo bank, a slick app
Speaker 1: Behind that surface, it's actually capital markets in trading business
Speaker 1: with skillful individuals that were participating in this GBTC trade
Speaker 1: using their client funds, and that revenue generating machine of
Speaker 1: g BTC enable the growth of the crypto ci fi
Speaker 1: sector celsie. It was a major driver of revenue. And
Speaker 1: when that premium flip to negative, it's similar to the
Speaker 1: idea of like the yield curve going inverted, a key
Speaker 1: leg or prop supporting these business models was kicked away
Speaker 1: and these businesses had to pivot to find other sources
Speaker 1: to generate revenue, including lending. I think this is really
Speaker 1: important here because in the beginning, when you talked about
Speaker 1: the creation of GBTC shares, there was a full legal process,
Speaker 1: and this I guess I hadn't appreciated that there was
Speaker 1: a whole process. You had to set up, set up
Speaker 1: a relationship, set up a corporate entity, etcetera. So one
Speaker 1: way to think about these sort of like crypto ci
Speaker 1: fi entities, whether it's block Fire or Celsius, etcetera, was
Speaker 1: they did that, they set up that entity and then
Speaker 1: as long as the way was that premium doesn't really
Speaker 1: matter the price of bitcoin as long as the some
Speaker 1: premium that existed between GBTC and BTC, they could use
Speaker 1: that legal structure that they had made to take in
Speaker 1: money by bitcoin and attempt I don't know, arb isn't
Speaker 1: the right word, but exploit, That's that's exactly right. They're
Speaker 1: wearing the risk of whether that premium will maintain at
Speaker 1: the time of delivery. So how does Gemini play into
Speaker 1: all of this? Because you know, we mentioned people being
Speaker 1: upset about various things here, and the Winklevos twins certainly
Speaker 1: seem to be upset, right. So the Geminis, of course
Speaker 1: is one of the United States the largest crypto exchanges,
Speaker 1: competing with the coin base. People in crypto want yield.
Speaker 1: That's what the lesson is from Celsius is the lesson
Speaker 1: from block fights listening from Voyager. People want to earn
Speaker 1: high yield in a then zer rate interest environment. And
Speaker 1: Gemini spotted the opportunity and they created a program called
Speaker 1: Gemini Earn and in that program, the creditors face off
Speaker 1: with jen So gem and I offered a the ability
Speaker 1: for retail investors, a credit investors and institutions to make
Speaker 1: direct loans to Genesis gem and I was acting as
Speaker 1: an agent. They weren't taking credit risk themselves. They didn't
Speaker 1: put Genesis loans on their balance sheet. They were really
Speaker 1: like an offerer of this program. Marketing agent was coin
Speaker 1: you know, there was at one point coin Base had
Speaker 1: this thing. They were going to do an earned thing,
Speaker 1: and then they're like, I got a letter from the SEC.
Speaker 1: They're not gonna let us do it. Was there going
Speaker 1: to be roughly the same style business similar? Yes, So
Speaker 1: the SEC it's been reported threatened to wells notice and
Speaker 1: coin Base stopped. Also recalled. The SEC did find Block
Speaker 1: five for similar program Hunter million dollars. Again, what was
Speaker 1: Block five doing. Block Fire was paying out interest and
Speaker 1: there was no retied securities offering. If you want to
Speaker 1: pay out interest or you want to have poth cake deposit,
Speaker 1: you have to be a bank. Only banks have exemptions
Speaker 1: from securities laws. So on this note, another bad thing
Speaker 1: that has happened in the crypto space recently is that
Speaker 1: Gemini as well as Genesis happened sued by the SEC
Speaker 1: over this earned program that you just described, basically for
Speaker 1: breaking securities rules. And one of the criticisms that we've
Speaker 1: seen online, you know from I guess investors who are
Speaker 1: probably burned by some crypto things. Is, well, why didn't
Speaker 1: the SEC say something sooner? You know, they knew that
Speaker 1: these companies were doing this program, they'd may be issued
Speaker 1: warnings to Block five things like that. What's the rationale
Speaker 1: for that? Why wouldn't they have moved sooner? Sure, so, first,
Speaker 1: Tracy is going to put me in the uncomfortable position
Speaker 1: of defending the SEC. Here. I only asked the tough
Speaker 1: questions Twitter. Let me do my my best here. So
Speaker 1: the SEC has indicated through public statements and enforcement actions,
Speaker 1: including on Block five, that they perceive exchanges offering unregied
Speaker 1: securities to the public. So they're trying to say, hey,
Speaker 1: guys and gals, clean up otherwise is we're going to
Speaker 1: have enforcement actions. That's one second. Is the way to
Speaker 1: think about the regulators. A metaphor to use here is
Speaker 1: like the fireman. Okay, so there's a fire in the house,
Speaker 1: you call the regulators, you file a complaint, you say, hey,
Speaker 1: protect me. The fireman show up. House already burned down,
Speaker 1: but there's probably a safe with some assets in the basement.
Speaker 1: And then then what does the firemen do. They'll say,
Speaker 1: did you adhere to your building code standards? For example,
Speaker 1: that would be did you have sufficient disclosure? Did you
Speaker 1: say may lose value in bold old cats and that's
Speaker 1: not on the loan agreement for instance. The sec will say, Okay,
Speaker 1: if you complied with the building code standards, then you
Speaker 1: probably aren't gonna get a penalty because bad things happen. Also,
Speaker 1: if you had a legal opinion, meaning you had an
Speaker 1: inspector show up and said you're you're doing things by
Speaker 1: the code, you're gonna have less liability. But that's what
Speaker 1: happens to you you and the reason why that's the cases
Speaker 1: the SEC regulations. American securities laws are rounded on a
Speaker 1: disclosure framework. It's not a licensing regime like banks. If
Speaker 1: you're at JP Morgan, there are dozens of regulators that
Speaker 1: are on site that can access books and records. They
Speaker 1: have to prove new products, they're sufficient, they're stringent controls.
Speaker 1: Whereas in the American capital markets, what drives entrepreneurship is
Speaker 1: you don't need a chief compliance officer or a lawyer
Speaker 1: on staff to raise capital or be in business. That
Speaker 1: is the trade off of the American approach to capital formation,
Speaker 1: there's just an expectation of disclosure. There's an expectation of
Speaker 1: compliance with the law. So the SEC will show up
Speaker 1: after usually a mistakes happened, and they'll start to take
Speaker 1: names and take actions and try to send an example
Speaker 1: for others in the industry. And that's why they put
Speaker 1: these public releases out saying we took action, here's a fine,
Speaker 1: and everybody else better claim. Because the SEC can't truly
Speaker 1: please the category, They've got to find examples. Remind me,
Speaker 1: what was the peak of the premium the g BTC
Speaker 1: was to the bigco and I think again, then it
Speaker 1: got recently down to like a fifty discount or pretty
Speaker 1: close to that. Correct, it's bounced back a little bit.
Speaker 1: We've had this rally. Are there steps that d c
Speaker 1: G could take right now to close that nav but
Speaker 1: that would come at the expense of feed generation. Yes,
Speaker 1: Gray Scale could utilize the Ragam redemption. First they have
Speaker 1: to modify the provisions of the trust to enable them
Speaker 1: to do that, and then they could redeem out bitcoin
Speaker 1: and that would close the gap dramatically. Here's a trade off.
Speaker 1: Though d c G has ten million, we're on ten
Speaker 1: percent of the GBTC issued excuse me, sixty one million
Speaker 1: g BTC on their balance sheet as of September reporting.
Speaker 1: Now they might have sold some since that time that
Speaker 1: could have caused the discount to widen. So it would
Speaker 1: help d CGS holdings of g BTC because they would
Speaker 1: also double in value if that closes, but they will
Speaker 1: lose the fee generating potential from owning the bitcoin. And
Speaker 1: the right move if your DCG in a self interested
Speaker 1: capacity is not to permit that you're better off taking
Speaker 1: the unrealized loss on the GBTC held and maintain the
Speaker 1: fee generation. What does it mean for gray Scale and
Speaker 1: the Bitcoin trust that Genesis has experienced so many problems
Speaker 1: because I think, didn't they suspend withdrawals at some point?
Speaker 1: That's right, Genesis a few weeks after the FTX collapse,
Speaker 1: after reassurances to investors, including repping to the solvency of
Speaker 1: their business, suspended withdrawals and if you take a step back,
Speaker 1: this is another common theme in the category, is this
Speaker 1: pattern of non banks acting like banks, and of course Tracy,
Speaker 1: we saw this in the fintech lending category as well.
Speaker 1: But what do I mean by that? Yes, for for
Speaker 1: our listeners, ROM and I go way back to fintech
Speaker 1: and peer to peer lending, which is when we first
Speaker 1: started talking. Maybe there's a lot of overlap actually with crypto.
Speaker 1: Maybe one day we'll have ROM back for my dream
Speaker 1: episode or the what is fintech? That? Because I still
Speaker 1: don't know what fintech means, But that's another that's it's funny.
Speaker 1: So what is a non bank doing here? Non bank
Speaker 1: is taking short term liquid deposits. That's what we call
Speaker 1: a demand deposit. You can go to your bank and say, hey,
Speaker 1: I want my funds back. When you go to your
Speaker 1: JP Morgan checking account and says you've got ten thousand
Speaker 1: dollars there, those dollars aren't actually there. They're being lent
Speaker 1: out on the other side. And banks can pull that
Speaker 1: off because they have two things f d i C
Speaker 1: insurance to guard against a bank run and a lender
Speaker 1: of last resort. So but it's a great business to
Speaker 1: borrow short and lend long. That's what banks do, and
Speaker 1: that's what these non banks, including Block fives, Celsius, Voyager
Speaker 1: and now Genesis have done. They're borrowing short term liquid
Speaker 1: deposits that are callable. They can be redeemed whenever client
Speaker 1: wants what they're lending against long term, long duration asked
Speaker 1: us that are ill liquid, not marketable securities. So when
Speaker 1: you get a run on the bank, then you can
Speaker 1: be caught offsides. All right, So we mentioned block five Celsius,
Speaker 1: who else, like, how many anti three A C were
Speaker 1: they doing the g BTC trade in some version? Yes,
Speaker 1: three a C was a maybe the biggest better on
Speaker 1: this g BTC carry trade. Voyager were they doing It's
Speaker 1: not clear whether Voyager or Celsius was black Fire was
Speaker 1: just on three A C specifically because they were not
Speaker 1: like one of these c FI fintech things. So what
Speaker 1: was how did how were they going about the g
Speaker 1: BTC trade? So they were borrowing leverage from Genesis and so,
Speaker 1: and of course d CG was was doing the same trade.
Speaker 1: We can circle back to that as well, and that's
Speaker 1: what's created issues of the DCG balance. But essentially, with
Speaker 1: three years Capital as a hedge fund, they were buying
Speaker 1: GBTC on leverage when the discount was around, betting that
Speaker 1: that discount would close. I have an existential question based
Speaker 1: on all of this, which is you talked about how
Speaker 1: you know the people in this space really cared about
Speaker 1: yield at a time when interest rates were very low.
Speaker 1: And this is a theme that's come up on the
Speaker 1: show quite a lot, which is in crypto, there are
Speaker 1: lots of very creative and at times ingenious ways to
Speaker 1: manufacture yield, but it all seems to come from, you know,
Speaker 1: some form of self dealing within the crypto space. Is
Speaker 1: crypto going to be able to maintain those yields going forward?
Speaker 1: You know, in a world where there is now a
Speaker 1: lot of doubt and cynicism about the space and still
Speaker 1: a big question mark over whether or not there is
Speaker 1: an actual use case for the underlying technology. Great questions.
Speaker 1: So first off, in crypto, if you don't know where
Speaker 1: the yield is coming from, you are the yield. The
Speaker 1: yields and crypto have dropped dramatically because the primary driver
Speaker 1: of yield generation was the demand for leverage. So if
Speaker 1: you are on tokens and protocols like A and compound
Speaker 1: during the heyday, the yields generations were relatively attractive as
Speaker 1: compared to zero percent interest rates in your bank. What
Speaker 1: you're seeing now though, is the crypto ecosystem and entrepreneurs
Speaker 1: are adapting. For example, you're starting to see tokenize the
Speaker 1: real world assets on chain, which I'm very excited about.
Speaker 1: You're seeing t bills on chain, So crypto natives that
Speaker 1: want to have a a non constilled, a non banking
Speaker 1: bankless experience can access yields on chain. I'm not endorsing that,
Speaker 1: by the way. Still early days, i've seen some of
Speaker 1: these tokens offer greater yield than t bills. I don't
Speaker 1: know how they do that, but that's trouble that it
Speaker 1: sounds like trouble. I have another question about the premium
Speaker 1: or the lack of premium for GBTC relative to BTC. So,
Speaker 1: as we mentioned, you know, GBTC launched in tw it
Speaker 1: was very difficult in those days to get bitcoin price exposure.
Speaker 1: It's become a lot easier going forward. Like let's say
Speaker 1: there's another like sustained bitcoin bowl market. Like I don't
Speaker 1: know like if GBTC would ever go back into premium again,
Speaker 1: but there's a it is much easier to buy bitcoin
Speaker 1: or get bitcoin exposure I would think in than it
Speaker 1: was in or even ten or maybe even one. How
Speaker 1: much does that influence potential deviation from pricing Just the
Speaker 1: fact that like it's kind of getting less special We
Speaker 1: will never, in my opinion, see a premium on GBTC again.
Speaker 1: It was a short lived premium, and what drove the
Speaker 1: premium was the fact that GBTC enabled you to access
Speaker 1: bitcoin through the convenience of your brokerage account. And you know,
Speaker 1: as we know, the coupital markets are tens and tens
Speaker 1: of trillions of dollars you put in a ticker, you
Speaker 1: hit by, and not many retail investors read the prospectives
Speaker 1: understand all their dynamics behind it. You know, when you
Speaker 1: were describing the trust, you were talking about basically liquidity
Speaker 1: and maturity transformation by non banks, which to me makes
Speaker 1: something like the GBTC the sort of ultimate shadow bank.
Speaker 1: And I guess my question is should we have just
Speaker 1: had an e t F instead, Like it seems like
Speaker 1: we ended up with maybe a closed end structure. Well,
Speaker 1: I mean I could argue it both ways. I guess
Speaker 1: maybe a closed down structure is better for an liquid
Speaker 1: asset like bitcoin. But tell me your thoughts. So Genesis
Speaker 1: was the ultimate shadow bank gray Scale. The issues around
Speaker 1: gray Scille aren't so much that they took bitcoin and
Speaker 1: listed in a token format on the public markets. It's
Speaker 1: the allegation of the perception that they're not offering liquidity
Speaker 1: to their investors through rag M to enable to access that.
Speaker 1: You know, the SEC chair Gensler denied the application for
Speaker 1: Gray Skill to convert to an e t F in
Speaker 1: November of one, again around the peak of the bitcoin
Speaker 1: market and just before the FED started to raise rates.
Speaker 1: This is a really a speculative question. Certainly, if there
Speaker 1: was an e t F offered, investors would utilize e
Speaker 1: t F. It's got lower fees. It's also convenient, there's
Speaker 1: not going to be a discount to n a V.
Speaker 1: But GBTC would still be out there because it still
Speaker 1: has that Hotel California dynamic. That issue of bitcoin being
Speaker 1: trapped in this trust would still remain. But so but
Speaker 1: g b they did apply to turn to turn GBTC
Speaker 1: into an e t F, and so it was the
Speaker 1: basic bet then that like, okay, we'll fees are going
Speaker 1: to collapse presumably in an e t F structure, but
Speaker 1: the NAV would be so much bigger in an ETF structure.
Speaker 1: That is a worthwhile trade off, right, it's a rate
Speaker 1: volume trade off. There are competitors to g BTC today.
Speaker 1: G BTC was the first and only game in town
Speaker 1: for several years, and their competitors and other offerings. For example,
Speaker 1: Valkyrie has published a letters saying we're happy to be
Speaker 1: the program sponsor. Hey, gray Scale, let us manage that
Speaker 1: for you, which is really a gray Scale committing corporate
Speaker 1: suicide have to terminate themselves. So you're right, you would
Speaker 1: see fee compression and you probably would see volumes grow. Well,
Speaker 1: I just have we're recording this one, so who knows
Speaker 1: what's going to happen between now people here. It which
Speaker 1: a couple of days. But what are you watching for here?
Speaker 1: And what should we be watching this development? Because they're
Speaker 1: all kinds of moving part looking for one, is there
Speaker 1: an involuntary petition for chapter eleven that creditors two Genesis
Speaker 1: get together and say, hey, we're tired of the fact
Speaker 1: that there's no resolution and forcing Genesis into bankruptcy if
Speaker 1: that happens, and the other things you need to look for.
Speaker 1: For example, D c G attempted to kind of quasi
Speaker 1: bailout Genesis, not through cash, but by creating this one
Speaker 1: point one billion dollar a loon. They swapped out this
Speaker 1: bad loan three hours capital for this good loan back
Speaker 1: by d CG. I would love to see the terms
Speaker 1: of that promissory note. And if that note there's getting
Speaker 1: a little technically, But if that note is callable in
Speaker 1: the event that Genesis goes through chapter eleven, which Barry
Speaker 1: claims it's not callable, but there may be other provisions
Speaker 1: that would force d CG to pay it, then that
Speaker 1: note is really like a noose around the neck of DCG.
Speaker 1: A Genesis chapter eleven can drag DCG over. So we
Speaker 1: have to assess that promisoring note in what I think
Speaker 1: is an increasingly inevitable chapter eleven for Genesis. Where are
Speaker 1: Genesis claims trading at the moment, because they are out
Speaker 1: there right there their trading It's been reported on Twitter.
Speaker 1: Take what you Want is in the low twenty cents,
Speaker 1: which by the way, is lower than the claims for
Speaker 1: Voyager Block Fine Celsius, which is an indication that markets
Speaker 1: do not believe Genesis is solvent. Now. Barry, through his
Speaker 1: public letters, has said and reinsisted multiple times, including over
Speaker 1: the last eight weeks, that the issues at Genesis are
Speaker 1: around liquidity in duration mismatch, not solvency, and he has
Speaker 1: to keep saying that because the loan agreements state there's
Speaker 1: a representation from Genesis attesting to their solvency. So if
Speaker 1: they took in customer funds after three hours capital, which
Speaker 1: they did, or after the ft X blew up, which
Speaker 1: they did, and in fact they were insolvent, they would
Speaker 1: have violated the law. And that brings you why you
Speaker 1: have this SEC and d o J investigation. Honestly, I
Speaker 1: feel like in crypto liquidity is almost anonymous with salt.
Speaker 1: Absolutely not in traditional banking for totally, and partly is
Speaker 1: because there's so like, so so internal and so convex.
Speaker 1: I would say, Uh, you've you've hinted that there's all
Speaker 1: what's the what's shakespeare play? You've hinted that there's like
Speaker 1: a Shakespearean element to all this. What should we how
Speaker 1: should we think about this? So this is a big
Speaker 1: Shakespearean drama with intra company, intra family relationships, related parties. Yeah,
Speaker 1: that's crypt vary ancestors exactly. So here's my take. Julius
Speaker 1: Caesar is Verry Silber. He had the DCG Empire, Julius
Speaker 1: Caesar across the Rubicon. That's when Genesis suspended withdrawals and
Speaker 1: of course gray skills run by his Lieutenant Michael Shanna Segan.
Speaker 1: That's Mark Anthony, his trusted lieutenant. Mark and Julius Caesar
Speaker 1: have a shared love interest. Of course, that's Cleopatra. We'll
Speaker 1: call that Genesis. We gotta anthropomorphize so you can keep going.
Speaker 1: But yeah, there's a it is a it is a
Speaker 1: grand drama Romalia. Thank you so much for coming on,
Speaker 1: odd Lodds. I actually kind of get it. You know,
Speaker 1: it's a really complicated, but you you explained this really well,
Speaker 1: and it really is extraordinary the degree to which this
Speaker 1: one vehicle seems to have created so many headaches. So
Speaker 1: appreciate you explaining it to us on today show. Thank you,
Speaker 1: thanks so much. From that was great, and you even
Speaker 1: defended the SEC a little bit. Don't worry, we want,
Speaker 1: we want, we'll tweet out that, Tracy. That really was
Speaker 1: helpful to me because I understand, you know, there's so like,
Speaker 1: first of all, just back over, there's so many things
Speaker 1: in crypto that start with G. So it's why it's confusing.
Speaker 1: It's like the three of the Crypto APOCALYPSI, Gemini Galaxy.
Speaker 1: The galaxy wasn't part of this story. Seminar GC is
Speaker 1: like d C G I honestly think this is they
Speaker 1: gotta come up with some new names or they all
Speaker 1: have to merge, because I really think this is part
Speaker 1: of why it's so confusing. Well, I think everything should
Speaker 1: move away from like three or four letter acronyms for
Speaker 1: a start, That would help. But I do think you're right.
Speaker 1: That was totally a market structure episode, not necessarily a
Speaker 1: crypto episode. But it does throw up the usual questions
Speaker 1: I think for crypto, which is, what does the space
Speaker 1: actually look like when all these sort of money making
Speaker 1: ecosystems start to fall apart. I hidn't appreciated the degree
Speaker 1: to which, and I don't want to say their entire existence,
Speaker 1: but they had a big sort of like value prop
Speaker 1: to the extent that that is a useful term for
Speaker 1: some of these sort of c FI neo banks. Was
Speaker 1: essentially just having established that relationship in order to pledge
Speaker 1: bitcoin for GBTC and how like, okay, you have that
Speaker 1: and as long as there's some sort of premium because
Speaker 1: there's a scarcity because there it's difficult to get bitcoin
Speaker 1: the exposure that's just a money printer. But then once
Speaker 1: that goes away, then like all of these business models,
Speaker 1: just like don't really work any well. Absolutely, And Rom's
Speaker 1: point about sort of resemblance to the yield curve, yeah,
Speaker 1: is fascinating. And when you think about crypto, like the
Speaker 1: way it's recreated certain aspects of the financial system. I
Speaker 1: know it's become a bit of a cliche at this
Speaker 1: point to mention this, but the idea of you know,
Speaker 1: tether breaking the book is sort of like a money
Speaker 1: market fund, and then this is sort of like the
Speaker 1: yield curve. Those examples come up a lot, well, you know,
Speaker 1: and we didn't actually talk about this at all, but
Speaker 1: there was apt even more specific like sort of curve,
Speaker 1: which was the The other regulated way that entities could
Speaker 1: get bitcoin exposure was those SMI bitcoin futures, which for
Speaker 1: a long time traded with a huge premium to spot
Speaker 1: and so there was like for a while a theoretically
Speaker 1: riskless trade that you actually could are where it's like
Speaker 1: you pledge bitcoin or you know whatever, go go along
Speaker 1: one of them, go short the other one, et cetera.
Speaker 1: There guides to how to do it. But all of these,
Speaker 1: all of these trades were predicated on a sort of
Speaker 1: scarcity of access to bitcoin. It's now going away absolutely
Speaker 1: all right, Shall we leave it there? Let's leave it there.
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe wi Isn't All. You can
Speaker 1: follow me on Twitter at the Stalwart. Follow our guest
Speaker 1: rom Alawalia. He's at ram Alla Walia. Follow our producers
Speaker 1: Carmen Rodriguez at Carmen Arman and Dash Bennett at Dashbot.
Speaker 1: And check out all of our podcasts at Bloomberg under
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