WEBVTT - The 'Widowmaker' Crypto Trade That Helped Blow Up an Industry 0:00:10.160 --> 0:00:14.280 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.400 --> 0:00:18.919 I'm Joe Wisenthal and I'm Tracy Alloway. Tracy UM, A 0:00:19.040 --> 0:00:22.400 lot has gone wrong for crypto in the last year 0:00:22.560 --> 0:00:25.119 or so. I think let's start there. I think that 0:00:25.280 --> 0:00:28.880 is safe to say that. There are many different scandals, 0:00:29.000 --> 0:00:33.080 blow up, disasters, etcetera. So the background to that intro 0:00:33.400 --> 0:00:35.760 was right before Joe said it, he was going, how 0:00:35.760 --> 0:00:37.600 am I going to start this one? And he just 0:00:37.640 --> 0:00:40.199 went with bad things have been happening, right, Like, we 0:00:40.240 --> 0:00:41.800 could go for a lot, we could just list him. 0:00:41.800 --> 0:00:44.559 We don't need to do that, Okay. So one of 0:00:44.600 --> 0:00:46.920 the bad things that has been happening in the crypto 0:00:47.000 --> 0:00:51.519 industry has to do with several high profile entities, and 0:00:51.560 --> 0:00:54.200 I'm still trying to wrap my head around the relationships 0:00:54.240 --> 0:00:57.040 between all of them. But we need to talk about 0:00:57.040 --> 0:01:01.200 what's going on with Grayscale, Genesis and Jeff and I. Right, so, 0:01:01.240 --> 0:01:03.320 for a long time, you know, there's no bitcoin e 0:01:03.400 --> 0:01:06.280 t F in the United States for a long time, 0:01:06.319 --> 0:01:09.640 Like buying bitcoin might have been a little tricky. Maybe 0:01:09.640 --> 0:01:12.919 people didn't want to trust like some of these online exchanges, 0:01:12.959 --> 0:01:15.520 some of them for good reasons. If you were some 0:01:15.600 --> 0:01:18.600 sort of regulated entity like a fund or something, or 0:01:18.600 --> 0:01:20.520 an advisor, you might not be able to get your 0:01:20.560 --> 0:01:24.199 client money into bitcoin itself. But for a long time, 0:01:24.600 --> 0:01:28.240 so GBTC, which is this entity owned by Gray Scale, 0:01:28.760 --> 0:01:32.360 was like one of the regulated vehicles that one could 0:01:32.360 --> 0:01:37.000 get exposure to bitcoin, right but not an exchange traded fund. Importantly, 0:01:37.200 --> 0:01:40.560 it was well the Gray Scale Bitcoin Trust I think 0:01:40.600 --> 0:01:44.119 it's called. And because of its existence, we saw this 0:01:44.360 --> 0:01:47.000 trade that it really seems like a lot of people 0:01:47.120 --> 0:01:50.040 in the crypto world we're doing where they would basically 0:01:50.200 --> 0:01:55.320 borrow bitcoin, deposit those with Gray Scale in exchange for 0:01:55.480 --> 0:01:59.520 GBTC shares, and then eventually they would sort of offload 0:01:59.520 --> 0:02:03.760 those shares to retail investors. But that only works as 0:02:03.840 --> 0:02:07.320 long as there's interest in bitcoin and the price is 0:02:07.440 --> 0:02:10.320 kind of going up, and now that everything seems to 0:02:10.400 --> 0:02:15.280 be going backwards or exploding in various ways, it's become problematic. 0:02:15.400 --> 0:02:19.840 And now we have this huge discrepancy between the value 0:02:19.840 --> 0:02:22.760 of Gray Scales bitcoin and where the shares are actually trading. 0:02:22.880 --> 0:02:26.200 So this is really interesting. For a while, the Gray 0:02:26.240 --> 0:02:30.760 Scale Bitcoin Trust GBTC and it's traded quotes all day. 0:02:30.919 --> 0:02:33.960 It was a large premium to the underlying bitcoin that 0:02:34.040 --> 0:02:37.000 it held, and now there is a big discount. And 0:02:37.040 --> 0:02:40.359 the key thing is is that all of these entities 0:02:40.400 --> 0:02:43.160 that were in some way trying to areb the spread 0:02:43.320 --> 0:02:47.880 or trading bitcoin veras GBTC, etcetera, they've now lost a 0:02:47.880 --> 0:02:50.440 lot of money. And I think, you know, I mentioned 0:02:50.480 --> 0:02:52.240 at the very beginning there have been a lot of 0:02:52.280 --> 0:02:56.080 disasters on crypto, but I think GBTC is at the 0:02:56.080 --> 0:02:59.440 center of many of them. Yes, everyone seems upset about this. 0:03:00.200 --> 0:03:02.320 You know, I've kind of been following it a little bit, 0:03:02.360 --> 0:03:04.919 but not that much, and so I am very interested 0:03:05.000 --> 0:03:09.520 to pick apart the relationships between these various entities, like 0:03:09.600 --> 0:03:13.120 why is Gemini that involved with Genesis and how does 0:03:13.160 --> 0:03:16.639 it involve Gray Scale as well? You know, superficially this 0:03:16.720 --> 0:03:19.240 is a going to be a crypto episode, but really 0:03:19.320 --> 0:03:23.560 it's like a fund structure episode more than anything else. 0:03:23.600 --> 0:03:26.079 It could be anything, but it happens to be a 0:03:26.120 --> 0:03:28.799 trust that owns a lot of bitcoin. Anyway, we need 0:03:28.800 --> 0:03:32.400 an expert here who's going to explain what was the 0:03:32.480 --> 0:03:35.840 g BTC trade that so many different entities get into, 0:03:36.040 --> 0:03:38.840 why it gets so much trouble all these new disputes. 0:03:38.920 --> 0:03:41.800 I'm very excited we're gonna be speaking to Rama Lawalia. 0:03:41.920 --> 0:03:45.240 Here's the founder of Lumeda, which is a private wealth advisor. 0:03:45.680 --> 0:03:48.040 You knows a lot about this stuff. So rong, thank 0:03:48.080 --> 0:03:50.320 you so much for coming out odd lots, thank you 0:03:50.320 --> 0:03:55.040 for having me. What is GBTC. So, g BTC is 0:03:55.080 --> 0:03:59.600 the security issued by gray Scale. It is a security 0:03:59.720 --> 0:04:03.200 that trades on the market, and right now it has 0:04:03.240 --> 0:04:05.880 a discount to the net asset value and that net 0:04:05.960 --> 0:04:09.720 SA values based on the value that bitcoin held by 0:04:09.840 --> 0:04:15.160 the trust. GBTC is issued by gray Scale, which is 0:04:15.160 --> 0:04:19.640 a wholly owned subsidiary of Digital Currency Group. And what's 0:04:19.680 --> 0:04:24.040 the relationship between gray Scale and Genesis and Gemini. Let's 0:04:24.040 --> 0:04:26.440 just do the whole like, let's name all the players 0:04:26.480 --> 0:04:28.800 at the beginning, we'll introduce the cast of character. So, 0:04:28.920 --> 0:04:31.960 first off, you've got Digital Currency Group, founded by Barry 0:04:32.000 --> 0:04:35.920 Silber a was and is a storied institution, really one 0:04:35.920 --> 0:04:39.080 of the blue chip firms that also seed and invested 0:04:39.080 --> 0:04:42.120 in quite a few companies in the category. So DCG 0:04:42.920 --> 0:04:46.600 created a business called gray Scale, and gray Scale was 0:04:46.640 --> 0:04:52.120 the first to issue a publicly exchange traded a security 0:04:52.160 --> 0:04:57.719 that represented access to bitcoin was wildly successful. Also, DCG 0:04:58.440 --> 0:05:02.440 created the first prime brokerage for the category, and that 0:05:02.520 --> 0:05:05.200 prime brokerage is called Genesis. So what does Genesis do? 0:05:05.839 --> 0:05:10.039 It performs custody, enables trading, and also provides financing for 0:05:10.160 --> 0:05:14.720 digital assets, including GBTC. What is GBTC. So it's not 0:05:14.800 --> 0:05:17.320 an e t F. It's an entity that owns a 0:05:17.360 --> 0:05:19.800 bunch of bitcoin and there are shares that want what 0:05:20.000 --> 0:05:21.960 is it? What is it? That's correct, it's not an 0:05:21.960 --> 0:05:24.839 e t F. You can analogize it to a closed 0:05:24.920 --> 0:05:27.120 end fund, although that's not what it is either. But 0:05:27.279 --> 0:05:30.600 essentially it's a security that trades in the market. It's 0:05:30.640 --> 0:05:34.240 issued by a trust and the value of that security, 0:05:34.279 --> 0:05:36.760 in principle should be based on the value of the 0:05:36.760 --> 0:05:39.880 collateral backing the trust, which is about ten billion dollars 0:05:39.880 --> 0:05:42.159 worth the bitcoin. It's not an e t F because 0:05:42.160 --> 0:05:47.480 there's no dynamic, instantaneous what's called the creation redemption mechanism, 0:05:47.680 --> 0:05:51.440 whereby market makers perform open operations to ensure that any 0:05:51.520 --> 0:05:53.160 of you is close to the value of the GBTC. 0:05:54.800 --> 0:05:57.360 So maybe talk to us a little bit more about 0:05:57.400 --> 0:06:00.719 the differences between e t F s and a TRY structure, 0:06:00.960 --> 0:06:03.080 Like what are the key differences and what is it 0:06:03.160 --> 0:06:06.440 that seems to be problematic with a bitcoin based e 0:06:06.560 --> 0:06:09.919 t F but is allowed to happen with a bitcoin 0:06:10.080 --> 0:06:12.920 based trust. Sure, So in an e t F, you 0:06:12.960 --> 0:06:15.800 have market makers that are ensuring that the value, the 0:06:15.920 --> 0:06:20.960 net asset value of the fund matches the tradeable value 0:06:21.040 --> 0:06:24.840 of the security, and arbitrage enforces that the authorized participants, 0:06:24.880 --> 0:06:28.440 so typically banks who are incentivized if they spot a 0:06:28.480 --> 0:06:32.640 discrepancy between the value of the underlying basket of whatever 0:06:32.720 --> 0:06:35.360 in this case bitcoin and the shares, they would buy 0:06:35.400 --> 0:06:38.080 a basket or sell a basket and take it to 0:06:38.320 --> 0:06:42.159 the e t F issuer. Exactly right. Okay, Now the 0:06:42.320 --> 0:06:46.680 SEC was not authorizing e t f s backed by bitcoin. 0:06:47.360 --> 0:06:51.640 So what Gray Scale did was they issued GBTC in 0:06:51.720 --> 0:06:53.800 a trust format. So you can think about a closed 0:06:53.880 --> 0:06:56.119 end fund, which are which are out there, and closed 0:06:56.200 --> 0:06:59.279 end funds generally traded a discount of the net asset value, 0:07:00.200 --> 0:07:02.520 So you have all these antiity everyone. There's been a 0:07:02.560 --> 0:07:05.640 million filings for e t f s and they tend 0:07:05.640 --> 0:07:08.360 to go in waves, it seems like, and then every 0:07:08.400 --> 0:07:11.480 six months or something you get a bunch of denials. Meanwhile, 0:07:11.720 --> 0:07:16.760 GBTC has existed since it looks like early this thing 0:07:16.800 --> 0:07:19.160 has just been like a huge money maker because as 0:07:19.200 --> 0:07:23.480 the one sort of like traded vehicle that's bitcoin ish 0:07:23.600 --> 0:07:26.960 that offers bitcoin exposure almost a monopoly. Like how much 0:07:26.960 --> 0:07:30.320 of a money maker was this business. Yes, GBTC was 0:07:30.360 --> 0:07:33.760 the ultimate carry trade and it generated hundreds of millions 0:07:33.760 --> 0:07:37.440 of dollars over billions of dollars for the issuers and 0:07:37.600 --> 0:07:40.160 parties have participated in the trade. So at the time 0:07:40.200 --> 0:07:44.880 when GBTC launched, it's premium above the value of the 0:07:44.960 --> 0:07:49.080 underlying bitcoin hell in the trust. The premium fluctuated between 0:07:49.160 --> 0:07:54.120 thirty for several years. So if you engage in this 0:07:54.160 --> 0:07:58.080 carry trade like Tracy outline, meaning you buy bitcoin, you 0:07:58.560 --> 0:08:01.840 convey and deliver it to Gray scale in six months, 0:08:01.920 --> 0:08:05.400 but you're wearing the price risk at the time of delivery. 0:08:05.480 --> 0:08:08.440 So if that premium has held firm, then you capture 0:08:08.480 --> 0:08:10.960 the value of the premium relative to the spot price 0:08:11.400 --> 0:08:16.120 of bitcoin. That discount started to appear. Really, the premium 0:08:16.160 --> 0:08:20.280 went to a discount with coin based going public around 0:08:20.280 --> 0:08:23.160 that time. But so just to go back for a second, 0:08:23.160 --> 0:08:26.160 you say, there's there's no like unlike an e T F. 0:08:26.200 --> 0:08:30.960 There's no like automatic redemption back and forth. But traders 0:08:31.000 --> 0:08:35.000 were able to create by bitcoin and then create GBTC, 0:08:35.280 --> 0:08:37.920 so it was like is it it was allowed? There 0:08:37.960 --> 0:08:39.640 was one direction you could take it, but not the 0:08:39.640 --> 0:08:41.560 other way, like this is why I don't get So 0:08:41.679 --> 0:08:46.680 you could create GBTC shares but they can't be destroyed. Correct, 0:08:46.720 --> 0:08:50.360 So GBTC. Gray Scale has this kind of Hotel California dynamic. 0:08:50.800 --> 0:08:52.160 The way it works is you've got to go through 0:08:52.160 --> 0:08:55.880 a deliberate set of procedures to acquire bitcoin, create a 0:08:55.960 --> 0:08:59.520 legal entity, notify gray Scale, and go through a set 0:08:59.520 --> 0:09:03.600 of mechanic X two, then capture the premium on the 0:09:03.600 --> 0:09:06.640 other side and hope it's there. On the redemption side. 0:09:07.640 --> 0:09:12.400 There is a mechanism to redeemount of trusts. It's called REGAM. 0:09:12.440 --> 0:09:16.840 It's one of the statutes in securities laws, and trusts 0:09:16.920 --> 0:09:21.440 have offered liquidity to investors. However, gray Scale received a 0:09:21.600 --> 0:09:25.079 letter from the SEC saying that they cannot engage in 0:09:25.160 --> 0:09:28.360 E t F like practices, and gray Scale interpreter that 0:09:28.400 --> 0:09:30.960 and said, oh, the SEC is telling us we cannot 0:09:31.120 --> 0:09:34.520 utilize REGAM to create liquidity, and then they modified their 0:09:34.520 --> 0:09:39.080 trust to expressly prohibit themselves from invoking REGAM, although other 0:09:39.080 --> 0:09:41.960 parties are saying in don't know, you can actually use REGAM. 0:09:42.000 --> 0:09:45.640 They're reading too much into the sec action and accusing 0:09:46.160 --> 0:09:48.560 Gray Scale of self dealing trying to keep this cash 0:09:48.559 --> 0:09:51.280 cow right. So this is part of the controversy that 0:09:51.320 --> 0:09:54.920 we're seeing unfold now. But setting the controversy aside for 0:09:54.960 --> 0:09:57.920 one second, and who's mad at who? What was the 0:09:58.040 --> 0:10:02.280 exit plan here from a scale itself, Like what exactly 0:10:02.320 --> 0:10:06.360 did they expect to be the outlet for redemptions? If 0:10:06.400 --> 0:10:09.240 there was a bunch of selling pressure, the paths liquidity 0:10:09.320 --> 0:10:13.199 would simply be selling the g PTC, so the secondary 0:10:13.200 --> 0:10:17.280 market would provide the liquidity. There's no mechanism to enforce 0:10:18.080 --> 0:10:23.720 the discount to close because reagam is not utilized. That's it. 0:10:23.840 --> 0:10:27.199 So you're betting that this will trade at some correlation 0:10:27.240 --> 0:10:48.120 to the underlying collateral. You mentioned the perception out there 0:10:48.160 --> 0:10:51.040 of self dealing or reading too much into the SEC 0:10:51.160 --> 0:10:53.760 and I'm not gonna ask you to render a legal judgment, 0:10:54.080 --> 0:10:59.320 but can you clarify when these counterparties are concerned that 0:10:59.520 --> 0:11:04.120 grace L is too conservative about it, and the claim 0:11:04.280 --> 0:11:06.480 is that it's just that this is a huge fee 0:11:06.520 --> 0:11:09.319 collection entity for them, right, Like, what are like the 0:11:09.520 --> 0:11:11.839 I don't know does it have fees in the same 0:11:11.880 --> 0:11:14.600 way a typical fund is? Like how much does gray 0:11:14.640 --> 0:11:17.280 scale get every year from the amount of big Climate. 0:11:18.520 --> 0:11:20.880 Let me walk you through that. So gray Scale files 0:11:21.000 --> 0:11:23.920 quarterly public ten cues and you can see the revenues 0:11:23.960 --> 0:11:28.240 that they generate. And today gray Scale is generating probably 0:11:28.280 --> 0:11:30.960 around three million in run rate revenue based on the 0:11:30.960 --> 0:11:34.280 prevailing price of bitcoin. If you assume a sixty five 0:11:34.320 --> 0:11:37.839 profit margin seems reasonable. They could be clocking it around 0:11:38.080 --> 0:11:40.679 ND seventy million, give or chain, give or take in 0:11:40.760 --> 0:11:43.319 terms of net income. I should also point out that 0:11:43.880 --> 0:11:47.960 the revenue that gray Scale generates is proportional one for 0:11:48.120 --> 0:11:53.640 one with the price of bitcoin. So DCG raised through 0:11:53.760 --> 0:11:58.640 private financing in November at a ten billion dollar valuation. 0:11:59.080 --> 0:12:02.200 They top take the market that was exact month that 0:12:02.280 --> 0:12:06.280 bitcoin hit their peak value as well. And the way 0:12:06.360 --> 0:12:09.840 gray Scale generates revenue is they have a two percent 0:12:09.920 --> 0:12:13.080 management fee, So it's two percent times of value the 0:12:13.200 --> 0:12:17.120 underlying bitcoin collateral, not times the traded value of the 0:12:17.200 --> 0:12:21.160 g BTC right, So I mean they were basically printing 0:12:21.200 --> 0:12:23.480 money when bitcoin was going up, which is kind of 0:12:23.480 --> 0:12:26.200 funny because all the bitcoin purists complain about the FED 0:12:26.240 --> 0:12:30.160 printing money, but they're still printy money. Right, Yes, they 0:12:30.160 --> 0:12:33.240 are making money. Absolutely, it is the cash cow. However, 0:12:33.280 --> 0:12:35.240 than other parts of the d c G business are 0:12:35.240 --> 0:12:38.480 feeling stressed. Right, I think this is the cue maybe 0:12:38.480 --> 0:12:41.240 to talk about Genesis and the relationship with gray Scale, 0:12:41.240 --> 0:12:44.240 because my understanding was that a lot of these market 0:12:44.280 --> 0:12:49.280 participants who were borrowing bitcoin were often doing it through Genesis. 0:12:49.320 --> 0:12:53.959 Absolutely right. So Genesis was the world's leading crypto prime brokerage. 0:12:54.080 --> 0:12:57.120 And what does a prime broker do. They enable lending, 0:12:57.320 --> 0:13:02.079 custody and trading in an institutional man So Genesis enabled 0:13:02.840 --> 0:13:06.760 hedge funds like three RS Capital to borrow bitcoin and 0:13:06.920 --> 0:13:11.440 GBTC and other tokens in size, and Genesis also enabled 0:13:11.480 --> 0:13:15.040 other non banks to participate in the gray scale trade 0:13:16.240 --> 0:13:19.839 was blocked. So Block five one of the entities that 0:13:19.960 --> 0:13:22.720 sort of, I guess, blew up over last year. How 0:13:22.840 --> 0:13:26.920 much was the gray scale trade the business of Block five, 0:13:27.800 --> 0:13:31.600 gray Scale made over a hundred million dollars in revenue, 0:13:31.679 --> 0:13:35.160 and perhaps a lot more than that through the GBTC trade. 0:13:35.200 --> 0:13:38.080 What's really interesting about block fives that on the surface 0:13:38.679 --> 0:13:43.280 it looks like a crypto neo bank, a slick app 0:13:43.360 --> 0:13:48.320 Behind that surface, it's actually capital markets in trading business 0:13:48.880 --> 0:13:54.560 with skillful individuals that were participating in this GBTC trade 0:13:55.280 --> 0:14:00.520 using their client funds, and that revenue generating machine of 0:14:00.600 --> 0:14:06.000 g BTC enable the growth of the crypto ci fi 0:14:06.160 --> 0:14:10.440 sector celsie. It was a major driver of revenue. And 0:14:10.520 --> 0:14:14.080 when that premium flip to negative, it's similar to the 0:14:14.080 --> 0:14:17.880 idea of like the yield curve going inverted, a key 0:14:17.960 --> 0:14:23.720 leg or prop supporting these business models was kicked away 0:14:23.760 --> 0:14:26.480 and these businesses had to pivot to find other sources 0:14:26.480 --> 0:14:29.960 to generate revenue, including lending. I think this is really 0:14:30.000 --> 0:14:32.520 important here because in the beginning, when you talked about 0:14:32.720 --> 0:14:38.000 the creation of GBTC shares, there was a full legal process, 0:14:38.080 --> 0:14:39.880 and this I guess I hadn't appreciated that there was 0:14:39.920 --> 0:14:41.960 a whole process. You had to set up, set up 0:14:41.960 --> 0:14:45.720 a relationship, set up a corporate entity, etcetera. So one 0:14:45.760 --> 0:14:48.840 way to think about these sort of like crypto ci 0:14:49.000 --> 0:14:52.680 fi entities, whether it's block Fire or Celsius, etcetera, was 0:14:53.080 --> 0:14:55.560 they did that, they set up that entity and then 0:14:55.560 --> 0:14:58.240 as long as the way was that premium doesn't really 0:14:58.280 --> 0:15:00.280 matter the price of bitcoin as long as the some 0:15:00.360 --> 0:15:04.920 premium that existed between GBTC and BTC, they could use 0:15:05.040 --> 0:15:07.800 that legal structure that they had made to take in 0:15:07.840 --> 0:15:11.040 money by bitcoin and attempt I don't know, arb isn't 0:15:11.080 --> 0:15:14.480 the right word, but exploit, That's that's exactly right. They're 0:15:14.520 --> 0:15:19.360 wearing the risk of whether that premium will maintain at 0:15:19.360 --> 0:15:23.800 the time of delivery. So how does Gemini play into 0:15:23.840 --> 0:15:26.200 all of this? Because you know, we mentioned people being 0:15:26.280 --> 0:15:30.240 upset about various things here, and the Winklevos twins certainly 0:15:30.680 --> 0:15:33.320 seem to be upset, right. So the Geminis, of course 0:15:33.400 --> 0:15:36.200 is one of the United States the largest crypto exchanges, 0:15:36.200 --> 0:15:39.760 competing with the coin base. People in crypto want yield. 0:15:40.080 --> 0:15:42.320 That's what the lesson is from Celsius is the lesson 0:15:42.360 --> 0:15:45.040 from block fights listening from Voyager. People want to earn 0:15:45.520 --> 0:15:50.120 high yield in a then zer rate interest environment. And 0:15:50.200 --> 0:15:53.320 Gemini spotted the opportunity and they created a program called 0:15:53.720 --> 0:15:59.560 Gemini Earn and in that program, the creditors face off 0:15:59.600 --> 0:16:02.480 with jen So gem and I offered a the ability 0:16:02.640 --> 0:16:06.840 for retail investors, a credit investors and institutions to make 0:16:07.000 --> 0:16:10.960 direct loans to Genesis gem and I was acting as 0:16:10.960 --> 0:16:14.200 an agent. They weren't taking credit risk themselves. They didn't 0:16:14.200 --> 0:16:16.360 put Genesis loans on their balance sheet. They were really 0:16:16.440 --> 0:16:20.800 like an offerer of this program. Marketing agent was coin 0:16:21.040 --> 0:16:23.160 you know, there was at one point coin Base had 0:16:23.160 --> 0:16:24.560 this thing. They were going to do an earned thing, 0:16:24.560 --> 0:16:26.840 and then they're like, I got a letter from the SEC. 0:16:26.960 --> 0:16:29.120 They're not gonna let us do it. Was there going 0:16:29.160 --> 0:16:32.600 to be roughly the same style business similar? Yes, So 0:16:32.640 --> 0:16:37.000 the SEC it's been reported threatened to wells notice and 0:16:37.040 --> 0:16:41.520 coin Base stopped. Also recalled. The SEC did find Block 0:16:41.600 --> 0:16:45.480 five for similar program Hunter million dollars. Again, what was 0:16:45.520 --> 0:16:49.160 Block five doing. Block Fire was paying out interest and 0:16:49.200 --> 0:16:51.040 there was no retied securities offering. If you want to 0:16:51.080 --> 0:16:53.280 pay out interest or you want to have poth cake deposit, 0:16:53.720 --> 0:16:56.360 you have to be a bank. Only banks have exemptions 0:16:56.360 --> 0:17:00.120 from securities laws. So on this note, another bad thing 0:17:00.200 --> 0:17:02.720 that has happened in the crypto space recently is that 0:17:02.920 --> 0:17:05.879 Gemini as well as Genesis happened sued by the SEC 0:17:06.560 --> 0:17:09.720 over this earned program that you just described, basically for 0:17:09.840 --> 0:17:13.360 breaking securities rules. And one of the criticisms that we've 0:17:13.400 --> 0:17:17.439 seen online, you know from I guess investors who are 0:17:17.480 --> 0:17:21.000 probably burned by some crypto things. Is, well, why didn't 0:17:20.960 --> 0:17:24.280 the SEC say something sooner? You know, they knew that 0:17:24.359 --> 0:17:27.240 these companies were doing this program, they'd may be issued 0:17:27.280 --> 0:17:31.720 warnings to Block five things like that. What's the rationale 0:17:31.760 --> 0:17:34.240 for that? Why wouldn't they have moved sooner? Sure, so, first, 0:17:34.280 --> 0:17:36.400 Tracy is going to put me in the uncomfortable position 0:17:36.640 --> 0:17:39.160 of defending the SEC. Here. I only asked the tough 0:17:39.240 --> 0:17:44.320 questions Twitter. Let me do my my best here. So 0:17:45.240 --> 0:17:50.240 the SEC has indicated through public statements and enforcement actions, 0:17:50.280 --> 0:17:54.800 including on Block five, that they perceive exchanges offering unregied 0:17:54.840 --> 0:17:57.920 securities to the public. So they're trying to say, hey, 0:17:58.040 --> 0:18:00.960 guys and gals, clean up otherwise is we're going to 0:18:01.200 --> 0:18:06.800 have enforcement actions. That's one second. Is the way to 0:18:06.800 --> 0:18:09.000 think about the regulators. A metaphor to use here is 0:18:09.000 --> 0:18:12.080 like the fireman. Okay, so there's a fire in the house, 0:18:12.400 --> 0:18:15.560 you call the regulators, you file a complaint, you say, hey, 0:18:15.600 --> 0:18:18.120 protect me. The fireman show up. House already burned down, 0:18:18.560 --> 0:18:21.600 but there's probably a safe with some assets in the basement. 0:18:22.080 --> 0:18:23.920 And then then what does the firemen do. They'll say, 0:18:24.040 --> 0:18:27.040 did you adhere to your building code standards? For example, 0:18:27.040 --> 0:18:29.720 that would be did you have sufficient disclosure? Did you 0:18:29.760 --> 0:18:32.920 say may lose value in bold old cats and that's 0:18:32.920 --> 0:18:37.600 not on the loan agreement for instance. The sec will say, Okay, 0:18:38.000 --> 0:18:42.159 if you complied with the building code standards, then you 0:18:42.200 --> 0:18:45.880 probably aren't gonna get a penalty because bad things happen. Also, 0:18:45.920 --> 0:18:48.159 if you had a legal opinion, meaning you had an 0:18:48.160 --> 0:18:50.720 inspector show up and said you're you're doing things by 0:18:50.720 --> 0:18:53.520 the code, you're gonna have less liability. But that's what 0:18:53.560 --> 0:18:55.159 happens to you you and the reason why that's the cases 0:18:55.960 --> 0:19:00.960 the SEC regulations. American securities laws are rounded on a 0:19:01.119 --> 0:19:06.359 disclosure framework. It's not a licensing regime like banks. If 0:19:06.359 --> 0:19:09.399 you're at JP Morgan, there are dozens of regulators that 0:19:09.440 --> 0:19:11.600 are on site that can access books and records. They 0:19:11.600 --> 0:19:15.280 have to prove new products, they're sufficient, they're stringent controls. 0:19:15.760 --> 0:19:19.560 Whereas in the American capital markets, what drives entrepreneurship is 0:19:19.840 --> 0:19:22.919 you don't need a chief compliance officer or a lawyer 0:19:23.000 --> 0:19:28.240 on staff to raise capital or be in business. That 0:19:28.359 --> 0:19:31.960 is the trade off of the American approach to capital formation, 0:19:32.560 --> 0:19:35.919 there's just an expectation of disclosure. There's an expectation of 0:19:35.920 --> 0:19:40.240 compliance with the law. So the SEC will show up 0:19:40.280 --> 0:19:43.840 after usually a mistakes happened, and they'll start to take 0:19:43.920 --> 0:19:46.200 names and take actions and try to send an example 0:19:46.880 --> 0:19:48.760 for others in the industry. And that's why they put 0:19:48.760 --> 0:19:52.040 these public releases out saying we took action, here's a fine, 0:19:52.080 --> 0:19:55.199 and everybody else better claim. Because the SEC can't truly 0:19:55.200 --> 0:19:58.919 please the category, They've got to find examples. Remind me, 0:19:58.960 --> 0:20:01.320 what was the peak of the premium the g BTC 0:20:01.640 --> 0:20:05.760 was to the bigco and I think again, then it 0:20:05.840 --> 0:20:08.600 got recently down to like a fifty discount or pretty 0:20:08.640 --> 0:20:10.680 close to that. Correct, it's bounced back a little bit. 0:20:10.720 --> 0:20:13.879 We've had this rally. Are there steps that d c 0:20:14.080 --> 0:20:17.080 G could take right now to close that nav but 0:20:17.400 --> 0:20:21.280 that would come at the expense of feed generation. Yes, 0:20:21.560 --> 0:20:25.280 Gray Scale could utilize the Ragam redemption. First they have 0:20:25.320 --> 0:20:27.960 to modify the provisions of the trust to enable them 0:20:28.000 --> 0:20:31.600 to do that, and then they could redeem out bitcoin 0:20:31.720 --> 0:20:34.800 and that would close the gap dramatically. Here's a trade off. 0:20:34.800 --> 0:20:40.320 Though d c G has ten million, we're on ten 0:20:40.359 --> 0:20:43.320 percent of the GBTC issued excuse me, sixty one million 0:20:43.840 --> 0:20:47.520 g BTC on their balance sheet as of September reporting. 0:20:47.600 --> 0:20:49.760 Now they might have sold some since that time that 0:20:49.800 --> 0:20:53.240 could have caused the discount to widen. So it would 0:20:53.280 --> 0:20:58.400 help d CGS holdings of g BTC because they would 0:20:58.440 --> 0:21:01.960 also double in value if that closes, but they will 0:21:02.040 --> 0:21:06.960 lose the fee generating potential from owning the bitcoin. And 0:21:07.359 --> 0:21:10.480 the right move if your DCG in a self interested 0:21:10.520 --> 0:21:14.919 capacity is not to permit that you're better off taking 0:21:14.960 --> 0:21:18.760 the unrealized loss on the GBTC held and maintain the 0:21:18.800 --> 0:21:23.359 fee generation. What does it mean for gray Scale and 0:21:23.400 --> 0:21:28.240 the Bitcoin trust that Genesis has experienced so many problems 0:21:28.280 --> 0:21:31.960 because I think, didn't they suspend withdrawals at some point? 0:21:32.640 --> 0:21:36.800 That's right, Genesis a few weeks after the FTX collapse, 0:21:37.600 --> 0:21:41.399 after reassurances to investors, including repping to the solvency of 0:21:41.400 --> 0:21:45.920 their business, suspended withdrawals and if you take a step back, 0:21:45.960 --> 0:21:48.840 this is another common theme in the category, is this 0:21:48.920 --> 0:21:54.280 pattern of non banks acting like banks, and of course Tracy, 0:21:54.320 --> 0:21:56.440 we saw this in the fintech lending category as well. 0:21:56.760 --> 0:21:58.760 But what do I mean by that? Yes, for for 0:21:58.800 --> 0:22:01.879 our listeners, ROM and I go way back to fintech 0:22:02.040 --> 0:22:04.120 and peer to peer lending, which is when we first 0:22:04.119 --> 0:22:07.560 started talking. Maybe there's a lot of overlap actually with crypto. 0:22:07.600 --> 0:22:10.760 Maybe one day we'll have ROM back for my dream 0:22:10.800 --> 0:22:14.120 episode or the what is fintech? That? Because I still 0:22:14.119 --> 0:22:17.440 don't know what fintech means, But that's another that's it's funny. 0:22:18.080 --> 0:22:19.840 So what is a non bank doing here? Non bank 0:22:19.960 --> 0:22:23.159 is taking short term liquid deposits. That's what we call 0:22:23.200 --> 0:22:25.400 a demand deposit. You can go to your bank and say, hey, 0:22:25.400 --> 0:22:27.520 I want my funds back. When you go to your 0:22:27.640 --> 0:22:30.000 JP Morgan checking account and says you've got ten thousand 0:22:30.040 --> 0:22:32.640 dollars there, those dollars aren't actually there. They're being lent 0:22:32.720 --> 0:22:35.960 out on the other side. And banks can pull that 0:22:36.040 --> 0:22:38.159 off because they have two things f d i C 0:22:38.320 --> 0:22:41.680 insurance to guard against a bank run and a lender 0:22:41.680 --> 0:22:44.439 of last resort. So but it's a great business to 0:22:44.520 --> 0:22:46.800 borrow short and lend long. That's what banks do, and 0:22:46.800 --> 0:22:49.679 that's what these non banks, including Block fives, Celsius, Voyager 0:22:49.760 --> 0:22:52.840 and now Genesis have done. They're borrowing short term liquid 0:22:52.840 --> 0:22:55.680 deposits that are callable. They can be redeemed whenever client 0:22:55.720 --> 0:22:59.960 wants what they're lending against long term, long duration asked 0:23:00.040 --> 0:23:04.280 us that are ill liquid, not marketable securities. So when 0:23:04.320 --> 0:23:06.680 you get a run on the bank, then you can 0:23:06.720 --> 0:23:28.200 be caught offsides. All right, So we mentioned block five Celsius, 0:23:28.640 --> 0:23:32.200 who else, like, how many anti three A C were 0:23:32.240 --> 0:23:35.160 they doing the g BTC trade in some version? Yes, 0:23:35.240 --> 0:23:39.280 three a C was a maybe the biggest better on 0:23:39.320 --> 0:23:43.240 this g BTC carry trade. Voyager were they doing It's 0:23:43.240 --> 0:23:45.919 not clear whether Voyager or Celsius was black Fire was 0:23:46.359 --> 0:23:49.400 just on three A C specifically because they were not 0:23:49.640 --> 0:23:52.880 like one of these c FI fintech things. So what 0:23:52.960 --> 0:23:55.080 was how did how were they going about the g 0:23:55.200 --> 0:24:02.120 BTC trade? So they were borrowing leverage from Genesis and so, 0:24:02.640 --> 0:24:05.240 and of course d CG was was doing the same trade. 0:24:05.280 --> 0:24:07.159 We can circle back to that as well, and that's 0:24:07.200 --> 0:24:09.399 what's created issues of the DCG balance. But essentially, with 0:24:09.400 --> 0:24:12.679 three years Capital as a hedge fund, they were buying 0:24:12.880 --> 0:24:18.560