Join us in this exclusive interview with Craig Salm, chief legal officer at Grayscale Investments, as we delve into the evolving landscape of Bitcoin ETFs, Grayscale's strategies, and the group's interactions with regulatory bodies like the SEC.
William Farrington (WF): Thanks for joining us, Craig. It's an exciting time for the crypto space, particularly with the buzz around the SEC potentially approving Bitcoin exchange-traded funds. I'd like to hear your thoughts on how significant these approvals could be for the Bitcoin market.
Craig Salm (CS): Spot Bitcoin ETFs in the US will be a very big deal, because the ETF wrapper is proven to be the most optimal and accessible way to invest in other asset classes, whether it's stocks, bonds, commodities.
With Bitcoin, I think you will find a similar thing take place where you'll have a whole universe of new ambassadors that have been waiting on the sideline, wanting to invest in Bitcoin, but need that ETF wrapper to really get that exposure.
So in terms of just opening up access, I think it'll do a lot of good things. I also think the regulatory clarity that comes from putting Bitcoin more into the regulatory perimeter, will be positive for Bitcoin, and then add external benefits for other crypto assets in the long term as well.
Bringing in more stakeholders will result in us seeing more of a push for regulatory clarity on the congressional side of things. So I think all of those are the positive externalities, you will see once we have spot Bitcoin ETFs here in the US.
WF: What's the latest on the timeline for these approvals? Do you have any predictions?
CS: We were very excited to see back in August, us winning in our lawsuit against the SEC when we challenged our denial of our spot Bitcoin ETF application.
Just to give your viewers context, Grayscale has the Grayscale Bitcoin Trust, the largest Bitcoin fund in the world.
Today, as nearly a million investors trade tens of hundreds of millions of dollars and daily volume, so about $20 billion or so in AUM, but is not an ETF. That's what we're trying to do during this process.
And so we challenged an original denial by the SEC and won that lawsuit in August. And that's when I think you really started to see the narrative change around Bitcoin ETFs and the market started to think that they might be approved that at some point in time.
We had to wait for our decision to see if the SEC would appeal it, that time period lapsed, and then we re-engaged with the SEC on our application to help list our product GBTC as a spot Bitcoin ETF. So we've had really good engagement with the SEC on this.
There's two divisions that review Bitcoin ETF applications, there's Trading and Markets, which is focused on the actual structure and trade ability of the ETF; they really focus on authorised participants and the ability for the product to work as an ETF.
Then there's Corporation Finance, which reviews the disclosures. So we're in really good constructive dialogue with both of those divisions. Timing is inherently uncertain this space, but we're optimistic that we will see eventually, it's only a matter of when at this point.
You have a lot of folks that are really coalescing around that January 10 date, because that is the next time that another issuer has their review period come due. So it couldn't happen then, but we're ready to operate GBTC as an ETF today and looking forward to when that happens.
WF: What's your relationship like with the regulators, whether that's the SEC or the other departments that you need to engage with?
CS: With any regulator dealing in the cryptocurrency space, you're going to face a tough job where the regulator on one hand wants to allow the innovation to flourish and promote capital formation and on the other end, they want to protect investors and consumers. With any new technology, that's going to be a difficult balance.
Grayscale has been very constructively engaged with the SEC since our founding. We operate investment vehicles that are securities so they are our regulator. I've always thought that we have a very mutually respectful relationship, and I've been really impressed and continue to be encouraged by the level of engagement we see from them as they're learning about this space.
We're often coming down to DC and talking about Bitcoin, crypto and Grayscale and how we see the industry moving and I've been very encouraged by the level of progress as they're running about this asset class.
WF: If and when we do see these big Bitcoin products approved is Grayscale going to end there or you're going to start gunning for ETF approvals for Ethereum-based products and other alternative coins apart from Bitcoin?
CS: Yes, I mentioned our Grayscale Bitcoin Trust. Currently, we are in the process of uplisting it to the New York Stock Exchange as an ETF. Besides GBTC, we have 17 other digital asset products. This includes our Grayscale Ethereum Trust, which trades under the ticker symbol ETHE. We are similarly working on converting this into a spot Ethereum ETF on the New York Stock Exchange. We've already filed for this uplisting, which is expected to be reviewed next year.
Once we achieve this, our aim is for all our products to become digital asset ETFs, as and when the regulatory environment allows it. With the imminent launch of a spot Bitcoin ETF, we are observing a new wave of interest from various investors, including financial advisors, registered investment advisors, and more institutional and retail investors who are beginning to explore Bitcoin. They will soon have the opportunity to invest through a Bitcoin ETF.
Following this, we plan to expand our offerings across a wider range of digital assets and technologies, such as decentralised finance and others, which are areas we are really excited about
WF: It's been such a struggle, though, to finally get in a position where we might actually see these Bitcoin approvals, so it's a bit of a moonshot to convince the SEC to approve a Ripple or Solana-based ETF surely?
CS: I believe it's all about timing and education. Bitcoin, being the most well-known, prominent, and longest-standing digital asset, has a clear use case as a sort of 'digital gold' or store of value. This concept has become very prominent and easy for investors, regulators, and policymakers to understand. Therefore, it's natural that the first exchange-traded fund would be based on Bitcoin.
The next significant digital asset with a notable use case is Ethereum, known for its smart contracts that enable more complex transactions. It seems logical that an investment vehicle based on Ethereum could be the next step.
As time progresses and stakeholders become more familiar with other assets, and as they start utilising these assets for their unique use cases, I believe we will see increased regulatory clarity for these other digital assets too.
Grayscale has recently launched something we call 'crypto sectors.' This initiative is our way of categorising and creating a language to think and speak about digital assets, similar to how traditional finance uses the Global Industry Classification Standard (GICS) to talk about sectors like technology, finance, consumer, and healthcare.
In the crypto world, our categorisation includes different types of currencies, smart contracts, decentralised finance, and more. I am really excited to work on this as we begin the next phase of digital assets, collaborating with other stakeholders.
WF: It seems like regulators only began paying attention and opening up to the concept when major players like BlackRock (NYSE:BLK) entered the scene. There's a sense in the market that the SEC started taking things seriously only after such big players got involved. Do you think that's a fair assessment?
CS: I actually disagree with that notion. Grayscale has been engaged with the SEC since the formation and public trading of GBTC in 2013. We began a process in 2018 to make GBTC more regulated and subject to heightened reporting standards, transitioning it into an SEC reporting company. Throughout this time, we've experienced substantial engagement with the SEC. They've asked sophisticated questions about Bitcoin's custody, trading, pricing, and product structuring. This level of interaction has been ongoing for many years, not just starting last summer.
Back in 2016, we first filed to convert GBTC into an ETF. The SEC had concerns about issues like fraud or manipulation in the underlying markets at that time, which is understandable given that crypto was still a new and burgeoning asset class. However, by the time the commission approved Bitcoin futures ETFs, which are derivatives of Bitcoin, it indicated their growing comfort with Bitcoin-related products. We believed this should extend to spot or physical Bitcoin as well. Eventually, the court agreed with our perspective.
So, I don't believe that the SEC's recent engagement is solely due to the involvement of big players like BlackRock. It's been a long and gradual process of the SEC evolving their understanding and comfort with the industry. This is part of the challenging job regulators face in balancing innovation with the protection of investors and consumers in any new technology or industry.
WF: Do you think the SEC will be selective about who gets ETF approval? Will it be a broad approval process?
CS: Grayscale's GBTC is operationally ready to operate as an ETF, and we've been prepared for this for quite some time. If everyone is operationally prepared, they should all be allowed to trade. Currently, our focus is on Form 19-B, the document that Trading and Markets reviews to allow an ETF to trade on a national securities exchange.
For GBTC, as a seasoned issuer and SEC reporting company, we file a shorter form, an S-3. If everyone's ready and the SEC is comfortable approving these documents, then all issuers should be able to start trading simultaneously.
WF: You will be competing with the likes of Fidelity, BlackRock, VanEck etcetera; you would have to expect some fee compression to remain competitive against these folks. So is this something that you do have a strategy in terms of your fee structure for the operation of these ETFs?
CS: We’re ready for a world of competition. I think the more investment vehicles you have, from the different kinds of issuers whether it's traditional finance or crypto-focused, the better for the end investor.
It's all about choice and folks being able to allocate their investments into Bitcoin, through whatever wrapper, whatever issue where they want. We've been very vocal that we will be reducing the fee on GBTC upon GBTC operating as an ETF, and looking forward to seeing how that environment plays out.
WF: Do you have any concerns about selling pressure? We've seen the likes of Cathie Wood selling quite a lot of Grayscale shares. And there's also the prospect of FTX administrators selling quite a lot of Grayscale shares as well. Is that a concern for you?
CS: As I mentioned, GBTC has quite a liquid market. It trades in OTC markets today as a publicly traded security. That's in the tens or hundreds of millions of dollars daily volume. So there's always going to be buyers and sellers. We've been very encouraged that the discount on GBTC has progressively been closing as we do get closer to the ultimate uplisting as an ETF.
It's not a matter of if now but a matter of when and we’re looking forward to having that approval and GBTC becoming an ETF.
WF: Speaking of discounts and premiums, some of your other products are running massive premiums right now. Do you have any insights as to why that might be?
CS: It's important to distinguish that our products currently trading in the over-the-counter markets are not exchange-traded funds, and therefore, they don't have the same arbitrage mechanism. This lack of mechanism in our current model means that these products often do not trade as closely in line with their net asset value or intrinsic value, unlike ETFs.
Historically, our OTC market products have experienced both premiums and discounts. Premiums can occur when there's more demand than available supply since we cannot create new shares as easily as in an ETF model. On the other hand, when these products trade at a discount, we lack a redemption mechanism to help increase the price by reducing supply.
These products' trading values are always influenced by supply and demand. The recent premiums we've observed can be attributed to the fact that for many investors, especially in a market with more regulated and institutional investors, these assets represent the only way to invest through a security in their brokerage accounts. This demand drives up the price. It's crucial for investors to be aware of these dynamics before engaging in buying or selling these securities.
WF: Have you heard anything from Fir Tree Capital Management who launched certain lawsuits against Grayscale to allow for redemptions, or is that issue gone by the wayside now that the ETF approvals are on the horizon?
CS: The lawsuits that have been filed against us for a while now are, in our view, quite frivolous. They have been aiming to enable redemptions in order to close the discount on our shares. However, we have consistently communicated that the optimal solution for all investors is to transition our products into exchange-traded funds (ETFs).
The reason for this is that once our products are uplisted as ETFs, they will be equipped with an arbitrage mechanism. This mechanism is designed to address both premiums and discounts in the market.
Our focus is therefore intensely set on converting our GBTC into an ETF. One of the primary advantages of this transition would be the significant reduction, or even the complete elimination, of the current discount on GBTC. Considering that GBTC has over $20 billion in assets under management, this transition would effectively result in billions of dollars being returned to investors.
WF: All right, so Craig bitcoin price predictions for 2024? Have you got a number written on your whiteboard at the Grayscale HQ?
CS: You invited the chief legal officer on so out of my bailiwick, but looking forward to next year!
Note: The above transcript was cleaned up for the purposes of clarity