Chain Reaction

Americans may get a bitcoin spot ETF soon (w/ Craig Salm)

Episode Summary

For this week’s news episode, Jacquelyn interviewed Craig Salm, chief legal officer at Grayscale Investments. Grayscale is a digital asset investment firm that aims to provide products and services, like its Grayscale Bitcoin Trust (GBTC), to institutional and individual investors. The company was founded in 2014 and is one of the world’s largest digital asset currency managers. It currently owns 3.4% of outstanding bitcoin, “worth tens of billions of dollars,” according to a recent legal filing. The firm was making headlines this week after the D.C. Circuit Court of Appeals ruled in favor of Grayscale in a lawsuit against the U.S. Securities and Exchange Commission (SEC) on the matter of a bitcoin ETF. This ruling is in response to the SEC denying Grayscale’s application to convert its GBTC product into a bitcoin spot ETF in June 2022.

Episode Notes

Welcome to Chain Reaction. 

A podcast that unpacks and dives deep into the latest trends, drama and news in crypto with some of the biggest names in the industry to break things down block by block for the crypto curious. 

For this week’s news episode, Jacquelyn interviewed Craig Salm, chief legal officer at Grayscale Investments.

Grayscale is a digital asset investment firm that aims to provide products and services, like its Grayscale Bitcoin Trust (GBTC), to institutional and individual investors. The company was founded in 2014 and is one of the world’s largest digital asset currency managers. It currently owns 3.4% of outstanding bitcoin, “worth tens of billions of dollars,” according to a recent legal filing

The firm was making headlines this week after the D.C. Circuit Court of Appeals ruled in favor of Grayscale in a lawsuit against the U.S. Securities and Exchange Commission (SEC) on the matter of a bitcoin ETF. This ruling is in response to the SEC denying Grayscale’s application to convert its GBTC product into a bitcoin spot ETF in June 2022. 

We discussed why the ruling matters for Grayscale and its GBTC investment vehicle; as well as what it could mean for the crypto ecosystem and other firms like BlackRock, Citadel and Fidelity that also filed applications for bitcoin spot ETFs. 

We also talked about the SEC’s argued difference between bitcoin futures ETFs, which have been approved by the agency, and bitcoin spot ETFs, which have not been approved by the agency. 

Not quite caught up on bitcoin ETFs? Here’s some TechCrunch coverage:

Chain Reaction comes out every Thursday at 12:00 p.m. ET, so be sure to subscribe to us on  Apple Podcasts, Spotify or your favorite pod platform to keep up with the action.

Episode Transcription

Jacquelyn Melinek  0:01  

Hey everyone, its Jacqueline Melinek Welcome to chain reaction, a show that unpacks and dives deep into the latest trends drama and news with some of the biggest names in crypto breaking things down block by block for the crypto curious. For this week's Chain Reaction news segment, we're diving back into bitcoin spot ETFs and what grayscale successful lawsuit may mean for the industry as a whole. Before we get into that and bring on our guests, let's run through everything that's been going on since we last talked, the price of Bitcoin is back up on the week and Friend.tech transactions are way down like 95% down and two of the Tornado Cash co founders were officially charged in the US with conspiracy to commit money laundering, conspiracy to commit sanction violations and conspiracy to operate an unlicensed money transmitting business, a lot of conspiracies there. And the third co founder is facing legal repercussions in Amsterdam. And even with all of that going on, the biggest news of the week is Grayscale's recent legal victory, a DC Circuit Court of Appeals has ruled in favor of Grayscale and a lawsuit with the SEC after the Security Exchange Commission denied Grayscale's application to convert its Grayscale Bitcoin trust into an exchange traded fund or ETF in June of 2022. And we'll link some of the stories in the show notes. But we've obviously been talking a lot about Bitcoin ETFs and the implications that could have on making Bitcoin accessible to TradFi investors kind of giving crypto a sort of legal stamp of approval. So there's a lot to dive into here. And as a disclaimer, we did record this on Wednesday morning. So keep that in mind when listening to the conversation. Let's get into it. Joining me today is Craig, Salm chief legal officer at grayscale investments. Thanks for joining us, Greg.

 

Unknown Speaker  1:48  

Hi, Jacquie. It's great to be here. Thank you for having me.

 

Jacquelyn Melinek  1:50  

Yeah, definitely. So to start, why does this ruling matter for Grayscale? And more specifically, why does it matter for Grayscale's GBTC Bitcoin trust shares, which can trade up to a 30% discount to the value of the underlying coin?

 

Craig Salm  2:05  

Yeah, so just a level set. Yesterday's decision represents something that really started all the way back in 2013. When we first launched GBTC, ultimately, to convert into an exchange traded fund, when permitted via the regulatory environment. For the sake of brevity on this podcast. I'll fast forward to October of 20 2001, when we refile their application to convert it into an ETF, we did it on that day, because that was the very same day that the first Bitcoin futures ETF started trading in the US would follow, there was a record breaking 11.5 thousand Common letters into the SEC from investors, market participants, academics, all in favor of the conversion of GBTC into an ETF. Unfortunately, we were denied that following June and on that very same day, again, we filed this lawsuit challenging that denial by the SEC, the basis for our legal argument is that because the commission has shown that they are comfortable with Bitcoin futures, which are a derivative of Bitcoin itself, logically speaking, they should also be okay with physical Bitcoin or spot Bitcoin, which is what GBTC holds. Following that they were briefs, amicus briefs, oral arguments, all leading up to yesterday's decision, which was a unanimous decision by a panel of judges in the DC Circuit, agreeing with grayscales legal arguments for the SEC can no longer deny spot Bitcoin, Jeff applications like GBTC, on the basis, he's that they've expressed before. As for why it's important, you mentioned, you know, GBTC can trade at a discount. That is because it does not have the continuous creation and redemption mechanism that allows ETFs to trade in line with a net asset value, that's through something called the arbitrage mechanism that market participants called authorized participants engaged in with any other ETF, allowing grayscale to be an ETF would allow a PS to redeem shares to close that discount. So you know, today, given that the fund is nearly $20 billion of AUM, that represents billions of dollars of value that will be returned back to shareholders. So that right there, it's a very key investor protection argument that we've been making. And yesterday, the court show that they agree with that reason,

 

Jacquelyn Melinek  4:11  

right. And I think that was about like $4 billion on the table. If I'm quoting the firm, correct, it's

 

Speaker 2  4:16  

a bit less now it has been that amount. It's a bit less now because the discount has been closing progressively as we've been waiting for this court decision. There was a significant reduction in it just yesterday, because, you know, I think the market appreciates that we do have really good arguments here. Seeing the court decision was another very significant step in that process. But we're not there yet. We're laser focused on getting over the finish line. Right now. There's still a 45 day period where the commission has the opportunity to review the decision and decide if they want to seek a rehearing. We have to honor that process. But otherwise we are dead set on re engaging with the Commission on a constructive basis. Provide them whatever else they need to get this product converted,

 

Jacquelyn Melinek  4:59  

right and decline. If I for listeners briefly, can you explain the SEC reasoning for approving Bitcoin futures? ETFs in the past and not any spot Bitcoin ETFs. And then what's your argument against this?

 

Speaker 2  5:11  

Yeah, so there's been this argument from the Commission that the distinction between the Chicago Mercantile Exchange or CME Bitcoin futures, versus physical bitcoin is one around regulation and surveillance. Their view had been that the CFTC regulation oversight over the CME and surveillance that the CME has over Bitcoin futures is a distinction worth deciding, you know, approvals for ETF that hold futures and denial of ETFs that hold spot. But we've argued that that is really a distinction without a difference in the context of Bitcoin ETF approvals, the reason being that Bitcoin futures, and although they trade on the CME and their surveillance there, the price of those futures is inextricably linked to the value of underlying Bitcoin that is proven just based on simple common sense. But also quantitative analysis that we included in our case from a professor named Bob Whaley, who conducted a year long study comparing Bitcoin futures to spot and concluding that they were 99.9% correlated, which is effectively say, you know, for all material purposes, futures and spot are essentially the same. The surveillance of the SEC pointed to that certainly exists over the CME. Well, we argued that that surveillance is just as good as detecting fraud and manipulation in the futures market, as it is in the spot market, because the SEC approved a Bitcoin futures ETF. The Court yesterday really decisively agree with that reasoning. And so it's a you know, huge win for us and our shareholders, and really the whole crypto community. And right now, we're focused on finishing those final steps to get this conversion to

 

Jacquelyn Melinek  6:47  

happen. Right. So after all of this has transpired, do you now expect grayscales Bitcoin spot ETF to be approved? And if so by when,

 

Speaker 2  6:55  

you know, we've always been saying that it's a matter of when not a matter of if right timing is difficult to predict, I can tell you that there is this 45 day time period that we'll have to play out. And then after that, it's us back in front of the SEC re engaging on a constructive basis. If anything, we've shown that we are very good at sticking to what we say and making our products more regulated and more accessible for investors. GBTC was the first digital currency investment vehicle to become an SEC reporting company. We've since done that for several of our other funds, conversion to an ETF is the fourth and final stage or product lifecycle. And so we're laser focused on making that happen.

 

Jacquelyn Melinek  7:33  

Yeah, this has been a long time coming. So after those 45 days, do you think it'll be more of a expedited process, given the relationship you now have with the SEC and everyone else involved that all you have to do is kind of like, dot your i's and cross your t's at this point, or it's going to be a bit longer?

 

Speaker 2  7:49  

Yeah. So I mean, our relationship with the SEC has always been professional and respectful. This is one instance where we just had a professional disagreement, we felt one way the commission felt another way, the court agree with our reasoning. Next steps is reengage in with them to provide whatever else they need to get comfortable with these products. terms of timing, you know, my view is that this should happen as soon as possible. Because we do have investors today and GBTC represents nearly a million investors across all 50 states. But because the product is not an ETF today, it is trading at a discount. The closure of that discount through conversion into an ETF would represent billions of dollars of value being returned to shareholders. I don't think we should wait any more time to let that happen, especially now that we have this paving of the road to ETF conversion and bringing us one step closer.

 

Jacquelyn Melinek  8:37  

Right? And what do you think this means for the crypto ecosystem as a whole and the other firms like BlackRock, Citadel fidelity to name a few, which also filed applications for Bitcoin spot? ETFs.

 

Speaker 2  8:49  

So then, you know, the ETF wrapper has proven over the years to be a great way for investors to access any asset class, whether it's bonds, commodities, securities or cryptocurrencies, it opens up the universe of investors that can invest because although there are certainly people that are completely comfortable self custody in Bitcoin, or going to a Bitcoin marketplace, whether it's in the US or outside the US, there are a lot of investors that are more regulated more institutional there really need that ETF wrapper in their brokerage account with all their other investments, if they're going to make an investment into Bitcoin, when we do eventually have ETFs I think it will be extremely positive for Bitcoin. Because Bitcoin is a network effect. The more people who use it, the more usable it becomes, the more valuable and the healthier the whole ecosystem becomes. So I do really think this is just as much of a win as it is for our shareholders and GBTC. It is also a very huge win for the Bitcoin community.

 

Jacquelyn Melinek  9:44  

Right. And what about the other firms that also filed applications? Do you think this kind of helps them in a way or is it completely separate?

 

Speaker 2  9:50  

The arguments that we made were around the underlying Bitcoin market structure? So I would say the way that you know we benefit from this lawsuit others benefit as well. We are definitely ready for a world where there's multiple competing Bitcoin ETF products. And that's a good thing, investors should have a choice. We've also been on record saying to the commission that when they are ready to approve spot Bitcoin ETFs, in order to promote investor protection and maintain fair, orderly and efficient markets, they really shouldn't be approving them all at the same time to put them on the same playing field. For us, the stakes are a lot higher, because we do have an existing product with actual investors, where the others are just ideas on paper. So you know, I just want this to happen as soon as possible, whether that means that we're the first or among the first, the sooner the better for our shareholders.

 

Jacquelyn Melinek  10:35  

Right. And you already do have shareholders involved. But what do you think this ruling could potentially mean for you know, Trad fie investors, institutions or individuals who don't want to self custody or use a centralized crypto exchange? But want to get exposure to Bitcoin? You kind of touched on this before. But I'd love to know, what do you think is the potential for growth here for Bitcoin and the broader ecosystem?

 

Speaker 2  10:55  

Yeah, so that's exactly that the ETF gives them that way to allocate to the asset class, they've not otherwise been able to do without that product structure. So it is certainly good for growth to the extent that people want to, you know, invest in Bitcoin and hold it for the long term through this investment vehicle. You know, I often think about investors that have wanted to access this asset class, but because there's not a regulated Bitcoin fund on the US national securities exchange, they might be going outside the US to less safe, risky, or potentially even fraudulent other marketplaces. We've seen what happens when, you know, investors and token holders do that. So who are we really protecting by not allowing these products to exist in the US? So I absolutely think the renewal approval will be very good for the whole Bitcoin ecosystem growth and those looking to invest in the asset class.

 

Jacquelyn Melinek  11:44  

I like the way you say eventual approval. So it seems pretty certain at this point that it's coming.

 

Speaker 2  11:48  

It's uh, we, you know, we've always said it's a matter of when not a matter of if the timing is hard to exactly pinpoint down, I do go back to the fact that there is this still 45 day review period. But then once that passes, if there is no rehearing, we are then extremely focused on re engaging with the SEC, and having this happen as soon as they're able to make it happen.

 

Jacquelyn Melinek  12:09  

To wrap things up, Craig, what do you think is next for Bitcoin? ETFs? And what other news Are you watching that you think we should be following?

 

Speaker 2  12:16  

Yesterday's decision was a huge win. It was a very pivotal moment. I think that's what's next. And what happens after then, we've been asked, you know, what is the mood been like in the office, and it's been extremely positive and excited, but there's still work to be done. GBTC is not an ETF today. They're not spot Bitcoin ETFs in the US yet, so really just focus on that 45 day process, respecting and honoring it, and then taking it from there. In terms of what else I'm watching. I've seen amazing progress in DC on the legislative front, we're often going down there to meet with folks on the Hill from both sides of the aisle, you know, talking about Bitcoin, talking about the asset class, talking about various skill sets within it, to help them better understand how it should be regulated. The fact that we had the first two pieces of legislation pass both the House Financial Services Committee, and the House Ag Committee was a major step forward. That's the first time any bills have passed House committees. So I'm really excited to see what happens in DC and bring even more regulatory clarity to crypto through legislation.

 

Jacquelyn Melinek  13:14  

Yeah, I think there's a lot coming down the pipeline. And I'm sure your hands are full. So thank you again for taking the time to come on today and talk to us.

 

Unknown Speaker  13:21  

Yeah, thank you so much for having me.

 

Jacquelyn Melinek  13:24  

We'll be back next week with conversations around what's going on in the wild worlds of web three with top players in the crypto ecosystem. You can keep up with us on Spotify, Apple Music, or your favorite pod platform and subscribe to our companion newsletter, also called chain reaction. Links to the newsletter and stories we talked about can be found in our show notes. And be sure to follow us at chain underscore reaction on Twitter. Chain Reaction is hosted by myself Jacqueline melanic, and produced by Maggie Stamets with assistance from Nishad Kearney and editing by Cal Bryce Durbin is our Illustrator and Henry pick a vet manages TechCrunch audio products. Thanks for listening in. See you next time.

 

Transcribed by https://otter.ai