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Expert's Take: Is a Bitcoin ETF Really Possible? with James Seyffart

1 hours 34 minutes 44 seconds

🇬🇧 English

S1

Speaker 1

00:00

Yeah, let's be I'll be very blunt if you look at all the things that they have said and written over the

S2

Speaker 2

00:04

last 3 Years, this will be denied But really a lot. There's a lot of circumstantial evidence that suggests that It will be approved. It goes back to what I said, they can back into whatever decision they want to.

S3

Speaker 3

00:17

Okay, well, you said 2 things there, James. I want to be clear. When Bitcoin ETF?

S3

Speaker 3

00:28

That is the question on our mind today. Is the Bitcoin ETF actually happening or not? Will it happen this year or not? BlackRock, Fidelity, some of the largest ETF issuers in the world have now submitted filings for ETFs with the SEC.

S3

Speaker 3

00:45

Is Gary Gensler going to let them through? And at this point, can he even say no? That's the question we raise with James Seyfert. He's a Bloomberg analyst who's tracking this thing closer than anyone I've ever met.

S3

Speaker 3

00:58

He's on the episode today and He gives us a date by which we should have a clean answer from the SEC on the Bitcoin ETF. So is he over or under on the probability of the SEC approving a Bitcoin ETF this year? You have to listen to the entire conversation to find out. I'm psyched about this episode.

S3

Speaker 3

01:17

And before we begin, I want to address a question that some of you might have, which is why is Bankless even covering the Bitcoin ETF? That's not very Bankless of you, you might say. I disagree with that. And here's why.

S3

Speaker 3

01:28

I think when people buy crypto assets, they buy into crypto values. Not all the way, not all at once, but a little bit at a time. This is just another step forward. Crypto ETFs, in my mind, are a gateway drug, a type of gateway drug.

S3

Speaker 3

01:43

I don't think people will stop with just the Bitcoin ETF in their retirement account. I think that's the gateway to them setting up an exchange account, for instance, and buying spot Bitcoin or spot Ether that way, which is the gateway to going full bankless and taking custody of their own keys. In order for people to care about crypto, they actually have to own crypto. And this is an easy way for people to own crypto in their retirement accounts.

S3

Speaker 3

02:08

When we get more crypto ownership, we get more economic security. And we get more people who care about crypto issues in their respective jurisdictions. We need a lot more people to care about crypto in the United States in order to turn the regulatory tide. There's 1 other thing I think we get from this episode, which is learning more about traditional finance.

S3

Speaker 3

02:27

How is crypto supposed to eat traditional finance and disrupt it if We don't even understand how it works. Like, do you understand how ETFs work today? What backs them? Why people love them?

S3

Speaker 3

02:37

Why they're popular? I didn't. And that's where we start this episode with James. This is a college level course on ETFs from their birth in the early 90s to the Bitcoin spot ETF and the possibility of that today.

S3

Speaker 3

02:50

I'm doing this episode solo today. David is off climbing mountains, but he'll be back soon. And he'll certainly be back in time for an event that you should pay attention to. It's called Permissionless.

S3

Speaker 3

03:02

This is the crypto conference to go to in 2023. If you only pick 1, and I think you should pick 1, the bear market conferences are the best conferences. You got to come with David, myself, the rest of the bankless nation to permissionless. It's happening in Austin, Texas, September 11th through the 13th.

S3

Speaker 3

03:21

So that's Texas, Austin, September 11th through the 13th. And we have an absolutely stacked agenda. We've got Eric Voorhees, who's talking. We've got Hester Pierce from the SEC Commission.

S3

Speaker 3

03:33

We've got Stani from Aave. Go click the link in the show notes, get a ticket, and come with us to Permissionless this year. All right, guys, it's time to go find out about this Bitcoin ETF. We'll be right back with James, but before we do, I want to thank the sponsors that made this episode possible, including Kraken, the number 1 crypto exchange I recommend to all of my friends and family.

S3

Speaker 3

03:53

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S4

Speaker 4

03:57

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04:13

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Speaker 4

04:30

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Speaker 4

04:59

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Speaker 1

05:06

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Speaker 4

05:06

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Speaker 4

05:36

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Speaker 4

05:56

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06:12

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Speaker 4

06:44

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S3

Speaker 3

06:51

Bankless nation. The question on our mind today is a Bitcoin ETF happening. We have an expert who can weigh in on this.

S3

Speaker 3

06:59

James Seyfert is a research analyst at Bloomberg. He's got 1 foot in crypto and the other foot in ETFs. He's currently a Bloomberg intelligence ETF analyst. And he's here to drop some insight on the question I just opened with.

S3

Speaker 3

07:13

When are we going to get that Bitcoin ETF? James, welcome to bankless.

S2

Speaker 2

07:17

Thanks for having me, Ryan. Happy to be here.

S3

Speaker 3

07:19

You know, we talk a lot about crypto in on bankless, of course. And so I think it's in some people, some listeners, they got their first exposure to finance by way of crypto. Actually, my co host, David Hoffman's very much like this.

S3

Speaker 3

07:34

So I don't know if David's ever purchased an ETF in his life. And I think there's probably some Bankless listeners that fall into that camp too. So could we start by going through some of the basics? What is an ETF?

S3

Speaker 3

07:46

I think I know the acronym. Does that stand for exchange traded fund? Is that correct? And what is this thing that we're talking about today?

S2

Speaker 2

07:54

That is 100% correct. So it's exchange traded fund. It's basically people, a lot of people have 401ks, 403bs, these types of plans, at least in the US, and usually what you're investing in is a mutual fund.

S2

Speaker 2

08:07

And those have much longer tickers with an X at the end, typically. But essentially, what that means is those funds are not traded. So you give money and at the end of the day, they put that money to work the next day for when your money comes in. And for mutual funds, for 401ks and plans like that, it makes complete sense.

S2

Speaker 2

08:24

It's easy. You're not usually super time commitment because you're just contributing on a regular basis. But an ETF is a traded vehicle. And basically, the real story here is that the ETFs were invented after the SEC wrote a report in 1987.

S2

Speaker 2

08:36

There was this big crash. A lot of it had to do with futures and derivatives. And the SEC said basically they wish they had something that was more physically backed rather than derivatives or derivative of different assets. And basically this guy, Nate Most, came up with the idea for what is now an ETF.

S2

Speaker 2

08:54

And it comes off the idea of these things called commodity warehouse receipts. Those have been around forever. And the idea of commodity warehouse receipts, if you think about it this way, it's like, say you had a bunch of gold or a bunch of barrels of oil or whatever, wheat, corn, you name it, right? And 1 thing that you used to be able to do is you would store that somewhere and then the warehouse would charge some sort of fee.

S2

Speaker 2

09:15

And in return, they give you pieces of paper that say, you have this much exposure, or it was a vault or gold. You would say you have this much gold. And rather than moving that physical gold, those physical commodities around, you trade those pieces of paper. So those pieces of paper were a right to those things held in that warehouse.

S2

Speaker 2

09:30

And that's where the idea of an ETF came about. And basically the first 1 in the US was the S&P 500. And it basically, those instead of commodities being held in that warehouse, it's stocks or the S&P 500, the stocks that make up the S&P 500 held in by a custodian. So those stocks are held by somebody.

S2

Speaker 2

09:49

And what that means is at all times, the key thing that makes an ETF work and why it's super efficient is because you can always access those underlying stocks. Or in the example of the commodities, you can always access those underlying commodities. So basically those shares are a right to your ownership of the underlying assets. So in the S&P 500 ETF, you can always trade in shares of the ETF and get back the underlying stocks in a potential Bitcoin ETF.

S2

Speaker 2

10:13

It would be the same way. You could always trade in the shares of the ETF and get back Bitcoin, or vice versa. You can always trade in Bitcoin and get back shares. And what that means is, we can get into this more, but like 1 thing that I'm sure a lot of your viewers have heard about is GBTC, the Grayscale Bitcoin Trust.

S2

Speaker 2

10:27

That operates more like what we what in our world we would call a closed end fund. It's technically not 1, but it means ETFs have that mechanism where you can create shares and redeem shares because always the underlying can be exchanged for the shares of the product, right? So in Grayscale's case, there's no way to access the underlying Bitcoin. I can't hand over GBTC shares and get back Bitcoin, which is what Grayscale is suing to do to try and get access to that mechanism so that you don't have a situation where the price of those shares is very different from the value of the underlying assets they hold.

S2

Speaker 2

11:00

So when you have an ETF, that problem doesn't happen because you can always, at some point, if somebody thinks the price of the ETF is not in line with the underlying asset, you can buy those shares of the ETF or buy up the underlying asset and exchange them. It's called arbitrage. They're always the same thing. So basically there's some trading costs, so there's minute differences there, but for the most part, you can always exchange shares for assets, and that's what's causing a lot of the problems in different parts of the market.

S2

Speaker 2

11:25

So the way to think about an ETF is, if you're used to looking at stocks, or even cryptos really, right? You know the supply. So for the most part, Bitcoin's a bad example since its supply is ever increasing. But if you look at a stock, typically the supply of shares is relatively stable, right?

S2

Speaker 2

11:40

You know what it is. And what drives the price is that change in demand. So if you think about like 2 bars in a graph, basically what drives the price of most assets is the change in demand, right? Obviously supply impacts it as well.

S2

Speaker 2

11:53

The benefit of ETFs is as demand changes, you can change supply. So you can add more shares to meet demand. And If demand drops, you can destroy shares to meet demand. So that way, the price and the value of the underlying assets, so the price of the fund, the price, the value of the underlying assets are always going to be very close.

S2

Speaker 2

12:09

So that's the background of an ETF and why so many people view this as like the key to the Holy Grail for crypto and bridge to tradfy.

S3

Speaker 3

12:20

You just opened up probably a thousand questions in my mind and I want to get to them. That last point that you mentioned, I want to draw an analogy for bankless listeners. So as the demand changes, you can increase the supply.

S3

Speaker 3

12:33

USDC, a stable coin, kind of works like that as well. Think of that, right? So how much USDC can be minted? Well, kind of pretty much as long as the US continues to give access to Coinbase, to encircle to US bank accounts, it's kind of an unlimited supply.

S3

Speaker 3

12:49

It's as much as the market will demand, and it sounds like ETFs work that way too. So a few things, just to recap. So this is a newish product, I guess, in the full scope of financial products. You said it sounds like it was invented maybe in the late 1980s.

S3

Speaker 3

13:04

So it kind of took

S2

Speaker 2

13:05

off.

S1

Speaker 1

13:05

93

S2

Speaker 2

13:06

was the first 1. So technically, I told you about that guy, Nate Most. He actually went, the first ETF ever launched was technically in Canada a few years because the SEC took like 3 years to get comfortable with the idea.

S3

Speaker 3

13:17

No way, they've done this before?

S2

Speaker 2

13:19

Yeah, so Canada did it first in like

S1

Speaker 1

13:20

91,

S2

Speaker 2

13:21

after talking with Nate Most and these guys. So they got it done in like a year. And then we came along afterwards in the US and finally figured it out.

S2

Speaker 2

13:29

Okay. But yeah, so 93 was the first time. And along the whole way, there's been people questioning the structure, saying it was going to cause issues and they've done nothing but prove themselves as inefficient. The way to think about it is it's a wrapper and it's a technology in a way.

S2

Speaker 2

13:42

It's a democratizing technology in the way it's been used in the traditional finance space.

S3

Speaker 3

13:46

It's interesting that people would say that this would cause issues, because it actually seems much simpler than the other kind of price exposure mechanisms based on derivatives and that sort of thing. It's like, because it's pretty simple. It's just a wrapper for underlying assets, right?

S3

Speaker 3

14:00

So, like, what can go wrong?

S2

Speaker 2

14:02

Yeah, So we don't need to get too far into the weeds here. But essentially a lot of the people say, like, if you're looking at bonds, so they all, there's bond ETFs, they hold other assets that are less liquid than typical stocks. But so people like think you're adding liquidity.

S2

Speaker 2

14:16

There's a lot of nuance here. But essentially what it comes down to is in the good times, an ETF can be way more liquid than the underlying because people don't have to go and access the underlying market to trade it, right? They can just use the ETF shares and sometimes it just trades back and forth. There's a lot of market makers that can handle that.

S2

Speaker 2

14:31

But in times of stress, that like access liquidity ETF offers is not going to be there. It's not magic. So basically, if the underlying market freezes up, like happened in March of 2020, during COVID, those, they basically, the ETFs don't, they're not magic. So if the underlying market is locked up, there's going to be issues with the ETF.

S2

Speaker 2

14:50

But with an ETF, you can always trade. So basically, like, yes, in the good times, there's more liquidity because the ETF is there. It's operating on exchange. There's market makers.

S2

Speaker 2

14:59

There's always bids and asks. So if you think about a bond market, it's mostly over the counter traded, like literally some of it's like phone calls still, like that's the way things are traded still. But like basically what happens is like the ETF will look like it's dislocated, but what really ends up happening is just the underlying market is out of whack. There's not enough liquidity.

S2

Speaker 2

15:16

Nobody's willing to buy or sell or there's just mismatch of what's going on. So there's plenty of examples of things like that that happened in March 2020. But all the ETFs in the US and around the world have held up extremely well and were perfect beacons of efficiency during that time. They really like proved their mettle.

S2

Speaker 2

15:34

Even some of their most ardent critics even had to come step back and admit like they did extremely well in handling the issues.

S3

Speaker 3

15:39

You sound like an ETF bull, my friend. Are you like, do you like this asset?

S2

Speaker 2

15:44

Yeah, I mean, 1 of the things we've always said is like, we're gonna get into a lot of this, but like if the SEC had approved this thing, honestly, all the people in these markets, these market makers that operate in this market, like they're not going to let some of the fishy stuff that has been going on in crypto, like they're gonna go to the exchanges that are operating cleanly. They're not gonna get involved in a lot of the other things that plenty of people have been involved in in this space. So if we do get 1, it's going to clean things up.

S2

Speaker 2

16:09

It's going to drive down trading costs. ETFs trade like penny wide, very, very tight. So there's no transaction fees on most brokerage platforms. And then if you look at most brokerage platforms they don't really tell you what the bid ask spread is.

S2

Speaker 2

16:22

You can kind of back into it by looking at like what the trading looks like on Coinbase or Binance or any of those things right. But there is a spread So you know you're paying a fee typically to do the trade and then there's also a spread between what the bid and the ask is. And like usually market makers are making that money. So there's a lot of money to be made in offering markets in the crypto markets.

S2

Speaker 2

16:42

And when an ETF comes about, it's gonna get way tighter. So You'll see a lot of people who trade Bitcoin specifically in crypto markets learn to start to use the ETF and vice versa. People from the ETF world will probably go to the underlying crypto markets and make things more efficient and more liquid because you have the behemoths of the US trading and financial system come in?

S3

Speaker 3

17:02

I think I was first exposed to kind of the ETF concept just earlier in my adulthood and early investing career through Vanguard Group and John Bogle. The idea that, hey, you know what, you don't have to like outperform the market. You just buy an index fund, buy a low cost index fund of some sort, and you'll outperform, you know, like 80% of active traders out there.

S3

Speaker 3

17:29

And so it's always been a good concept. And of course you want to keep your management fees low. And my understanding is a lot of ETFs can, can somewhat provide that. So that's what, is that a reason?

S3

Speaker 3

17:39

And then I want to ask you, who are the holders of these ETFs? Is it, um, is it like kind of large pension funds? Is it sort of big money capital pools? Or is it mainly like individual Americans, like retail investors with a Fidelity account or a Schwab account with their 401k money as you alluded to earlier?

S3

Speaker 3

17:59

Who are the net buyers of these things?

S2

Speaker 2

18:01

So really, that's the beauty of the ETF, It's everyone. So in the old mutual fund world, what you're used to looking at in your 401k or whatever it might be, if you're a US listener, there are multiple share classes. So like you need to invest a certain amount of money to get access to this lower fee because you get these other things, right?

S2

Speaker 2

18:19

The economies of scale, whatever. So they have all these different share classes, ABCI for institutional. There's different things, right? But what the ETF did is it democratized at all.

S2

Speaker 2

18:29

So everyone's playing in the same pool. So if your grandma wants to buy an ETF, she's buying the same ETF as Citadel if they're looking to trade that, or some other big hedge fund or pension or PE fund. So really everyone is involved in this. And that's the beauty of the ETF ecosystem because it incorporates everyone.

S2

Speaker 2

18:45

So you have all the liquidity from the big trad fi players who are looking to make short term trades alongside the mom and pops you were talking about, who some of them might be looking to do short term trades. A lot of them are just looking to buy and hold like you were talking about low cost ETFs and hold them for a very long time. They can get exposure. And part of the reason they can be so cheap is because so many people are using them.

S2

Speaker 2

19:04

So many different types of people are using them.

S3

Speaker 3

19:06

How big is the ETF market, James, in terms of assets inside of ETFs? Are we talking hundreds of billions? Are we getting into the trillions here?

S2

Speaker 2

19:15

Yeah, we're definitely a trillion. So like we're right around 10 trillion globally, but most of that is in the US. I believe we have, I'm looking it up right now, I think we have 7.

S2

Speaker 2

19:24

I think we're right around 7000000000000 in the US alone. I'll tell you the exact number, 7.25 trillion.

S3

Speaker 3

19:31

Where do you find that info? Is that like a Bloomberg terminal?

S2

Speaker 2

19:34

Yeah, that's a Bloomberg function. But I don't, I probably vetify ETF.com, things like that will probably have that type of information. But the global markets, like over 10 as well.

S2

Speaker 2

19:45

But that you got to remember that includes like it holds stocks, that's going to hold bonds, it'll hold treasuries, commodities, everything you can think of that has basically been thrown into an ETF wrapper. Even cryptos, just not in the US.

S3

Speaker 3

19:57

Right, right. We'll get there to crypto. We're building here, building our understanding here.

S3

Speaker 3

20:02

Okay, so 10000000000000 dollars worldwide. How much of that would you guess is kind of like retail mom-and-pops versus like the big guys?

S2

Speaker 2

20:13

It's hard so a lot of the So if you look at the way the US market works, like for the most part, a lot of the money is via advisors and platforms. So we can't see exactly how much is retail, but a lot of people will use advisors. So roughly we estimate right now that US advisors, the people that are helping, like if you went to somebody to help you manage your money, right?

S2

Speaker 2

20:32

They control about 30 trillion in assets and they love ETFs, specifically independent advisors. So the way the old mutual funds I keep talking about used to be sold is there was basically a kickback. So if you put your client into this fund, you got some money out of it and possibly into perpetuity and different things like that. So basically mutual funds were sold by people that were wholesalers and trying to get advisors to put their clients in those funds because they get more money.

S2

Speaker 2

20:57

Everyone basically the money gets kicked back all over the place. ETFs it's not some of that kind of happens, but it's not directly the case. It's more that ETFs are bought. So advisors are huge owners of this.

S2

Speaker 2

21:09

Hedge funds like to use these things. Institutions are using these things to park money for the most part because they're super low cost. So retail, we don't have a like clear breakdown on that front, but it's a decent chunk, I would say, at least 30%, probably more, just because a lot of it is buy and hold. But there's also plenty of ETFs that are not built to be bought and held.

S2

Speaker 2

21:31

Some of them are built to be traded. And like I said, the SEC came about this because they wanted an alternative to futures and different things that were happening. So they wanted people to be able to use these in trade. And there are some ETFs out there, like the S&P 500 from SPY and plenty of others that we refer to as like pseudo futures, where institutions are using them for liquidity.

S2

Speaker 2

21:50

So like they had, they got a certain amount of money, they can't put it to work fully and exactly what they want to. So they're going to throw it into an ETF or like you even have mutual funds, some of those guys are talking about that are picking bonds, picking stocks. And what they'll do is they'll pick, they'll hold an ETF in like 3% of their portfolio or 4% of their portfolio. If they're a large cap manager, they'll hold a large cap equity ETF.

S2

Speaker 2

22:11

If they're a high yield bond manager, they'll hold a high yield corporate bond ETF. And basically they just use that like sleeve almost if you think about it as a moat around their portfolio. They're picking the bonds they think are going to outperform the most, give them the best whatever characteristics they're looking for. And then rather than holding cash, which is what they did historically, which doesn't give them exposure to the market, it's called cash drag.

S2

Speaker 2

22:31

Actually in the last couple of years it might not have been that bad with the way rates have gone. But essentially, what they do is they want to have exposure to the market, but they know that ETFs are super liquid. So I keep going back, everyone uses this. People across the traditional financial ecosystem are using ETFs in many different ways.

S3

Speaker 3

22:47

Yeah, and I'm looking at kind of a list of different ETFs, and you probably have a better list in your head, but you basically buy any collection, any set of assets in an ETF. So we mentioned the SPY, it's a S&P 500 index, if you want general stock index in the US. There's a NASDAQ.

S3

Speaker 3

23:04

We've got equity precious metals. You can buy a gold ETF. I'm sure you could buy silver. I'm sure there's all sorts of other commodities you can buy.

S2

Speaker 2

23:13

I've

S3

Speaker 3

23:16

seen certainly oil ETFs as well if you want to go down the commodity stack, real estate ETFs of various types. I don't know if it gets as specific as like, let's say I want to bet on the real estate market in California. Maybe that's a bit too specific, but you know, maybe they have something like that actually they

S2

Speaker 2

23:35

do have some stuff they have new bonds that focus on they have muni bonds that hold focus on that so you could bet on the California muni market, but also like basically there are those real estate ones they don't hold in physical real estate they own REITs with the real estate investment trust which have been all over the news lately because public REITs are trading very different from private REITs, but ETS will wrap those things as well and hold them, so give you exposure. So like maybe 1 REIT specializes in like the Southwest United States, So they'll have California, Arizona, whatever. And so if that's what you're after, you could just buy the REIT that's kind of similar to like buying a stock.

S2

Speaker 2

24:07

And these will give you like, here's the US market, or here's a REIT for like multifamily homes or stuff like that. It's becoming sliced and diced in different ways. There are REITs out there that focus specifically on like retail warehouses or data warehouses that hold all these servers. So like they own the real estate and people rent those warehouses to put all their servers in them.

S2

Speaker 2

24:26

And that that has been 1 of the best performing areas of the read market. So like There's ETFs that specifically target that. So yeah, there's ETFs that basically target everything. Do you buy

S3

Speaker 3

24:33

like money markets? Can you just buy like dollars in an ETF or something? Could you buy

S2

Speaker 2

24:37

just- Yeah, there's actually, yeah. So there's some dollar ETFs that like basically they, the way those work though, isn't like they're just holding dollars. There are money market fund ETFs elsewhere.

S2

Speaker 2

24:46

There's money market funds obviously that are ETFs. For the most part, people just use like Treasury ETFs if they're looking for that type of exposure. Because it just holds treasuries, the treasury bills specifically, you can look at T bill ETFs. But yeah, there are some money market ETFs in Canada, just not in the US yet.

S2

Speaker 2

25:04

But again, you get those T-bill type ETFs and they give you a very similar exposure. Otherwise there's ones that basically you can bet on the direction of the US dollar. So it'll go like long US dollar futures and then shorts a basket of other currency futures. So it'll short the Great British Pound, the Japanese Yen, the Euro, Brazilian Real, like you name it.

S2

Speaker 2

25:25

So it'll tell you what it's going long and what it's going short. And that's how you could bet like tactically on where the dollar is going.

S3

Speaker 3

25:32

All right. For crypto natives, crypto listeners, TradFi, you thought of this idea of tokenization before crypto did. This looks

S2

Speaker 2

25:39

a lot

S3

Speaker 3

25:39

like tokenization of different assets, doesn't it? Okay, so this other point that you raised, which is like the thing that's different about ETFs is you can always access the underlying assets. I think that will come into play when we talk a little bit about crypto.

S3

Speaker 3

25:53

Again, we're still building to the crypto conversation, James, but this idea of you can always access the underlying assets. I want to get into the details of that, right? So, for something like stocks, it's weird, it's interesting because when we say the underlying assets, what are we talking about actually? Like pieces of paper, like legal documents somewhere?

S3

Speaker 3

26:12

I want to contrast that from a commodity like gold or like oil, for example, where the underlying asset at the root of it is much more clear. The underlying asset is like a barrel of oil somewhere in a warehouse, you know, you hope at least.

S1

Speaker 1

26:28

So actually, so for oil,

S2

Speaker 2

26:29

you mentioned, I was debating saying this before, but like oil, 1 of the, we like to call some ETFs are like wolves in sheep's clothing because they look like they're simple. There are no ETFs that hold physical oil because you can't really store it, it costs too much money. There's a multitude of reasons.

S2

Speaker 2

26:42

There are some people, like I know some people who are thinking they want to give it a try, but really all the oil

S3

Speaker 3

26:47

ETFs- O'Reilly. Warehouse oil? Actual warehouse oil?

S2

Speaker 2

26:49

Lennon. Yeah, but the only way to really get the oil ETFs work is they invest in futures. They invest in derivatives, which is how a lot of commodity ETFs also work, except for those precious metal ones you were talking about and there are some others. But all

S3

Speaker 3

27:02

right, well, so let's talk about those. So first, let's talk about maybe the precious metal ones. So if I buy a gold ETF of some sort, where is the actual gold bar stored?

S3

Speaker 3

27:14

And can I actually like, Can I actually redeem that for gold? And you said it's always able to access the underlying assets. I want to convert my gold ETF into a physical bar of gold. Am I actually able to do that or are there some intermediaries in between here?

S2

Speaker 2

27:30

Yeah, so this is gonna get in the weeds on market mechanics of ETFs a little bit, so I'll do my best to keep it simple. But essentially, the way to think about it is there are, there's a few people involved in a creation redemption process. So Usually it's what we refer to as a market maker.

S2

Speaker 2

27:47

Think of those as the big trading firms, the Citadels. If people out there have heard of, obviously people have heard of Jane Street, if you're listening to your show, Virtu. Those are, they are big ETF market makers. They're pairing trades and they will access the underlying if they have to make a trade happen or it's more efficient to do it that way than just sourcing the actual shares in the exchange.

S2

Speaker 2

28:06

So I keep saying at any point you can access the underlying market to create or redeem shares. These market makers know that and they know what's more efficient. Is it more efficient to just source the actual ETF shares or is it more efficient to go to the underlying market and make this happen? Sometimes the buy is so big that there's not enough shares to be demand, so you have to go to the underlying market to make it.

S2

Speaker 2

28:23

That might be a little more costly, or it could be more efficient than buying those that many shares in the market. It's the same thing as a big whale comes to a crypto market and buys a ton of Bitcoin, you're going to blow through the price. But if you could theoretically figure out a way to buy Bitcoin more efficiently, that's how you would do it. So but the way this works is those are the market makers.

S2

Speaker 2

28:41

There's also something called an authorized participant, which has been in the grayscale situation as well. And the APs are the people that facilitate that creation. These are the huge banks with massive balance sheets. Think Bank of America, Goldman.

S2

Speaker 2

28:54

There's a whole bunch of APs out there. Merrill Lynch. They'll basically like, they are the people that facilitate that creation of shares and redemption of shares that work with the issuers that own these ETFs. Now, for the most part, it's these market makers and these APs that are making sure that the market is efficient and the underlying, if you need to tap the underlying market, whether it's to create ETF shares or destroy ETF shares, they're the ones doing it.

S2

Speaker 2

29:16

So the market makers are constantly trading every day. They're dealing with the APs. The APs are dealing with the issuers. In some instances, not to get too wonky, the market makers can be an AP as well.

S2

Speaker 2

29:26

But like essentially, it's these people, these institutions that have specific licenses to operate in whatever markets that can operate in those markets and make the creations and redemptions. That said, that's the way most things work because for the most part you need like a hundred thousand shares of the ETF to do a creation or redemption right. So these are big so like if you That was what make like you or I, or actually I don't know, maybe you're a whale, but like if you wanted to buy an ETF, it's these people on the back end that are batching the entire market together to make sure it's operating efficiently. There's very low cost to trade.

S2

Speaker 2

29:57

All of those things, they're making sure that the ETFs are created or destroyed for demand to meet supply. Now that said, there are ETFs out there like OUNZ for gold ETFs. This is a gold ETF and basically the creation and redemptions are way lower at the minimum. So like there is going to be a cost if you owned enough you could get gold delivered to your house But that's like a special exemption that they went through to get to happen But also like most ETFs hold their gold in vaults in London.

S2

Speaker 2

30:26

There is 1 that holds it in Switzerland There is an ETF that used to hold it at the Perth Mint in Australia. So there's like all these different ways you can do it. Everyone has different custodians, but gold is like a unique subset. So some people like the true gold bugs are like, I don't trust anyone to hold my gold.

S2

Speaker 2

30:43

There's a lot of issues where people are worried about paper gold with futures. But for the most part, the gold has to be stored in the vault and every share of the ETF should be backed by physical gold. Now, sometimes the trading is literally like some guy in London goes into the vault for the Spyder GLD and takes gold out and moves it to the vault down the street for some other trading firm or gold trading firm or whatever, what may have you. But to our view, that's gold leaving the trust that we were interested in or the 1 we were looking at and going into a different 1.

S2

Speaker 2

31:16

That's a creation of redemption.

S3

Speaker 3

31:19

Hopefully, they're using a Brinks truck or some security apparatus for that transfer.

S2

Speaker 2

31:24

No, and literally sometimes it's the same building. It's just literally different. It's moving it from 1 vault to another.

S2

Speaker 2

31:31

And

S3

Speaker 3

31:32

if they didn't move it, would we really know?

S2

Speaker 2

31:35

That's an interesting question. There is auditing and stuff. I'd like to think it's better than the auditing we've seen in the crypto space.

S3

Speaker 3

31:43

Well, it couldn't get worse with respect to FTX and the custody. But what's interesting is we have, as with crypto, we have, with the gold example, we have an actual bearer asset, which is when you have it, it's kind of valuable. That's the thing.

S3

Speaker 3

31:58

Possession is the asset itself. It's not like equity. It's not a legal agreement or something like that that's enforced by some sort of legal code. It is actual physical possession.

S3

Speaker 3

32:11

But there's a clean separation of responsibilities in ETFs. You mentioned the APs, you mentioned the market makers. And then a third group, you said, is the custody providers, whether that's somewhere in Perth, in Australia, or that's some vault in London. These are not the same entities.

S3

Speaker 3

32:33

The vault is not, the AP is not the market maker. Generally, there's some clear division of responsibilities. Is that approximately right?

S2

Speaker 2

32:41

That is correct, which is 1 of the things that the SEC is going after Coinbase for in this lawsuit. They want them to break up their brokerage, their custody, all those things into separate legal entities. Cool.

S3

Speaker 3

32:51

You know, I appreciate that Coinbase, or sorry, the SEC is like asking for these things, but it's also not providing a clear way to actually do that, which is This weird scenario we're in. Okay, but so if I own a gold ETF, it's pretty much like, it's pretty rare to own an ETF where I could actually get the gold bar delivered to my house. Maybe there's kind of 1 of those.

S2

Speaker 2

33:14

Well, So for the average person, if you had millions of dollars in there, you could absolutely get the gold, right? Like you could, like it would not be a problem. But like for the average person who's not going to have millions of dollars in this ETF.

S3

Speaker 3

33:25

How do you know with gold? It's so weird though. It's like, let's say I had millions of dollars of gold.

S3

Speaker 3

33:29

Like what, I just show up with my like minivan or something, like loaded

S2

Speaker 2

33:32

in the back. Yeah, so like Canada specifically does, they have ETFs that do this as well. The Canadian Royal Mint has, they're actually, I don't even think they're technically ETFs but they operate like ETFs.

S2

Speaker 2

33:42

Yeah. You can do the same thing, right? You can get it delivered to your house, essentially. I don't know exactly what it looks like, but I imagine basically a Brinks truck would show up.

S2

Speaker 2

33:54

But I'm sure if you're moving enough money, you're not going to have it delivered to your house. But Bitcoin obviously is different because of the way it's transmitted and stored. And we can get into that.

S3

Speaker 3

34:05

And to be clear, who is responsible for approving ETFs? Who's kind of the gatekeeper? Is this somebody in government?

S3

Speaker 3

34:11

Is this always the SEC? It's always the SEC.

S2

Speaker 2

34:13

You have to register. There are different divisions in the SEC that make these decisions on different ETFs. But it's always the SEC.

S2

Speaker 2

34:20

The 1 that we're specifically, these issuers are dealing with right now. And the 1 that has been the traditional holdup is a place called the Division of Markets and Trading. But it's really the SEC and it comes down to Gary Gensler. He's the overarching head.

S2

Speaker 2

34:33

Basically, they do what he says for the most part.

S3

Speaker 3

34:36

So Gary Gensler or the current whatever, whoever the current chair of the SEC is basically emperor king of like, well, you know, giving the this final sign off for an ETF. Is that it?

S2

Speaker 2

34:48

Yeah, pretty much. But the thing is here, like the way that you might have seen, like notice about like some of these Republican senators who are pro crypto trying to change the way the SEC is set up. But basically there's 4 commissioners and then also a chairman.

S2

Speaker 2

35:02

And usually it's 2 Republicans, 2 Democrats. That's the way it works. So then the chairman is the 1 that has like the overriding power because typically it's 2 versus 2. So theoretically, if you were, if somebody was able to swing, which I wrote about in 1 of my notes, 1 of these commissioners, basically that that could change things as well because Gary would be outvoted.

S2

Speaker 2

35:20

But Hester Peirce, which I'm sure anyone listening knows who that is, crypto mom, she has dissented on multiple ETF denials in the past. The most recent dissent came this year, and for the first time the new commissioner joined her in her dissent of the SEC's decision to deny VanEck, and I don't, I think it was VanEck, this most recent 1, but whoever it was, they, they, they wrote a dissent letter, kind of like you would see from like the the supreme court descent from judges that disagree so uh... If they get 1 of those other commissioners to agree with them 1 of those 2 dams against gary then all the sudden this thing is likely to get approved so it's not as cut and dry as like kensler is fully in charge but like 95 percent chance that guns are just the 1 making decisions here because and and you gotta remember he reports to the democratic party right uh... Think elizabeth warren uh...

S2

Speaker 2

36:09

That did There's a lot of jokes about her like getting orders from Elizabeth Warren, but there really is a lot of ties to that side of the Democratic Party in what's going on here.

S3

Speaker 3

36:19

But let's draw that out because shouldn't the ETF process or maybe I'm asking a question of historically how has it been? So who are the issuers of ETFs? Who are filing and asking for the SEC's permission to do this.

S3

Speaker 3

36:33

Is this a small collection of very large companies or is it pretty distributed and diverse? And what's the process? I would assume that we've had a process in place for regulators to be somewhat neutral and to have kind of guidelines and rules, but they can't, I would assume, they can't necessarily pick winners or losers, right? Like I have friends at BlackRock versus like, you know, I hate Goldman or whatever, and I'm going to choose 1 issuer over the other.

S3

Speaker 3

37:03

What's this approval process been like historically for traditional finance?

S2

Speaker 2

37:07

So let's just say that they can do that, and they do do that, and I'll go into why they do that, but they basically can make the decision and back into it legally,

S3

Speaker 3

37:17

But that's not- Wait, wait,

S2

Speaker 2

37:18

wait, wait.

S3

Speaker 3

37:18

They can be biased however they want?

S2

Speaker 2

37:20

Technically, they shouldn't be, but they can, you would have to prove it. And Grayscale's trying to prove that in court right now, right? But for the most part, they have been biased in some of the things that they're doing.

S2

Speaker 2

37:31

And it's definitely coming down from what the Democratic side of the ticket wants to have happen.

S3

Speaker 3

37:37

So it's already been politicized prior to crypto, you would say. Is this like kind of like a secret on the inside? Yeah.

S2

Speaker 2

37:45

So I would say like the Winklevoss twins tried to do this first in

S1

Speaker 1

37:48

2013,

S2

Speaker 2

37:48

right? They were small, they got denied, they tried again, they ended up getting denied again in

S1

Speaker 1

37:52

2018.

S2

Speaker 2

37:53

That was the first time that Hester Peirce dissented on a decision. I would argue that the denial then actually kind of made sense because the way that the Winklevoss application was constructed. We don't need to get into the weeds on that, but it's a lot of different issuers.

S2

Speaker 2

38:06

So I'm looking now, I have

S1

Speaker 1

38:07

40

S2

Speaker 2

38:08

different filings for spot ETFs and 37 different filings for futures ETFs. What do

S3

Speaker 3

38:15

you mean you have them? You're just seeing them

S2

Speaker 2

38:17

in some queue in a database? I just looked at a list. Yeah, I have a list of like, it's literally an Excel spreadsheet of where I track them and I can look at the links and see what the SEC is saying about them and all of the above.

S2

Speaker 2

38:26

I try to track everything that's going on. It's basically, so When I first came to BI, I was covering commodities and we added crypto and I had already owned crypto personally and was interested in it personally and I reported to Mike McGlone, who's our commodities analyst, who covers crypto heavily as a strategist and then I reported to Eric Balchunas, who is my boss, who covers ETFs And eventually I got moved up and I'm specifically in the ETF side. But that experience of my personal experience covering crypto from a strategy side of point of view and having all my ETF knowledge made this like ETF potential fund. Crypto stuff was like my squarely in my wheelhouse.

S2

Speaker 2

39:02

So that's why I was tracking this stuff already on my own and it was made a complete no-brainer to start writing about it.

S3

Speaker 3

39:08

So how many on those lists are crypto related in your queue? Did you say it was like 40 or so?

S2

Speaker 2

39:13

So a lot of them have been denied. There's only 8 that are currently active on the spot side. But if you look at all the filings, you're at, let me see.

S2

Speaker 2

39:24

Yeah, you're at 40 plus 37. You're at 77 total filings and 30 ish issuers.

S3

Speaker 3

39:30

How many how many filings so far if you include the ones that have been denied and are active and these are Bitcoin ETF filings to be clear?

S2

Speaker 2

39:38

Not just Bitcoin. They're crypto the some of them is a future ZTF a couple of them are each spot Which had no shot of ever getting approved, But I guess people figured they'd try. But yes, 77 different filings.

S2

Speaker 2

39:50

And there's some others that you could argue that are kind of like crypto ETS, but they're a little, they might hold a little bit of futures, but they also hold some other stuff. So but yes, 77 different ETS are, have either been approved, denied, or are kind of like in limbo right now waiting to see if they get approved.

S3

Speaker 3

40:09

Well, jumping back to that question about the neutrality of kind of a regulator, like how are they supposed to go through the process of approving an issuer, but and then also contrast that with how it happens practically for requests outside of crypto.

S2

Speaker 2

40:26

Yeah, so the SEC is supposed to be a disclosure regulator. They're not just a merit regulator. So there are some countries that have merit regulators that decide whether an investment has any merit and should be allowed.

S2

Speaker 2

40:38

The SEC's job is to do basically have they disclose all the risks. They're not saying whether or not something is a good or bad investment.

S3

Speaker 3

40:45

And that's stated in the law that's around the formation of the SEC.

S2

Speaker 2

40:50

Yeah, yeah, exactly. So Hester has written dissent saying we're getting dangerously close to being a merit regulator, which is a key term that I think a lot of people don't realize how strong that statement is. But they're really doing a really good job of towing that line.

S2

Speaker 2

41:04

And I would argue they've kind of crossed it, but it's more of a gray zone than a black and white, they're saying this is a bad investment, which is not something they should do.

S3

Speaker 3

41:12

Okay, so they're supposed to be basically a neutral regulator. They're not supposed to make merit-based decisions. What that means effectively is they may personally think that gold is just a shitcoin asset or whatever.

S3

Speaker 3

41:27

It's completely useless. They might hate it, But they cannot have that determination in their rulings. They have to be neutral with respect to what they decide to allow retail ETF investors, not all ETF investors exposure to or not. And that's different than some other regulatory apparatuses outside of the United States.

S3

Speaker 3

41:49

Is that approximately correct?

S2

Speaker 2

41:51

Yeah. So the way to think about it is their job is to prevent fraud, manipulation, anybody getting taken advantage of. That's what they're there to do. They want to make sure that's not happening.

S2

Speaker 2

42:00

And honestly, some of the stuff that they've done that has been questionable has probably saved some people from getting rugged. That's happened in the crypto space. But I would also make the argument that they should have been going after these actors before anything ever happened. But that's a whole different discussion.

S2

Speaker 2

42:14

But the way that the process works. So there's 2 ways that this works. So basically this all goes back to the 1933 Act and the 1940 Act, which are just laws about the US financial markets, securities markets. We don't need to get too in the weeds there.

S3

Speaker 3

42:28

This is where the SEC was formed. There wasn't an SEC previous to this, right?

S2

Speaker 2

42:32

Yeah, yes. So essentially the way that it initially worked was like everyone had to go through this 19B4 process, which is essentially where what we're doing right now with these spot applications. And what that means is there it's exchanges that apply to the SEC for a proposal for a rule change.

S2

Speaker 2

42:52

And at the end of the day the rule change is to be able to list a spot Bitcoin ETF, right? And those are specifically for ETFs that are under the 1933 Act. In 2019, they made this rule called an ETF rule for anything that's under the 1940 Act. 1940 Act thinks things that hold securities that are diversified.

S2

Speaker 2

43:10

There's more requirements on those types of products. They made the rule because before this, everyone had to file a 19B4 to launch an ETF, right? If it was remotely new. Now under the 40 Act, it's just a more simple process.

S2

Speaker 2

43:24

You apply and you have after 75 days, the prospectus or the application to launch a fund goes live and you can start trading it. In those 75 days, the SEC can say, no, no good, you can't launch, and then it's bounced. But it's not the same process of the 19B4 process. Futures ETFs, the first 1 that came out, were launched under that process because the SEC didn't have to, trading a market didn't have to okay anything that happens with those applications because they're 1940 X products because the futures ETFs They hold treasuries and you can argue that holding treasuries and futures is diversified portfolio And therefore they can fit under the 40 Act which is the same reason that all these futures ETFs they actually all got denied in June because they applied and the SEC within a week was like, no, take them back.

S2

Speaker 2

44:07

The 19 before process is the process that we're going to spend most of the time talking about, which is what spot Bitcoin ETFs have to go through. And that process, like I said, is for the proposal of a rule change.

S3

Speaker 3

44:16

Can you define that term, spot Bitcoin ETF? Spot Bitcoin. What's the significance of saying spot Bitcoin versus just Bitcoin ETF?

S2

Speaker 2

44:26

Yeah, so we have Bitcoin futures ETFs, which like a futures ETF, typically the way it works is most of them hold like the front month futures contract. So a futures contract basically means you enter an agreement to either buy or sell Bitcoin at the end of a month on a given date. And you can trade that right to do that or the ability to do that via futures contracts.

S2

Speaker 2

44:46

But the problem with that is that, like I said, it's every month. So right now, if you're holding a front month futures contract for Bitcoin, you're gonna have to sell it towards the end of July and then buy the August contract. And typically, the way these markets work, they work in like where they're in contango. So the July contract is maybe priced here and then the August contract might be priced just a little bit above Sometimes that can get steeper or not, but that means you're selling low and buying high and it eats away at your return So this is constant churning of Holding things of holding these futures can be bad detrimental long-term returns.

S2

Speaker 2

45:17

That said, these Bitcoin futures ETFs that have been in the market have done very well. Historically, if they had launched a few years ago, they would have vastly underperformed the spot market or physical market, as you can also call it. But it's really just the futures market versus the spot market. And the holy grail here would be to have a physically backed spot Bitcoin ETF, meaning that Bitcoin is stored in cold storage somewhere and you have the shares of the ETF are a right to the underlying asset, in this case, spot Bitcoin.

S2

Speaker 2

45:45

Whereas in the futures ETFs that the SEC has approved, you have a right to those futures contracts.

S3

Speaker 3

45:50

So we want spot Bitcoin because it's just a much better user experience, right? I can't imagine if I was purchasing sort of a Bitcoin ETF in my Fidelity account as a retail user and I'm trying to deal with like selling at the end of the month to buy the kind of the next month and just what terrible user experience compare.

S2

Speaker 2

46:08

Let me just buy a cool 1. Yeah, so for the ETF, you don't have, the ETF does that for you. So it does that for you.

S2

Speaker 2

46:11

So you can just hold it.

S3

Speaker 3

46:12

I

S2

Speaker 2

46:12

see. So, but that rolling is the problem, right? And it's not actually holding spot Bitcoin. It's it's paper exposure is derivative exposure Okay, so a lot of people prefer not to handle that so we talked about oil ETFs before sometimes those things can go into massive contango where like the next contract is super expensive or Backwardation which is where the current contract is more expensive than the next 1.

S2

Speaker 2

46:34

So I don't know if some of you guys probably remember when oil went negative in

S1

Speaker 1

46:37

2020.

S2

Speaker 2

46:38

That caused a lot of problem for these oil ETFs. But because like I said, they all hold futures to get their exposure.

S3

Speaker 3

46:45

So if I'm recalling correctly, and you might remember the full history, so correct me if I'm wrong here, James, but I think when Gensler took over, that was when maybe the Bitcoin futures ETF was approved somewhere around there. Am I wrong with that?

S2

Speaker 2

46:58

Yeah. So he was already in charge. He took over after the Ripple lawsuit had been filed. But so that's what most people associate with him.

S2

Speaker 2

47:07

And after Coinbase went, was like approved to go public. But he is the reason that we have futures ETFs. He gave a speech in late July.

S3

Speaker 3

47:16

Gensler was.

S1

Speaker 1

47:17

2021.

S2

Speaker 2

47:18

And this is not verbatim, but he essentially said they had denied all futures ETFs up until this point. And at the end of the speech, he was talking about a little bit of crypto and he said, we look forward to applications for Bitcoin futures ETFs filed under the 1940 Act. That 1 line in like a relatively longish speech and then like everyone filed for a futures Bitcoin ETF.

S2

Speaker 2

47:39

And sure enough, we got 1 approved in November. We also have an

S3

Speaker 3

47:41

ETH 1 too, right?

S2

Speaker 2

47:42

An ETH 1? No, we don't have any ETH ETFs. We don't, okay.

S2

Speaker 2

47:45

Yeah, so they've applied, but they haven't been approved. So the SEC will not approve Ethereum futures ETFs. Largely, Genzo, the 1 thing he will admit is a security, is not a security, is Bitcoin. And he won't say the same now for Ethereum, which has been covered extensively.

S2

Speaker 2

48:00

So I don't think he's going to allow those things anytime soon. But because of that statement and because of us talking to the people is why in September or October of 2021, why we were so bullish on the fact that we were going to get a launch. And we actually were very different from a lot of our counterparts at the trad5 space saying that this launch was going to happen. And most people were just banking on history and what the SEC has typically done and saying no shot that this thing gets approved.

S2

Speaker 2

48:28

And that's where we made a name for ourself, I guess, honestly, on that front.

S3

Speaker 3

48:34

So why is Gensler in favor of kind of the futures Bitcoin ETF style and not the spot Bitcoin ETF? So I can tell you his argument. What's the difference?

S3

Speaker 3

48:44

OK.

S2

Speaker 2

48:44

Yeah, his argument is it's their CME futures. So they are covered by the CFTC. It's a regulated market.

S2

Speaker 2

48:52

There is not going to be any manipulation of those futures contracts. That's what they would say. But the real fact of the matter is the pricing of the futures markets are dictated by something called the Bitcoin reference rate. And the Bitcoin reference rate is based off of a bunch of spot markets, including Coinbase, Kraken, and a few other, Gemini, some others.

S2

Speaker 2

49:09

So it's literally the price of those futures contracts determined by an aggregate of the spot market value of Bitcoin.

S3

Speaker 3

49:17

Okay, well, Gary's a smart guy. I mean, he surely knows what you just said, right? So that's what he said.

S3

Speaker 3

49:23

What do you think the real reason is? Do you care to speculate?

S2

Speaker 2

49:26

I don't know why he, I think the problem is they couldn't deny, they realized they were gonna run into issues with the fact that the CFTC had approved these things and let them list. They are not making an argument that Bitcoin is security and basically saying that you can't launch these ETFs. First of all, like I said, It goes under a different process.

S2

Speaker 2

49:45

So it didn't go through division of trading and markets. So these things kind of got a little bit of a green light because they didn't have to go through the same process, the 19B4. So yeah, Gensler kind of gave that to the crypto community. And it's what's biting him now.

S2

Speaker 2

50:00

So ironically, there were other ETFs that were filed before Gensler made that speech. And this 19 before process takes 240 days. Basically you file, the SEC can bounce it back to you for changes, and then you can refile. But essentially it starts a clock, and the clock goes 45 days, and you have to approve, delay, deny, 45 days, 90 days, and then at the end of 60 days after that you either have to approve or deny.

S2

Speaker 2

50:22

There is no more delaying. And there was an application from a company that is a commodity CTF provider, Tucrium, that had filed before Gensler gave that speech for a 33 Act 1 that goes through this 19B4 process. And I wrote about this 6 months before it happened, but I said, this is putting the SEC in an absurd place to be. Like they approved these futures ETFs under the 40 Act.

S2

Speaker 2

50:43

And now we have 33 Act applications that are fundamentally very, there's very little difference between the 2 of them. And the SEC is going to have to decide how hard they're going to stay on this 19B4 process in approving them versus not approving them. And what they did is they approved this ETF and the argument they made. So 1 of the reasons why all ETFs have been denied is because there is no surveillance of an underlying market.

S2

Speaker 2

51:06

And they specifically say they want surveillance share agreements or they want a regulated spot market of significant size. And the 2 keywords there are regulated market and significant size. And the way that they got around those, this is where I said they can kind of back into what they want. The way they got around those requirements for the CME futures market, because if you talk to somebody in crypto, they would tell you there's billions of dollars trading in futures markets in Europe and on these exchanges and what have you, but specifically regulated futures markets, the SEC basically said that it was a regulated market of significant size with respect to itself.

S2

Speaker 2

51:41

So the CME futures market is a regulated market of significant size because it's a market of significant size, because the entire market they were looking at was nothing but the CME futures market. So they can kind of back into whatever reasoning, that's what I kind of hinted at before. So that's a good example of what the SEC will do just to make sure they can do things the way that they want to. And that in that application, they spent pages upon pages explaining why they were going to prove that futures ETF and still not allow spot ETFs.

S2

Speaker 2

52:11

And then a couple of months later, we got the grayscale denial, which we also fully expected and Grayscale has sued and now that's where we are.

S3

Speaker 3

52:19

Guys, I think we're going to get to the crypto part of this conversation all in on whether we're going to get a Bitcoin ETF anytime soon. I've got a lot more questions for James, but before we do, I want to thank the sponsors that made this episode possible including Metamask and their portfolio application. If you haven't looked at your Metamask portfolio go check out your crypto wallet right now download Metamask and load it up.

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52:43

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S3

Speaker 3

55:12

Okay, you mentioned that the SEC can basically back into whatever they want. And it seems like they're having trouble maybe keeping their story straight with all the different things they've said and actions they've taken. Is there a real reason that the SEC and Gensler is not just approving a Bitcoin ETF, okay, surveillance, all of this type of thing.

S3

Speaker 3

55:35

Is it? I mean, crypto will just tell you. I mean, there's definitely a lot of conspiracy theories here, of course. But the simple explanation seems to be Gary Gensler and some political body within the government does not want to propagate crypto any further.

S3

Speaker 3

55:54

And so they're just trying to hold the line for as long as possible and delay things for as long as possible because they don't like crypto. Is it as simple as that, James? Or have you seen anything in your journey here to bring up kind of an alternative explanation for all of this?

S2

Speaker 2

56:15

I would say that's a huge part of it. But you also like, part of it, the other side of that is 1, that sounds very wrong, but at the same time, like, look what's happened with FTX. Look what's happened with Celsius.

S2

Speaker 2

56:26

I mean, those are the ones that seem to be ones that committed really bad acts. Then you have Prime Trust also. And then you have the companies that went down with them, whether or not they committed bad acts in BlockFi and Voyager. I mean, we can name all of them, right?

S2

Speaker 2

56:39

And this kind of gives credence to the SEC's argument as far as I'm concerned, right? There is some definitive reason. Well, Dustin, let me ask

S3

Speaker 3

56:44

you this, though. But like, if they, to your point earlier, I think you made this point that if we do get an ETF, it'll clean things up, right? I mean, like the reason that people had to trust an FTX or felt like they did, wanted to trust a Celsius or something else is because our regulator, our gatekeeper, wouldn't go through the process of approving a regular spot Bitcoin ETF.

S3

Speaker 3

57:10

Do you think that argument has any merits? I mean, crypto people don't want to get ripped off either. So how about the regulators create some alternatives rather than just setting up blockers all the time? Do you lend any credibility to that argument?

S2

Speaker 2

57:25

Lennon I lend a lot of credibility to that argument. So I find that when I'm on TradFi type, we'll say podcast, but it's really anything, if it's a client call, I find that I talk about that side a lot more than the side I spoke about earlier because they focus on that side. So basically the whole thing is like there's 2 sides of the coin here, but I agree with everything you said.

S2

Speaker 2

57:47

The problem is that also I would say some of the, some of it wasn't people had never bought DTF because they were chasing Celsius and those other actors because they were promising like whatever unimaginable returns and people, um, didn't do their research and understand how it was actually working.

S3

Speaker 3

58:01

It feels like the Spider-Man meme of all the Spider-Men, like, just pointing at each other and blaming each other here. All right. So something new, it feels like, has happened this year, but I want you to tell us if there really is anything new here.

S3

Speaker 3

58:13

Of course, you said there were 77 different applications for Bitcoin ETFs, or crypto ETFs, over the years. But this year, some new participants have thrown their hat in the ring, 1 of which is BlackRock. It was very interesting earlier this week as well. We had Larry Fink doing kind of the, that's the BlackRock CEO, doing kind of a mainstream media tour and talking good things about Bitcoin and about crypto in general, which is very interesting because 6 years earlier, He had called it, I think, the direct quote as an index.

S3

Speaker 3

58:48

Bitcoin is an index for money laundering. So definitely a change, maybe some education that happened, maybe he changed his mind, maybe he has a product to sell. I don't know. Believe what you want to about that.

S3

Speaker 3

59:00

But BlackRock entering a $9 trillion asset manager, the largest in the world, is that different? There's also a stat here where they've done over 500 different ETF applications and they only missed once. So they don't often miss once they file applications, so that feels new. Is there something new here, or is this more of the same?

S2

Speaker 2

59:24

So, 1, when we basically, CoinDesk broke the news that they were going to file, and we saw it, And me and Eric and other people on the team were like, whoa, and the industry were like, can this be true? Sure enough, a few hours later, we got the filing hit and my eyes were wide open.

S3

Speaker 3

59:40

You were not expecting this.

S2

Speaker 2

59:42

So let me explain what we were expecting. So like, 1, BlackRock is the only new entrant. Everybody else has already tried this this year.

S2

Speaker 2

59:48

So the only new entrance to the space to try and launch 1 of these is BlackRock.

S3

Speaker 3

59:52

Like even Fidelity. They had tried previously.

S2

Speaker 2

59:54

Yes. Yes. Multiple times. OK.

S2

Speaker 2

59:57

So there's been multiple people that everyone else who's doing this has already done it in the past aside from BlackRock. That said, we always expected BlackRock, no matter at 1 point, they were going to launch a Bitcoin ETF, particularly after they partnered with Coinbase last year for different things. They used Coinbase for their institutional clients. They used them for pricing into their Aladdin, some technology that BlackRock sells, which we don't get into.

S2

Speaker 2

01:00:21

But they've had a partnership with Coinbase. We knew they weren't shying away. But BlackRock is so big. They have so much distribution.

S2

Speaker 2

01:00:27

They have so much marketing power. We didn't think they were going to waste time just fighting with the SEC to get this thing launched. We figured it would get approved and then BlackRock could file and they were they would be ready to go. So this caught us by surprise.

S2

Speaker 2

01:00:38

Not that BlackRock filed at all, but that they were filing to fight with the SEC to get this thing out the door for you.

S3

Speaker 3

01:00:43

You just thought they'd be a fast follow after somebody else gets it approved, then of course, BlackRock's going to throw their hat in the ring. But like, why be macheting your way through the jungle and be kind of a lead here?

S2

Speaker 2

01:00:55

Yeah, exactly. And honestly, you mentioned that Fink interview. That was like way stronger than I expected him to.

S2

Speaker 2

01:01:01

Like we always, so 1 thing we also knew, once they filed this, we knew Larry signed off on this. Larry's 1 of the biggest figures in traditional finance. And we knew that if BlackRock filed this, they knew they were gonna start a race. They knew they were gonna, if they filed, that everyone else was going to file after them because it's just the way things have worked historically.

S2

Speaker 2

01:01:21

The key difference here with what BlackRock offered in their filing is they said they were entering into a surveillance sharing agreement with a spot Bitcoin ET trading provider. We guessed at the time that it was Coinbase. Subsequently, we learned it was definitively Coinbase after the SEC made them name it before they could fully file. So that's the big difference.

S2

Speaker 2

01:01:41

They entered into a surveillance sharing agreement. I mentioned those earlier. That's what the SEC has said when they denied all of these. They want a surveillance sharing agreement with a regulated market of significant size.

S2

Speaker 2

01:01:51

A lot of people initially said, no way, Coinbase is not a market of significant size. I've written notes that debate the opposite because it is the largest Bitcoin trading pair with U.S. Dollars. They are the largest U.S.

S2

Speaker 2

01:02:02

Exchange. They are the largest exchange that accepts US dollars as an on-ramp. So in our mind, it is a market of significant size. The biggest market is obviously Binance.

S2

Speaker 2

01:02:12

But Binance, all that is done on stable coins like Tether and TrueUSD and things that the government really doesn't like as it is anyway. So I think it is a market of significant size. And then everyone else jumped on board to try and get this. Now, 1 thing I said that I want to correct is I said BlackRock filed.

S2

Speaker 2

01:02:29

Technically these 19B4 filings are filings from the exchanges that they're partnered with. So in this case, it was NASDAQ that filed this in partnership with BlackRock, but it's a NASDAQ application. And then we have other, NYSE, New York Stock Exchange, and CBOE has partnered with other issuers to also file them.

S3

Speaker 3

01:02:47

Well, that seems to lend a bit more credibility to I don't know how this works, but when you say Nasdaq plus BlackRock is filing rather than just, you know, BlackRock, that's very interesting or Nasdaq on their behalf. But is this also with the comments this week from Larry Fink, is this also a signal from BlackRock? Are they trying to broadcast something?

S3

Speaker 3

01:03:10

Are they trying to say, hold on, US regulators, you've gone a little bit too far. We actually want to lean into this asset class. And if you're not going to let us do it in the US, then we're going to fall behind all of the other jurisdictions. Is this a kind of a coordinated pushback?

S3

Speaker 3

01:03:28

Is there a signal? Or should we, Should I not read that into what the messages that are going on here?

S2

Speaker 2

01:03:33

So I would say that that's putting your tinfoil hat on a little bit. That might be the case. Honestly, we also thought that it's because of BlackRock.

S2

Speaker 2

01:03:40

Let's be clear. BlackRock is the gorilla in the room, right? BlackRock is 31, 33 percent of U.S. ETF assets.

S2

Speaker 2

01:03:46

Vanguard is 28 percent. And then everybody else is nowhere close. Right. So it's BlackRock and Vanguard.

S2

Speaker 2

01:03:51

Vanguard is never will never fall for a Bitcoin ETF. If I had to guess maybe very far down the line. But why are

S3

Speaker 3

01:03:57

we just they're more conservative.

S2

Speaker 2

01:03:59

It's not they don't have a gold ETF. It's not something they believe in. It's not something they do.

S2

Speaker 2

01:04:04

They're low cost index equity and bonds. That's what they do. Right. Like that's what they specialize in.

S2

Speaker 2

01:04:11

They don't even have a gold ETF. Jack Bouldal didn't believe John Bouldal didn't believe in investing in gold to be. And he hated crypto or Bitcoin, but he's not there anymore. They've changed a lot of things that he didn't like.

S2

Speaker 2

01:04:21

He also didn't like ETFs. I thought they promoted to he thought they promoted too much trading. He much preferred the old mutual fund index fund cheap. Yeah.

S2

Speaker 2

01:04:30

Honolulu G

S3

Speaker 3

01:04:31

for stock.

S2

Speaker 2

01:04:32

Yeah, he was. Yeah, exactly. Eric Belchunas, my boss, has written a note that basically says like, DeFi people can learn a thing from Jack Bogle.

S2

Speaker 2

01:04:40

It's called

S3

Speaker 3

01:04:41

Patience, crypto natives. You learn that.

S2

Speaker 2

01:04:44

Yeah. I forgot where I was going with that.

S4

Speaker 4

01:04:46

Well, let

S3

Speaker 3

01:04:47

me just ask you, so BlackRock filing, is that just slam dunk, like it's going to happen now, or is that not the case? Because I was giving you that track record, which you know, I think maybe I probably read it from a tweet that you put out,

S2

Speaker 2

01:05:01

which is like, they've only missed once out of

S1

Speaker 1

01:05:03

500.

S2

Speaker 2

01:05:04

Yeah, it's 5, we've said 575, I think the technical number is 546, upon like super close inspection that we could find, but we could be missing some. But either way, it's over 500, they've only lost 1. And that 1 that they lost, it was for something called a non-transparent active ETF, or we call them ANTs, active non-transparent.

S2

Speaker 2

01:05:22

And it's just a structure that doesn't have the same, like, most ETFs are fully transparent. So you can see what's in the ETF every single day. When it's trading, you know exactly how much of each stock or bond or whatever. And this is like where it's kind of hidden a little bit so people can't front run you.

S2

Speaker 2

01:05:35

And that was in 2014. And they approved these things in

S1

Speaker 1

01:05:37

2018,

S2

Speaker 2

01:05:38

I think, 2019, something like that. It ultimately did get approved. They were just early.

S2

Speaker 2

01:05:45

So that's a good sign. The other point is like, if you look at BIDO, which is the first futures Bitcoin ETF in the US, that thing got 1 and a half billion dollars in 2 days. That has

S1

Speaker 1

01:05:54

96%

S2

Speaker 2

01:05:57

of the Bitcoin futures ETF assets and 99, I don't know what the numbers are but it's like night over it's in the 90s

S3

Speaker 3

01:06:03

It's the 1 billion

S1

Speaker 1

01:06:05

1

S3

Speaker 3

01:06:05

billion in 2 days. Is that good?

S2

Speaker 2

01:06:07

1 in it's that was the best launch ever if it's so the previous record was GLD the gold ETF in

S1

Speaker 1

01:06:12

2004

S2

Speaker 2

01:06:13

which hit over a billion in 3 days, which let's be clear a billion dollars in 2004 is worth a lot more than a billion dollars in 2021. But that's the way we kind of look at it. Okay.

S2

Speaker 2

01:06:24

Yeah. But even still Biddle would have beat it because they went to 1.5 after 2 days. So it wasn't like they just cracked the $1 billion mark. So, but the problem is like they're a first mover advantage, right?

S2

Speaker 2

01:06:34

So if BlackRock thinks they could possibly be first and get that type of exposure and charge relatively high fees compared to what they're used to charging, the odds don't have to be very high for them to take that swing. If the benefit was not that high, maybe they wouldn't have taken this risk. But I think that this is me playing devil's advocate a bit. They don't have to, even if they think the odds are 10% or 20%, they could be out first.

S2

Speaker 2

01:07:00

The benefit of getting what they think may be

S1

Speaker 1

01:07:02

$2

S2

Speaker 2

01:07:02

billion in a week or $10 billion in a year and charging

S1

Speaker 1

01:07:06

50, 60, 70

S2

Speaker 2

01:07:08

basis points on that is very strong even for BlackRock, despite the amount of assets they have. That's a lot of margin that they can get. So like the benefit of being first and doing that is pretty strong.

S2

Speaker 2

01:07:21

So and the downsides are, yeah, so what, they have another loss on their record and they piss off some people at the SEC. Like there's very little downside in my eyes. But that said, BlackRock is not in the game of filing things willy-nilly, just throwing spaghetti at the wall. This is not a company that's going to do that.

S2

Speaker 2

01:07:36

This is not a company that's just going to jump into this without doing their due diligence. And they also have very close ties with the government. They've helped the government do different exchanges. The Fed do different things with buying programs.

S2

Speaker 2

01:07:50

There's a lot of I don't want to say It's not a revolving door, but it kind of is. There's a lot of people that are at BlackRock who are at the SEC and vice versa. There's a closer relationship there. There's a closer relationship there.

S3

Speaker 3

01:08:02

There has to be some political pressure building on the SEC to kind of do something. And this is why I'm just like totally speculating, but it feels like it's never been closer, even though the SEC is, you know, in 2023 especially, been very anti-crypto. This feels pretty big.

S3

Speaker 3

01:08:20

But you do think still, James, there is a possibility. There's always a possibility, but it's not a remote possibility that Gary and the SEC could still deny BlackRock that's still on the menu, right?

S1

Speaker 1

01:08:33

Yeah, let's be, I'll be very blunt. If you look at all the things that they have said and written over

S2

Speaker 2

01:08:37

the last 3 years, this will be denied. Really? But there's a lot of circumstantial evidence that suggests that It will be approved.

S2

Speaker 2

01:08:46

It goes back to what I said. They can back into whatever decision they want to

S3

Speaker 3

01:08:50

Okay Few things there James. I want to be clear. So you think that If you look at the history like the history over the last 3 years and what they've kind of you know said then it looks like it's a denial.

S3

Speaker 3

01:09:03

Yet, when you look at the circumstantial evidence, you think that it's maybe pointing to an approval.

S2

Speaker 2

01:09:09

Yep, exactly. So like, BlackRock jumping in, we think Grayscale is gonna win their lawsuit. So Grayscale's lawsuit is hinging.

S2

Speaker 2

01:09:16

It's called an Administrative Procedures Act. If you are in the US and you heard about like some overturning of the EPA, saying they overreached their bounds and stuff that the Supreme Court has done, the Administrative Procedures Act basically says like, you overstepped your power or you didn't treat like situations alike. And that's what this 1 is. And Grayscale's whole basis is like, you can't approve futures ETFs and then not approve spot ETFs because the futures market and the spot market are completely intertwined, which is an argument that everyone has been making since the futures ETFs were approved.

S2

Speaker 2

01:09:43

But the SEC has Basically said, there's still no way to detect fraud and manipulation in the underlying spot market, which again is a kind of an overreach from anything they've done for other commodity ETFs. Like, if that was the case, then we shouldn't have oil ETFs because OPEC is completely manipulating that market, right? Like, so You can push arguments and push buttons in any different way that you want. But yeah, so there's a lot of circumstantial things.

S2

Speaker 2

01:10:06

But we think the SEC is going to lose that lawsuit to Grayscale. And what that means is the judges will almost certainly say, look, you can't deny for the reasons you gave. Go back to the drawing board. And either the SEC is going to have to approve Grayscale's application that they're suing over, which is to convert GBTC to an ETF, or they're going to have to deny for other or those same reasons and additional reasons on top of it that make it so that the situations are not like for like.

S3

Speaker 3

01:10:33

So there's pressure building from multiple angles here. Not only do you have like, you know, Larry Fink and you BlackRock in kind of the 77 previous application of crypto ETFs, you also have this Grayscale lawsuit. And what's the timeline around the grayscale lawsuit?

S3

Speaker 3

01:10:50

When would the court have to make a decision by?

S2

Speaker 2

01:10:53

Yeah. So the decision needs to be done and it doesn't have to be done. So the courts kind of like roll through things, right? But our litigation analyst Elliot Stein who I work with expected it by the end of before the end of the third quarter So that's before the end of September So in the next couple months here, we're expecting it this year.

S2

Speaker 2

01:11:13

Wow, really the 1 But the 1 thing I would say to caveat everything we just said on the circumstantial evidence is there's hard evidence that the SEC is suing Coinbase and they're the people that are going to be the custodian for this BlackRock ETF. They are going to be the surveillance sharing agreement partner. And what they're doing is obviously

S3

Speaker 3

01:11:32

they're suing Coinbase over other things, not Bitcoin.

S2

Speaker 2

01:11:34

Exactly. That's the key point here, right? The SEC is Bitcoin is 1 thing that Gary Wold admitted is a commodity. It's not a security.

S2

Speaker 2

01:11:41

He's suing Coinbase and Binance. Binance for very different things. They're accusing Binance of fraud, manipulative practices, wash trading, spoofing, all the things you can name it. They're accusing Binance of it.

S2

Speaker 2

01:11:51

They're not accusing Coinbase of that. They're saying they're basically an unregistered securities broker because they're trading securities on their platform.

S3

Speaker 3

01:11:59

So does all of

S2

Speaker 2

01:11:59

this- But they're focused on different securities. So that in my mind, if Gary and the SEC are going to back down anywhere and give like bend a little bit on this front, it'll be on the Bitcoin side.

S3

Speaker 3

01:12:10

That's what it's felt like to me. But of course, you know better. But So are you over under on a spot Bitcoin ETF by the end of

S1

Speaker 1

01:12:19

2023?

S2

Speaker 2

01:12:21

So this goes back. So now we got to get into the detail. That's something we didn't talk about.

S2

Speaker 2

01:12:26

When BlackRock filed, there was, so I talked about 19 before process, right? So you submit the application, the exchange sends it to the SEC, and the SEC has some time period before they have to accept it and acknowledge it, or they send it back, and they basically say, you didn't do this. With BlackRock, that's what they did with all the CBOE filings, VanEck, Bitwise, NYSE, You name it, Invesco and Galaxy, Wisdom Tree. They sent them all back and said, you can't submit this with the surveillance sharing agreement without telling us who it is and giving us more information.

S3

Speaker 3

01:12:54

This happened recently, wasn't this?

S2

Speaker 2

01:12:55

Didn't this happen last week? Yes, yeah. This was a Wall Street Journal article.

S2

Speaker 2

01:12:58

And which was not surprising. The SEC was never going to approve these things because these filings said they were going to enter into an SSA. So it wasn't surprising that they shot them back. But the key difference here is that 21 shares, which is an ETF issuer in Europe, they have the most crypto ETFs launched in Europe based in Switzerland, but they partnered with ARK, which is a big ETF issuer here in the US, to launch an ETF.

S2

Speaker 2

01:13:22

They were denied recently. This is ARK? This is Kathy Wood's ARK? Kathy Wood.

S2

Speaker 2

01:13:26

She's partnered with Kathy Wood. So Kathy Wood has been on the board for 21 shares. We actually just did a podcast yesterday, 2 days ago, with the president of 21 shares, if anyone's interested. So she gave us some insight into what they're seeing on their end.

S2

Speaker 2

01:13:41

But that's on the Trillions podcast. Sorry to promote something. No, no, no. We'll include that in

S3

Speaker 3

01:13:46

the show notes. So Trillions podcast. Okay.

S2

Speaker 2

01:13:50

Yeah, that's Belts Unis' podcast. So they filed, so they were denied. Them and VanEck were denied, and then the SEC, I told you, issued those dissent letters.

S2

Speaker 2

01:14:01

But after they were denied, ARC and 21Shares got right back on the horse and applied again. I'm pretty sure it was So they basically applied not too long after we heard the oral arguments in the Grayscale case. And that's when we got We were like, after hearing the judge's conversation with the Grayscale lawyers and the SEC lawyers, we were confident that Grayscale had a legitimate shot to win the case. Not guaranteed, obviously.

S2

Speaker 2

01:14:22

We, my litigation analysts put it at like a 70% odds of Grayscale winning. And we talked about what that means really, but they filed. So I think they filed because of that, right? And they wanted to have an application outstanding with the SEC.

S2

Speaker 2

01:14:34

So they've submitted that on April 25th. And then the SEC acknowledged it on May 9th. So the only application that's active in that 19B4 process where I talk about that 45-day, 45-day, 90, 60-day process, The only ETF that was active or the application that was active was ARK21 Shares in partnership with CBOE. So then BlackRock dropped this application on June 15th.

S2

Speaker 2

01:14:56

CBOE and a bunch of issuers in NYSE and Bitwise filed suit And they were bounced back by the SEC. And then the first 1 we saw was ARK21 shares submitted an amendment. So basically their clock has already started. So we have a date, we have dates on when we know the SEC needs to issue a response, delay, deny, approve for ARK21 shares.

S2

Speaker 2

01:15:15

All the other ones were sent back and bounced back to the issuers and the exchanges, and they had to refile. The SEC hasn't acknowledged those, and basically acknowledged means they post it to the Federal Register, but like it's essentially the SEC says we got these and they post them to their website and then we get dates of when these things are going to happen. But the only ETF that we know exactly what those dates are right now is ARK21 shares. And the next, the interesting thing is the SEC on June 15th came out and issued ARK and 21 shares a delay.

S2

Speaker 2

01:15:43

But the deadline was until June 29th. So the SEC was required to respond with a delay, deny, approve by June 29th. And they delayed on June 15th, the day that BlackRock and Nasdaq filed their application. The next date is August 13th.

S2

Speaker 2

01:15:57

Now again, the SEC, that's a deadline that can go before that. But at the end of that 240 day time period is January 10th of 2024. So we will have an answer by January 10th, 2024 at the very least.

S3

Speaker 3

01:16:09

No way. And OK, so this would be basically like the 21 shares, the ARK 1 that you mentioned. That's kind of the leader, right?

S3

Speaker 3

01:16:17

That's the first 1. And like the way it would be very difficult for the SEC to deny this 1 and then like approve some of the others in queue, right? So is that why you're thinking that this January 10 2024 date is kind of the last and final cannot be delayed any longer date on which this entire crop of ETFs in this season, in this cycle, given this political climate, will either be approved or denied.

S2

Speaker 2

01:16:42

Yeah. So let's be very clear. The Hukouri has also followed Nasdaq. So they also, Nasdaq is the other 1, they're further along in their agreement with Coinbase.

S2

Speaker 2

01:16:49

We don't know exactly where it is, but there's different language. So in the first filings, we saw expecting to enter into a surveillance sharing agreement, right? Expecting. So the CBOE still said that in their amendments and they named Coinbase, But the BlackRock ones said they executed a term sheet to enter into surveillance.

S2

Speaker 2

01:17:05

So there's like, I don't know exactly what all these mean from a legal perspective. CBOE says their term sheet is already ready to go too. But essentially BlackRock and NASDAQ, well specifically Nasdaq is further along than CBOE and NYSE. So they have gotten further along in the process.

S2

Speaker 2

01:17:21

So if for some reason, which I can't, I don't think this is going to happen, that like CBOE can't enter into an SSA with Coinbase, that's the 1 thing that differentiates BlackRock and Nasdaq's application. Then maybe they could deny ARK21 shares and approve BlackRock, but that would be absolutely shocking to me. But also what the SEC could do is they could approve, like I said, there's all those deadlines, but the SEC can make a decision whenever they want, right? They just have to have a decision before those deadlines.

S2

Speaker 2

01:17:48

For example, they went 14 days on ARK and delayed it. Initially I thought that the first deadline, so August 13th, with the surveillance sharing agreement information, if they delay there, then it's probably just going to get denied. The more I look at it, the more I talk to people, this is going to require a long conversation. This is this whole process is going to be a back and forth between these issuers, the exchanges and the SEC.

S2

Speaker 2

01:18:08

So I would say now that if they do delay at the first instance of the BlackRock and all these other applications and ARK21 shares in August, I expect BlackRock's deadline to be I'll tell you right now, I'm estimating because it depends when, like I said, the SEC doesn't always acknowledge them on the same timeframe, but it'd be like the first week of September that we would get a delay, deny, approve on the BlackRock and other ones.

S3

Speaker 3

01:18:32

Got it. So this is all kind of coming to a head over the next few months. And this also matches the January 10th might be a date at least for the 21 shares ARK 1

S1

Speaker 1

01:18:43

2024.

S3

Speaker 3

01:18:45

But this also is interesting timing with the Grayscale case, which you said a decision could be made, you don't know when, but September is a possibility here. So all of these dates are kind of narrowing in. By the way, just a quick side quest on the Grayscale thing, GBDC.

S3

Speaker 3

01:19:01

That was, I think, a cause or folks in crypto have said that not having an ETF and being reliant on GBTC caused a whole cascade of shitty things to happen in 2024. We had 3 hours capital insolvency, which let this...

S2

Speaker 2

01:19:23

Yeah, I have strong views here. Give me your

S3

Speaker 3

01:19:26

strong views. Okay? Because there's a crypto narrative around something that people want to blame the GPDC and the SEC not approving an ETF, and others will say, well, that had nothing to do with it.

S3

Speaker 3

01:19:40

What's your take, James?

S2

Speaker 2

01:19:42

It did have something to do with it. A lot of these applications have said, including Grayscale and their applications to approve, it's like, this product is broken, retail, The SEC's goal is to protect investors, right? And this product is broken.

S2

Speaker 2

01:19:53

A lot of retail investors got hurt or have been hurt by the huge discount. And 1 of the arguments has historically been, Look at what we have in the market now. There's already things out there. People are using micro strategy to get exposure.

S2

Speaker 2

01:20:05

Like an ETF is a proven wrapper that we know will work.

S3

Speaker 3

01:20:07

That's so crazy to me, by the way, that we have to use micro strategy and Michael Saylor as a proxy to getting Bitcoin exposure in a public. That's crazy.

S2

Speaker 2

01:20:17

Yes, it's. But the SEC has come back and said they don't take that into consideration and look, they're trading as a markets way that they're looking at things. Right.

S2

Speaker 2

01:20:24

They just basically said they don't care about that. That's not something they're worried about. They acknowledge the situation. The flip side of this, which I do agree with all this thing said, is we might not have found out the shit that 3AC and FTX were doing without this entire blow up.

S3

Speaker 3

01:20:38

It could have gone on longer.

S2

Speaker 2

01:20:40

Exactly. If the SEC had approved these things, we might not have caught all this fraud, blatant fraud that happened. Or I guess I shouldn't say blatant because it hasn't been proven yet But it's it's likely to be pretty pretty blatant

S3

Speaker 3

01:20:51

in the FTF.

S2

Speaker 2

01:20:51

Yeah FTX is case FTX's case But I mean you look at 3ac which arguably triggered like what's like they were also triggered by the Luna stuff So it was all kind of related Genesis is having issues because of this. BlockFi was heavily invested in the GBTC stuff. It doesn't look like BlockFi necessarily committed fraud.

S3

Speaker 3

01:21:12

You're saying you're like, well, the ETF, not approving the ETF is to blame here. But like, consider yourself blessed, crypto market. This needed to happen.

S3

Speaker 3

01:21:21

This is a cancer that needed to be cut out at this point in time. It would have just consumed the entire body if we had another 3 to 5 years for this malignant tumor to kind of grow. And it would have been far worse.

S2

Speaker 2

01:21:35

To continue issuing leverage and doing things that they shouldn't be doing. Can you imagine? Yeah.

S2

Speaker 2

01:21:39

So I tweeted this the other day and made the argument that like, you know, like this might have been like 1 of the best things the SEC could have done for the long-term health of the crypto and Bitcoin market specifically. Because they didn't allow people to get out of it. Basically, it comes down to the fact that people couldn't access the underlying value of the Bitcoin in GBTC, which you can do in ETF. So because they couldn't access the underlying value of Bitcoin, they couldn't cover up all the other shit they were doing.

S3

Speaker 3

01:22:04

I didn't expect to come near to the end of this episode and say, thanks, Gary. But maybe that's part of the conclusion here. Just a couple other points before we depart on this issue.

S3

Speaker 3

01:22:17

So 1 is that Bitcoin ETF spot Bitcoin ETFs are already outside of the US. This is already happening in other jurisdictions. Is that correct?

S2

Speaker 2

01:22:27

Yes, there are Canadian spot Bitcoin ETFs as of

S1

Speaker 1

01:22:32

2021, 2022,

S2

Speaker 2

01:22:34

early. I don't even remember

S1

Speaker 1

01:22:35

2021, 2022.

S2

Speaker 2

01:22:37

I don't remember the exact date. Even long before that, they were available in Europe. They're not technically ETFs in Europe.

S2

Speaker 2

01:22:43

They're what's called ETCs, but functionally, they're ETFs. They're spot-backed, physically backed Bitcoin ETFs. And they have plenty of other crypto ETFs. They have some stuff.

S2

Speaker 2

01:22:51

I mean, they had an FTX ETF in Europe, so a BNB ETF in Europe. They have a lot of

S3

Speaker 3

01:22:58

things that the

S2

Speaker 2

01:22:58

US is very far away from ever getting to. So do with that information what you will. But yeah, and the other thing is, I want to say is like, they've been around, they were around for all this crazy stuff that happened, and they handled everything perfectly.

S2

Speaker 2

01:23:12

There was no issues, no issues with accessing the underlying asset. There was no issues with Bitcoin just not being on the wallets that you expected it to be. And it traded very smoothly, it traded very tight. It was about as efficient or as good as you could hope that it would be.

S2

Speaker 2

01:23:30

And it should be used as an example of what we can do here in the US. And I know for a fact what the SEC will say, because they've said in the past is we're the oldest, most trusted financial market, so we're going to have more requirements and blah, blah, blah. But if you look to other markets, these things have handled. Even Brazil, Brazil has bought Bitcoin ETFs from Hashtags, which I mentioned 2Cream before, but Hashtags is a crypto ETF provider that basically partnered with 2Cream to take over their application because 2Cream was like, we're not first, like it doesn't matter to us anymore, but Hashtags is a provider that wanted access to the US market and they partnered with them to launch it.

S2

Speaker 2

01:24:04

So Hashtags, which is ticker DeFi, we have something we haven't touched on yet, is the only 33-act Bitcoin futures ETF. 33-act futures, 33-act ETFs are the only ones that can hold spot Bitcoin. So theoretically, if we do get an approval here, that could be the first ETF on US exchange that holds spot Bitcoin. They would just have to change the prospectus and file an amendment with the SEC and get accepted.

S2

Speaker 2

01:24:27

But theoretically, they could be 1 of the first ones holding spot Bitcoin.

S3

Speaker 3

01:24:29

That's Interesting. Okay. So Ethereum as an ETF, is that happening anytime soon?

S2

Speaker 2

01:24:36

No, unfortunately not. Why not? Because there is Ethereum futures ETFs and I thought they were going to come quickly after the Bitcoin futures ETFs.

S2

Speaker 2

01:24:46

But Gensler and his SEC bounced that back immediately right after in early 2022. I said, I gave it a year and I said we'd have futures ETFs within a year of the Bitcoin futures ETFs. And I got that blatantly wrong. And basically it's because the SEC is arguing now that ETH is security.

S2

Speaker 2

01:25:05

They won't say it's...

S3

Speaker 3

01:25:06

You probably based that on the Hinman speech, right? Kind of the SEC... Yeah, yeah, yeah.

S2

Speaker 2

01:25:11

Exactly. It's based on the Hinman speech. I thought for sure it was going to the fact that we had futures, the volume on the futures in the CME were strong. And the fact that it follows the same, it would follow the same path that Bitcoin did.

S3

Speaker 3

01:25:21

But Gary has held the line and almost regressed on the SEC's

S2

Speaker 2

01:25:24

posture towards. 100% has regressed.

S3

Speaker 3

01:25:27

Yeah, I totally agree with that. So not happening anytime in the US, but is.

S2

Speaker 2

01:25:31

Well, actually, let me give you 1 caveat there. It's not happening unless Congress steps in. I'll give you multiple caveats.

S2

Speaker 2

01:25:37

Unless Congress steps in and gives some regulatory oversight and clarity. Please Congress. Yeah, but I won't hold my breath for that to happen. The other thing is it's not going to happen with Gary at the helm.

S2

Speaker 2

01:25:48

So if a Republican wins in the presidential election, Gary will likely not be at the helm of the SEC and then you'll have somebody in the Republican. So theoretically, Republicans have been more pro ETH, crypto, Bitcoin on that side of things. So you could get 1 that way, but it still seems very unlikely because you would have to undo some precedent that the SEC has already sent and set in different ways. But like I said, Ethereum futures, we had Ethereum futures, like give me 1 second, I'll tell you exactly when.

S2

Speaker 2

01:26:14

We had Ethereum futures ETFs apply in June. No, in May of this year. We had 3, yeah, we had, So basically what happened there was Grayscale applied on May 9th for 3 ETFs And they would go under that 75 ticking clock time period. And 1 of them was a futures ETF.

S2

Speaker 2

01:26:34

And then 4 issuers followed suit immediately the next day and applied for an Ethereum futures ETFs and those were denied. 1 of the ETFs that's likely going to launch on, it'll be approved, I'll tell you the exact date, July 23rd. This is also kind of comical because it looks like the SEC is going to have to let it go through because it satisfies all the rules they have. But what it'll do, it's going to hold a slew of international Bitcoin ETFs, the likes of Canada and Europe, for like 40 percent of the fund and the other 60% is going to hold Bitcoin miners.

S2

Speaker 2

01:27:08

Such a silly. So basically.

S3

Speaker 3

01:27:10

Forgive me, that's a silly product I feel like, but okay.

S2

Speaker 2

01:27:13

I don't know if the, I don't know if, so 1 thing is that the Grace it's called the Grayscale global Bitcoin composite ETF, but they're using ticker BTC. And there's some wonky stuff here, but I think they need the file have an active application because their hold on the ticker BTC might have gone. So I don't know if they actually plan to launch this, but if they do, it would be completely it just shows the ridiculousness of like the SEC's current stance.

S2

Speaker 2

01:27:40

And even if you talk to anyone in this, for the most part, they agree that a proving futures dying spot, It doesn't make a lot of sense, even people who are vehemently anti-crypto. So those people tend to advocate for the position that the SEC is going to have to basically reverse their decision in approving futures ETFs for Bitcoin in order to get out

S3

Speaker 3

01:28:02

of this. How can they do that? They can't reverse.

S2

Speaker 2

01:28:04

They have done it in some instances in the past, but it would probably open them up to more lawsuits.

S3

Speaker 3

01:28:10

Wow. This is very fascinating. Of course, this comes into play when you have a gatekeeper over your tokenization types of events, of which Gary Gensler and the SEC is. James, as we get to the end of this episode, then the concluding question to me is, some people will have been listening to this, being fascinated by this exploration of ETFs and how this works and all the people involved, the companies, all of these things.

S3

Speaker 3

01:28:36

And they'll ask the question of, well, why do I care? I could just go buy Bitcoin or ETH or any asset that I want on Coinbase. This isn't a very bankless product, is it? An ETF product is by definition custody by someone, so is by definition banked.

S3

Speaker 3

01:28:53

Can you tell us the price here? Like what markets does a Bitcoin ETF actually open up? Like why is this good for maybe, for people who are very price conscious, Bitcoin price, or for Bitcoin price exposure being in the hands of more people? Why is even having a Bitcoin ETF a good thing?

S3

Speaker 3

01:29:14

How does it affect the market? How does it affect price from your perspective?

S2

Speaker 2

01:29:18

I mean, the dumbest answer is that it's just another way, another market and way that people could buy. But the really way I look at it is it's going to act like a bridge, right? There are going to be some people that go in this way and might go over to the bankless side of things, right?

S2

Speaker 2

01:29:31

Like it's, that's not, that's how a lot of people have acted. I know for a fact, some people have gone through the grayscale option and then have figured out ways to do it differently. The other side of it is it just opens a whole bunch of people. There's a lot of endowments, pension funds, institutions that have mandates on what they can and cannot invest in.

S2

Speaker 2

01:29:48

And a lot of them say they can only invest in securities or they can only invest in securities and debt instruments. So they are literally against, it would be against their mandate, against like everything they were founded on to hold Bitcoin directly. So when you have an ETF, all of a sudden an ETF is security, so you're wrapping it and you're able to hold it in that instance. So that just opens up for a lot of different people to hold this and use it or trade it, if you will.

S2

Speaker 2

01:30:15

The other side of it is, in the US, I hinted at, I said this before, there's $30 trillion with advisors, right, and advisors love ETFs, specifically independent advisors, but because it's the most tried and true trusted practice. So If there are products out there like on ramp and other things, they're trying to work with advisors to custody the assets for their clients, right? If you had an advisor, typically the way they make money now, it used to be like you get paid commission kickbacks for selling those mutual funds. Now it's a more fiduciary standard and you get paid, say, or if I was your advisor, I get paid like the average is like 1% of your assets every year.

S2

Speaker 2

01:30:51

And so what's happened in many instances is clients of them, of these advisors, 1, they had no way to get access to the crypto markets or Bitcoin. So their clients were doing it on their own, and they don't know what they're doing. So they don't know what the risk exposures are. They don't know like they wouldn't the advisor 1 just from like, this is a pro love, this is a positive way to look at it.

S2

Speaker 2

01:31:12

Like the advisor doesn't know that the client is risking all this money in this market that they can't control. The other part of it is it's selfish, is that it's not under their umbrella where they can charge the 1% fee. So they would much rather bring that under the

S1

Speaker 1

01:31:25

1%,

S2

Speaker 2

01:31:26

under the umbrella where they can charge for it. The other part is like I mentioned this on-ramp allows you to kind of do it directly. There's other competitors that are trying to allow advisors to store in cold storage wallets or what have you.

S2

Speaker 2

01:31:37

But for most of these advisors, they're not going to be putting significant client assets in these things, right? They're going to give them 1, 5% exposure to something like this. They probably would honestly prefer like a crypto index ETF to put like a couple percentage exposure. And if you're gonna be doing that, you don't wanna be setting up like tons of different contracts with different providers and custodians.

S2

Speaker 2

01:32:00

Like it's just so much easier to be like, I can just hit click and buy for these clients. And then I have it under my traditional financial, it basically takes Bitcoin and puts it on the traditional financial rails. This is what GBC did, GBTC did, but in a less efficient manner. We talked about all the issues with that.

S2

Speaker 2

01:32:15

But this would be the holy grail of doing that, as far as I'm concerned. I've actually talked with the CEO of OTC Markets, which is where GBTC trades a lot of these pink sheets, penny stocks, but they have a market. And he thinks another area is these things will trade as basically depository receipts. I think that might happen as well, but I think just an ETF is a tried and true technology, wrapper, and easy way to do this.

S2

Speaker 2

01:32:44

We know it will work, we know it's clean, we know it's efficient, and people would love, if they want exposure, that that's how they'll get it.

S3

Speaker 3

01:32:53

Fantastic summary, James. I appreciate all your help on this. I think that the bottom line for Bankless listeners, for those crypto investors on the journey is this could be a bull catalyst.

S3

Speaker 3

01:33:04

Of course, the exposure of potentially, you know, tens of trillions of dollars into crypto, the opportunity to purchase an ETF could affect price in some way. Yeah, I will.

S2

Speaker 2

01:33:16

I'll give you 1 counteracting point that we had CME futures launched at the end of 2017, early

S1

Speaker 1

01:33:23

2018.

S2

Speaker 2

01:33:25

And Bitcoin futures ETFs launched at the end of October in

S1

Speaker 1

01:33:28

2021.

S2

Speaker 2

01:33:30

So if you've been in the market in

S1

Speaker 1

01:33:32

2017,

S2

Speaker 2

01:33:34

you had the the the the hitting the market

S3

Speaker 3

01:33:36

is kill what's already dead, man. Like it does. You know how exactly it's

S2

Speaker 2

01:33:40

a very different market cycle right now But who knows where we'll be in January?

S3

Speaker 3

01:33:44

Yeah, that's a great point James This has been incredibly helpful Some action items for the Bankless Nation. I think the first action item is you should go follow James on Twitter if you want updates on the Bitcoin ETF. James, what's your Twitter handle?

S3

Speaker 3

01:33:56

James Reilly J-S-E-Y-F-F. There you go. We'll include a link in the show notes. James, I just want to thank you for coming on Bankless.

S3

Speaker 3

01:34:03

It's been a lot of fun today.

S2

Speaker 2

01:34:05

Yeah, thanks for having me, Ryan.

S3

Speaker 3

01:34:07

Also another action item in the show notes, the 21 shares podcast that James mentioned. We'll include a link to that. Got to end with this.

S3

Speaker 3

01:34:14

Risks and disclaimers. Crypto is risky. Price goes up and down. We don't know when we're getting an ETF.

S3

Speaker 3

01:34:21

All of crypto is risky. You could lose what

S2

Speaker 2

01:34:30

You