Craig Salm, chief legal officer at Grayscale Investments, joined Proactive to discuss the transformation of Grayscale's Bitcoin GBTC trust into an exchange-traded fund (ETF).
Celebrating a decade-long effort, Salm emphasised the importance of this milestone for the firm and its one-million investors, while also touching on fees and outflows.
William Farrington (WF): After 10 hard years of campaigning, Grayscale successfully converted its Bitcoin GBTC trust into an exchange-traded fund. What's been the general vibe at Grayscale HQ since these approvals?
Craig Salm (CS): Yes, the overall vibe here could not be better. We're witnessing the culmination of 10 years of hard work. The Grayscale team originally launched the Grayscale Bitcoin Trust (GBTC) as a private placement back in 2013, always intending to eventually upgrade it to a spot Bitcoin ETF when allowed by the regulatory environment. Last week, we fulfilled that promise. So, it was a huge day for GBTC, our nearly one million investors, and really the whole Bitcoin and crypto community overall.
WF: I'm just curious whether any concerns at the last minute in the days preceding the approval over whether these approvals were going to go through or not?
CS: All of this really started with the second wave of Bitcoin ETF applicants back in October of 2021 when we first refiled our application to operate GBTC as a spot Bitcoin ETF. The reason for this was that it coincided with the day the first Bitcoin futures ETF began trading in the US. To us, if the commission was okay with that kind of ETF, which is a derivative of Bitcoin, we thought they should also be okay with a spot Bitcoin ETF, like what GBTC holds.
Unfortunately, we were denied. On the same day of the denial, we filed our lawsuit in the DC Circuit, challenging that decision on the basis of the common-sense argument that if you're okay with Bitcoin futures, you should also be okay with spot Bitcoin. This was supported by quantitative data that we provided to the Commission, as well as the DC Circuit.
Fast forward about a year and a half, and in August of last year, we received a unanimous 3-0 vote in favour of Grayscale. Following that positive outcome, we started the continuation of positive, constructive engagement with the Commission. We were working through mechanical and disclosure pieces with the two divisions of the SEC that work on these products.
There's the Division of Corporation Finance, which reviews registration statements, including disclosures and risk factors, and also the Division of Trading and Markets, which reviews the application and has questions about authorised participants, the market participants that engage with the product to ensure it trades in line with NAV as an ETF.
We were engaged in this positive dialogue and always felt that approval was just a matter of time. We were excited to see last week that the Division of Corporation Finance allowed our registration statement to become effective, and the Division of Trading and Markets approved the 19b-4. So, those were the two pieces needed to allow this product to trade, and GBTC was among several of its type.
WF: On the first day of these approvals, we saw some pretty bullish inflows and some very bullish volume numbers coming out of the press. But I was wondering if you had any update for us.
CS: Things have definitely gone as we expected. GBTC, prior to becoming an ETF, was already a publicly traded security. And on the day it became a Bitcoin ETF, it was the largest
Bitcoin ETF in the world based on AUM.It was also the second-largest commodity-based ETF in the world of all ETFs. So, those two data points are really staggering. On the first day of trading, we saw $2 billion of volume, and on the second day of trading, we saw about the same, so we're talking about $4 billion plus of volume.
Our volume far outweighed the other ETFs that were trading. It's shown to be the most liquid product with very tight spreads, penny-size spreads to buy and sell the product. We did see a bit of outflows over the first few days, about $580 million or so. So, it's still early days, and we're looking forward to seeing how GBTC performs. But we could not be happier with the performance we've seen in the last couple of days.
WF: GBTC has an administration fee of 1.5%, considerably above the competition. How you think you can justify these high fees, or what do you think the value add is for these comparatively high fees?
CS: A couple of years ago, we promised to lower our management fee upon GBTC's conversion to an ETF. Last Monday, in our final registration statement, we announced a 25% reduction from the original fee. We were very excited to make this announcement for our investors. Regarding other products, we were always prepared for competition.
I believe the fee is certainly an important factor for investors when choosing which Bitcoin ETF to use for their investment. However, other crucial features like AUM, trading volume, liquidity, and spreads also contribute to the total cost of ownership of an ETF. It's not just about the management fee.
Factors like the asset manager's expertise in crypto are vital. Grayscale has been in this field longer than anyone else. We have navigated many of the unique challenges in the crypto space, such as dealing with memory pools in the Bitcoin Blockchain or managing forks and airdrops. These are events that don't occur in traditional finance. This expertise is another critical variable for any investor when deciding which Bitcoin ETF to choose for their Bitcoin investment.
WF: There were a few comments from the likes of Anthony Scaramucci, looking at the post-ETF approval of bitcoin price, almost laying the blame on the dip to these GBTC redemptions. Do you think that has anything to do with the sale of GBTC shares?
CS: I can't really comment on that kind of speculation. The price of Bitcoin fluctuates based on various events, and ETFs are designed to track Bitcoin's price. Inflows and outflows in these ETFs are closely tied to the dynamics in the underlying Bitcoin market. Regarding Grayscale's involvement, I'd like to remind listeners that the existence of a Bitcoin ETF today is largely due to a lawsuit we filed, challenging the SEC to allow our product to exist in the first place.
That's an important aspect to consider. Overall, last week was the culmination of a lot of hard work. I believe this achievement will benefit GBTC, our shareholders, and the Bitcoin and crypto communities at large. Right.
WF: Lastly, here in the UK, we're a bit behind the ball now. ETFs are approved in the US and Europe, you cannot get them domestically in the United Kingdom. What do you say to the regulators over here who are dragging their feet in comparison to their counterparts across the pond?
CS: We frequently visit London and have established good engagement with the FCA, similar to our interactions with the SEC. I always say that regulators have a challenging task: on one hand, they want to allow innovation to exist and thrive, while on the other, they need to protect investors and consumers.
I have nothing but respect for regulators. They're learning about the field and grappling with its complexities. I believe that eventually, regulators will become more comfortable as they observe that products like these can exist and trade just like any other ETF, allowing investors to engage with them as they have with other ETFs and commodities. So, I look forward to seeing what the future of Bitcoin ETFs in the U.S. will mean not only for the U.S. but also for other jurisdictions.