No US Spot Bitcoin ETF For You

Gray Scale has been lobbying regulators to allow it to convert one of its existing crypto products, one of the biggest in the market, into an e t F. This week, the SEC rejected their petition. Gray Scale has been very clear that they've been preparing for a fight and that they intend to take that fight to court. They've geared up accordingly. Earlier this they hired Donald Varelli, a top

White House lawyer during the Obama administration. Bloomberg reports that Kasey Greifeld joins me to examine why this fight is so important to cryptozy. Thank you so much for joining us. Please explain what is going on here? So we're talking about e t F. My favorite topic are exchange traded funds, and it's basically packaging an entire portfolio into a fund that port of bonds. Everything basically except physical bitcoin can be put into an e t F. It's a great question.

Everyone in the crypto ecosystem wants to know that answer, and there's not a good one. So when you think about the SEC, they let the first derivatives backed crypto funds launched in October, they haven't approved a physically backed bitcoin e t F. Uh, It's unclear why. It could have to do with the fact that if you think about bitcoin derivatives, for example, they oversee the CME, the

Chicago Mercantiles Exchange theme. Yeah, the SEC oversees the CME where these derivatives trade, but the SEC doesn't have any oversight into crypto exchanges. That could be a reason, but it is a real frustration point for the industry. But there's a slightly wild thing that you said, which is like physical bitcoin literally impossible in the digital asset context.

So when we're talking about the difference between you know, when we say a physical bitcoin back to e t F, versus a derivative bitcoing back BTF, Like, how does that

really shape out in practice? Right? So in e t F, which again it hasn't been approved, it would be basically the e t F holding x amount of bitcoin to back up x amount of assets, similar to the gray skilled bitcoin trust, which we'll talk about because you haven't seen these physically backed e t F could to prove basically, these frank and funds have sprung up where you have a bunch of trusts, for example, that hold crypto that own a certain amount of coins, whereas these derivatives backed

e t f s obviously they hold derivatives and in so in this case, futures on on crypto prices, bitcoin prices specifically, so great scale has this trust, it is a non trivial market player, and that it is the single largest crypto slash bitcoin holding trust listed in the United States. They really want to convert it to an e t F. Why is that conversion so important to them?

So it gets into obviously how an e t F is set up, and it's a little bit nitty gritty, but basically e t F s you're able to create and redeemed shares to sort of shift with market demands. So you have these specialized traders. They're known as authorized participants and as demand cools. They can destroy shares and that keeps sort of the price of the bitcoin, or rather the price of the e t F, inline with the net asset value. What it truly holds that entire

process doesn't exist when it comes to these trusts. These trusts can't redeem shares, they can only create shares, So as you can imagine, sort of the price of these trusts can get way out of whack with the actual net asset value, which is exactly what's happened here. And when we're talking about the net asset value, we're talking about the value of the underlying stuff exactly that's that's

in the trust. And in the case of gray scales, where what has happened there, It's like, is their net asset value bigger than where they're trading, is it smaller? Like what's the direction. It's so interesting if you look at the long term chart, because for years, the price of the trust traded at this enormous premium to the net asset value of the actual coins and gray scale. As a result, there were a bunch of shares created. Now you're in an environment this dynamic is that you've

had all this demand. Cool people have sold their GBD shares in the secondary market, but those shares that were created, hundreds of millions of shares, can't be destroyed. So now the price of the trust is trading at an enormous discount to the net asset value. The last time I checked, it was somewhere between below, which is obviously not something they're super happy with and not necessarily something those shareholders

are super happy with, exactly. And Gray Skill has argued if this was converted into an e t F, you'd see that discount repaired immediately if you were able to have that ap process and I authorized participants exactly, and I think they've argued it would unlock something eight billion dollars in value if that discount was repaired. That's their position, and so that's really why that they were putting so much muscle behind trying to get the SEC to approve

a spot at coin e TF. But of course the SEC has now made it clear that they're going to reject, and they have rejected that et F application, So it sounds like the next step is the lawsuit. Yep, the next step is the lawsuit, and they filed that within an hour of that SEC denial. They were watching and waiting, so suggest that they were expecting a denial. We'll be right back with more from Katie Griidfeld talking about gray

Scale's unsuccessful bid to converse its bitcoin trust into an ETF. So, Kathy, what exactly where gray Scale doing to make their case to regulate those then? What does that effort look like? What what did they do to try to persuade regulators? Well, they hired really a rock star legal team for former US Solicitor General Don Varilli was part of that effort. They hired him in June. They also have motivated this

letter writing campaign. The SEC has actually received thousands of letters from people writing in asking beseeching the SEC to convert GBTC into an e t F. Obviously that didn't quite make it. Dent on that note, Actually, our colleagues at Bloomberg Markets on Bloomberg TV spoke with the ray Scale Investment CEO Michael Sonenshein back in March. Let's listen to what he had to say. I think all options

are on the table. I think certainly it's important that between now and the end of that two forty day process which ends in early July, that the SEC hears from as many investors as possible, as well as academics, policymakers, everybody has an opportunity to weigh in on this issue, and all of that is in fact considered as the SEC weighs the issue in front of them. That was a pretty explicit warning of what was to come. As

they've now confirmed that they're absolutely suing the SEC. They're not the only people who want this to happen, though. There are various other folks who have also tried to get US regulators to approve their physically backed bitcoin ECF and in each case the regulations has been like no,

big time. There is a long line of broken hearts of you know, the SEC rejecting the spot this coin approvals basically since the Winkle Bostwans back in I think the first application was filed, so there's there's a pretty long history of this. Regulations don't seem to have come around. We may be facing some interesting legal challenges from a like practical non billionaire, non trust owning perspective, Why do other participants in crypto care about this fight, like, what

does the existence of a spot bitcoin ECF unlock? More broadly, the argument that you would hear is that it could potentially bring more people into the industry. I mean, at this point, probably everyone who wants to buy bitcoin has probably found a way too. But think about, you know, retirement accounts, for example, they probably don't want to set up crypto wallets and the likes and have to deal with keys, etcetera, etcetera. Buying an e t F is

much easier. And then you think about, you know, your average investor who maybe doesn't want to deal with all of that. Either, they can buy and trade e t f s on their brokerage platforms, So that's an argument. And also if you think about the different ways that retail and normal investors can get access right now, they can go to coin base and somewhat are you get

ripped off on the fees? Whereas e t s they tend to have lower costs their tax efficient that enables them to have lower expense ratios than other types of products for example. So the argument that folks might make here is, even if you are not a highly motivated billionaire, you as a retail investor would potentially benefit from having more access to these kinds of financial products exactly. And I mean you've seen e t F expand that access

in the past. If you think about the commodity markets, for example, you know a normal person really can't four gold bars exactly, or by barrels of oil. And for the fixed income markets too, I mean, getting that access through e t F s is easier if you are a normal person. So they file this lawsuits, as you say, within an hour of the rejection. What are the next steps from here? It's a great question. So we actually spoke to Gray Scale CEO Michael Sonenshine on TV on

Thursday asking him that question. What is your end game? The end game of course being E t F conversion if they win, that's assuming what would happen. The timeline there is interesting. It could be nine to twelve months, could be longer, could be shorter, but they've been guided to expect that this will be a nine to twelve

month process. Who knows where bitcoin will be trading in ninth to twelve months, Oh my gosh, who knows where any of us will be in nine to twelve months, But it should be a really interesting ride, and I don't know, we'll see there is there is talk of perhaps the shareholders of GBTC filing a regulation and lawsuit to try to force redemptions changes so that GBDC actually could redeem. But again that's a hypothetical and it's a long shot. Well that's definitely something we would be watching

and reporting on if that does actually happen. Oh yeah, I'm all on it. Is there any sense of you know, I don't know whether this is like class action e in the sense that we've seen in other parts of crypto where just grunt oled investors get together and they're like, we're all in this, we have complaints. Is the gray scale lawsuit against the SEC just them? Are they joined

by any other parties? I believe it's just them, But if you sort of look at the public opinion court that is Twitter, it seems like a lot of people are applauding their efforts, you know, having a crypto firm actually sue a US regulator. I mean, this is something that I was talking about with my editors on Wednesday night as this news was breaking. You know, we've gotten a lot of spot bitcoin application rejections. We haven't seen

someone go all the way and actually sue the SEC. So, I mean, to their credit, they're they're backing up their talk. And you haven't heard from any of your other sources that other firms may be considering either joining that legal action or making you know, legal maneuvers of their own.

Haven't heard that yet. And sort of conversations about what a reg M lawsuit would look like that would be more of a class action feeling, where it would be probably a group of investors, gray scale bitcoin trust shareholders getting together and ailing that. When you interviewed Sunenshine, was there anything that he said that sounded like surprising to you? You know, this is this is a story that you've been covering for a long long time at this point.

What was his vibe? Uh? Definitely not thrilled with the SEC. That was number one. I would say. We asked him a lot of questions that he did not answer on live television, But I mean questions I have that I would love answered. Is whether three Hours Capital, whether they're still the biggest institutional shareholder. That's a big one. Also, is there any situation in which they would liquidate liquidate GBTC,

Because if the goal is shareholder value. At this point, obviously the SEC is digging in here and not going to approve a conversion. I mean, your shareholders are just left in this sort of broken fund trading at a thirty percent discount. So how long that can continue or how patient shareholders can be? Uh, it's an open question. I think it's a sort of a final question. Are there other countries that have already allowed retail investors to

get access to bitcoin through e t F s? Yes, and that is a very annoying fact to both the cryptal and the e t F industry participants. Do you have physically backed bitcoin and crypto et f s in Europe? For example, end In Canada launched their first series of funds I think it was last February. Breaking news this week,

which is really exciting to the crypto community. You would issue a purpose Investments say that Canadian regulators have approved their bitcoin e t F. These products have existed in other parts of the world for years now. How are they performing? Not great as you would imagine, because think of what they are. I mean, the e t F product, at the end of the day, it's just a rapper.

So they haven't been doing great, I would say, and if you look at in the US, you don't have a spot bitcoin et F. Again, you have sort of these frank and funds. You also have crypto linked equity e t f s, which are actually far underperforming bitcoin itself. And those so linked equity et f s are things like here's coin Base, here's micro Strategy, here's other crypto

related companies in a pile. Essentially you have you know, the minors ETFs, you have blockchain technology exactly exactly, and n f T e t f s, which again don't hold actual n f t s right, so they merely have abstract thoughts about them, just the idea. Thank you, Katy. You can find more of Katie's reporting on the Bloomberg terminal, on Bloomberg dot com and on Twitter at k Greifeld. That's k g r e I F e l D. In June, Senators Christian Gillibrand and Cynthia Loomas introduced a

sweeping Senate bill that would regulate crypto assets. Influential crypto insiders hailed the proposal as a great starting point, a reception which suggests it might be perceived as relatively friendly to the digital asset community. Hilary Allen, a law pro ustler at American University, is a critic of the proposed legislation. She doesn't think it goes far enough, especially when it comes to consumer protection. Professor Allen will join me next Tuesday,

after the July fourth holiday. Here in the US, I'm Stacy Marie Ishmael and this is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Email your questions, comments, or suggestions for the show to Crypto at Bloomberg dot net and you'll find us on Twitter at Crypto. The supervising producer of this episode is Vicky ver Galina. Associate

producer is moses On, Associate producer is thy Butler. Dest To wonder At is our engineer. Original music by Leo Sidron. Bloomberg's Head of Podcasts is Frances Galvi. He ai acts as a sending a SI