ETF Edge - Deadline looming: Will spot Ethereum follow bitcoin? 5/13/24

Episode Date: May 13, 2024

The SEC has until May 23 to approve, deny or delay the first applications for spot Ethereum ETFs. Find out which one of those three options is most likely… and what it could mean for the larger crypto-sphere.       Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast, if you're looking to learn the latest insights on all things, exchange, traded funds. You are in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pazani. The SEC must approve deny or delay VanEx application for the first spot Ethereum ETFs by May 23rd. Which one of those three is most likely? Here's my conversation with Rick Aedleman. He's the head of the Digital Asset Council of Financial Professionals and the former head of Aedelman Financial Engines.

Along with Matt Hogan, he's the CIO of Bitwise asset management, which manages the Bitwise Bitcoin Trust. Rick, SEC has until May 23rd on Ethereum ETFs approved, denied, delay? What's going to happen? They're not going to approve it. There's too little traffic between the ETHLTFs. METF sponsors and the SEC to illustrate that they're really crossing the T's dot in the eyes. So I think that there are going to be another delay, which is frankly not really bad news, but I think anybody who's expecting this to happen in the next week or two is going to be disappointed. You know, Matt, Rick brings up a good point here that the sort of crickets from the SEC

is not a good sign. A whole bunch of companies, BlackRock, Fidelity, Gray Scale, Invesco Galaxies have applications in as well. understanding is several have continued to update those applications so what do you say here up or down from the SEC yeah I mean I should first start by saying of course bitwise has its own application in for a spot of theorem ETF and I can't speak to that but I can speak to the general situation I think as Rick mentioned usually what you see when ETFs are filed is a lot of back and forth as you approach the approval or

disapproval date updates on prospectuses changing and wording and we haven't seen much of that. So you continue to see issuers interested in this space. That's why there's this ongoing level of discussion. But I think you see the consensus in the media from leading analysts from Rick himself that it's unlikely. We'll have to see what happens next week. So when the spot Bitcoin ETFs were denied by the SEC, they were successfully sued, right, on the grounds that they had approved Bitcoin futures ETFs. And since they were similar products, they had to approve the SEC, the SEC had to prove spot Bitcoin ETFs. They've already approved the Ethereum Futures. So isn't the same logic applicable here? It seems like there's a clear chain of events.

Well, yes and no. Yes, the Ethereum Futures are out there, but we don't have the same train of history with Ethereum Futures ETFs that we have with Bitcoin Futures ETFs. So it's giving the SEC a little bit of a different environment, but it's basically a similar animal, Bob. And so for that reason most are expecting ultimately that these ETFs are going to come onto the market. I just don't think it's going to happen in the next 10 days. Matt, you, same opinion? I mean, they're going, is the logic still the same here? I mean, it's a slippery slope, right? They're in a tough position given what happened with the, with the Bitcoin futures. Yeah, I mean, look, I think we've entered the ETF era for crypto. We've seen the Bitcoin ETFs come to market. We've

seen the great things they've done for investors, lowering cost, improving regulation, improving sort of safety, security, and peace of mind. I think we will get there on Ethereum as well, but as Rick said, it's not exactly apples for apples. It's two similar fruits. I think it's moving in the same direction, but it just may take a little bit longer. So I think we're not hearing anything. So normally you'd hear these comments from the SEC and we're hearing nothing, right? And that's clear here. So the issue, it seems to be, is whether Ethereum is a security or a commodity. So the CFTC says it's a commodity, but the SEC's chair, Gary Gensler, seems to be implying

most cryptocurrencies are securities and subject to the SEC. I want you to take a listen to a recent comment that Gensler made here. The field of crypto assets, without prejudging any one of them, many of those tokens are securities under the law of the land as interpreted by the U.S. Supreme Court. So we follow that law and you, the investors, are not getting the required or needed disclosures about those assets. That was Gensler on our air last week. So the standard seems to be, as you mentioned, whether these are investment contracts.

Matt, are they? Is there some way for a viewer to understand what's going on here? Are these investment contracts? If they are, they're subject to the SEC. But that seems to be the issue, right? You know, I think what everyone can agree on is that 80-year-old securities laws don't fit neatly into this world of digital assets and crypto and 21st century technology. There's a debate between the SEC on one side and the CFTC on the other side, which has said

that Ethereum is a non-security commodity. What we really need is for the regulators and legislators to get together. and build a regulatory framework that all crypto assets can fit in that allow the industry to thrive here in the U.S. We don't need these turf wars, but it is a dispute. It's important to note that there are regulatory views on one side, regulatory views on the other, and that the courts haven't cleared that up yet. We're still in that process. Long term, I think we'll figure out the regulatory path that allows us to move forward,

but there is still some debate here. Go ahead. Matt's absolutely right. take it a step further, Bob. When Gary Gensler said here on CNBC last week that most coins and tokens are securities, well, he's right, but what he failed to articulate is which of those most are securities and which are not. And that has been what the bottleneck is all about. The SEC is refusing to stipulate exactly which coins and tokens are securities and which ones or not. And it's causing a huge consternation in the community because the crypto community is going

to the SEC saying we would like to register as a security. And the SEC is saying you can't because you don't meet the rules, which is causing companies like Coinbase and Robin Hood to trade these coins and tokens only to then have the SEC sue them for trading unlicensed securities. Securities that are unlicensed because the SEC wouldn't let them get a license. They wouldn't let them register. It's a ridiculous situation where the SEC isn't providing the clarity, isn't providing a path to registration, and then taking enforcement actions for those that are failing to follow the rules. The SEC won't let them follow. This is what's got to stop. So what we're seeing here, Matt, is the crypto community is mounting legal challenges finally against the SEC. What is it?

How do you draw the line between all the other cryptocurrencies, ETF? So I remember at the end of April, consensus software, which was those of you don't know, it's a software developer whose business kind of centers around the Ethereum blockchain network, sued the SEC in a federal court in Texas over regulation of Ethereum. Consensus had, as Rick notice, received a Wells notice stating that the SEC's intent to imminently recommend that commission is going to bring an enforcement action against consensus, violating federal securities laws. So the argument for rejecting crypto assets in an ETF becomes weaker, it seems to me,

with each ETF they approve there, essentially. Matt, where does this go? Summise what's going on with this consensus lawsuit? That's absolutely right. It's what Rick talked about. The SEC has not offered a way for these assets to register, and then is theoretically enforcing against them for failing to register. It's this weird catch-22.

again ultimately I think everyone wants the same thing they want a safe secure platform where investors are protected and innovation is protected and we can get that if we work together with regulators and work together with legislators to move forward I will say that crypto has done exceptionally well in the courts whether that was the gray scale lawsuit or the early findings in the ripple lawsuit some of the developments in the coin based lawsuit time and again the courts have come down on the side of in my view, common sense on crypto. So I think we're moving in the right direction. But look, this is a massively disruptive technology.

Crypto could disrupt large chunks of the financial market, make it better in many ways. It's natural for there to be this sort of regulatory lack of clarity. We will get through it. This is just the messy process by which we do. And here's the worst part of it, Bob, the saddest irony of it all. On the one hand, Gary Gensler says,

we don't need new regulation because all the laws are in place, and everybody just needs to follow those laws. Well, the absence of new regulation, the absence of new legislation, as Matt has said, is forcing us to work on regulation legislation that's a half a century old that is predated the digital technology that we're engaged in today.

The result is that in the absence of knowing whether a coin or a token is or is not legit, without any cop on the beat, it's forcing investors to go on their own outside of the investment advisory community, because the community can't help them because we don't know what the rules are, and they're ending up in scams and frauds. The FBI says 46,000 Americans lost over a billion dollars to crypto frauds last year. This is because they're not getting the aid in support of the investment advisory community, which can't help because of the lack of clarity behind these rules and regulations.

And this is the sad irony is that Gensler is claiming to be wanting to protect the consumer, but his refusal to write regulation is actually harming the consumer rather than helping them. It seems to me that the arguments for rejecting crypto assets in an ETF are becoming weaker with each ETFs they approve. I mean, does this ultimately Matt get down to a court case? I mean, if they approve Ethereum ETFs, are they now in a slippery slope where they're going to have to start approving all the other ones or is it going to get down to the classic Howie Test and whether or not this is an investment contract. I mean, what does the SEC do here? Oh, for sure. Look, again, I think we've entered the crypto, the ETF era of crypto. So eventually we're going to have a large number of crypto assets,

index-based crypto assets, available in ETFs. And I think that will be a great thing for investors. There is a difference between Ethereum and other assets in that we have regulated futures contracts on Bitcoin and Ethereum, and we don't yet have those contracts on other assets. So there are still miles to go and work to do. But if we look abroad, Bob, if we look overseas, their ETFs on a wide array of crypto assets. And in each case, they've helped lower cost and increase investor protection than exactly the way Rick mentioned. So I think, look, I think we are going to get there. We made a big leap forward with Bitcoin ETFs. They're the most popular ETF launch of all time. People want to access this asset class through low cost and reliable ETFs. We're going to get there.

And I think we're going to get there on Ethereum relatively soon, just whether or not it's next week or not. We'll find out. Go ahead. Here's the really interesting thing. We don't have to answer the question, is a given coin a security or not, in order to have an ETF of it. Gold's not a security, but you've got a gold ETF. And you could have the similar path with other digital assets. So we could sidestep the question of whether or not this coin is a security by simply allowing an ETF of that coin.

because the ETF is a security and would fall under security's rules, creating consumer protection in a way that they don't get by buying the coin directly. Buy it via the ETF, you now have the full force and strength of the SEC to protect investors. That itself would be a major leap forward in investor protection. So what are the arguments by the SEC use? I mean, sometimes they've argued it's not decentralized enough, for example. Is that an argument? I'm trying to think, do they just poo-poo it and say it needs more study?

It's really hard to find justification that supports. the rationale of Gary Gensler and the SEC. Pretty much everybody is opposed to the way they've been managing crypto regulation, not only the media and the investment community, the crypto community, virtually every former SEC commissioner has been criticizing Gary Gensler for his handling of this. Members of Congress are opposed to this. There's really a hard press effort to justify the SEC's behavior here. Matt, you mentioned that the Bitcoin ETF was the most successful ETF launch in history. That's an interesting claim, but update us on where we are right now. What's total assets under management and parse out? Of course, gray scales. What did they have

$27 billion initially in the whole game? Where are we at? And how are the how is the suite of spot Bitcoin ETFs trading relative to Bitcoin? Yeah, they're doing fantastic. They're tracking Bitcoin's price virtually perfectly. They're trading at very tight spreads and they're charging low fees. So for investors, they're often the lowest cost, most liquid, most accurate way they have to gain access to this space. And that's really exciting. We love doing that with the Bitwise Bitcoin ETF and VITB and our competitors do with their ETFs as well. There's maybe $50 billion in assets north of $10 billion of net flows. Clows have restarted after taking a few days off. We're actually in a really interesting point right now, Bob, because we're getting the 13F

where we're seeing whether professional investors are allocating to these ETFs. Those filings are due May 15th, but they're already a large number in, and there are a huge number of really iconic firms allocating to these ETFs, well north of 500 professional investors making investments, including firms that manage money on behalf of Yale and Princeton and others, firms like High Tower Advisors. These ETFs are being adopted by professional investors. We're learning that right now. And I suspect we're going to see the inflows from that group accelerate in the second half of the year. So from any perspective, a massive success. And I think that success will continue and compound in the second half. And it's easy to see why this is

the case, Bob. Everybody loves ETFs, the most popular investment vehicle in America. They're low cost. They're highly transparent. They're very liquid. They're extremely familiar. You can put them in any brokerage account where you can dollar cost average. You can rebalance. You can do tax loss harvesting really easy to own and manage, easier than the complexity of Bitcoin directly. And now that they're available, everybody who has always been curious about Bitcoin or has been wanting to do Bitcoin, but has found it daunting to engage, now can do so in the easiest way, most familiar way possible. And that's why we're seeing the flood of tens of billions of dollars into this. So you said 50 billion right now, AUM, for all the Bitcoin, Spot Bitcoin

ETF. Is that right, Matt? Yeah, around there, Bob. Yep. Okay. So we, we, you said, We started out with, well, Grayscale had 27 itself, right? In the back in January, is that right? Was it 27 billion? That's about right. And then we had some market appreciation, right? The price is up from 50 to 63. And but we have had this historic net flows, which again is just so even with just a wide

guess here, at least $5 billion a month in inflows going in just in the last four or five months. That's a pretty good number. It's by far a record shattering event. This is if you compare the flows that went into. GLD, which up until now was the record setter for asset flows, these ETS have shattered the record. The amount of money that has flowed in in such an incredibly short period of time demonstrates investor interest in this and the consumer buildup and the excitement behind this.

And yet, as Matt has pointed out, relatively few RAA firms or institutional investors or major Fortune 500 companies have yet to participate. This is going to be coming over the next couple of years, it's going to get very exciting. Guys, I would have to leave it there. It's been fascinating, as always. And Matt, let us know about those updates on May 15th. I love to see what kind of investors are involved, particularly if more institutional investors are. Let's keep us updated on that. Now it's time to round out the conversation with some analysis and perspective to help you

better understand ETS. This is the Markets 102 portion of the podcast. Rick Edelman, head of the Digital Asset Council of Financial Professionals and former head of Aedleman Financial Engines continues with us. now and thanks for sticking around Rick. I wanted to talk to you about a very interesting development in the personal finance space which you cover very well and that's the idea of a lifetime guaranteed income coming back. When we started CNBC over 30 years ago we looked carefully at covering the concept of annuities which is a sort of a lifetime guaranteed income product and mostly concluded that it was a nonsense that it was a product that you basically

bought rather than sold that it was primarily a benefit to the brokers that sold it to you. They usually collected 5% commissions. This was the 1990s. So we didn't do a lot of coverage of it. But in the last couple of years, I've heard somewhat better things about the concept of annuities, the environment around them is a little better, the payouts a little better, maybe the fees charge are a little less. And so now we have this new idea, as the baby boomers are getting older, they want some kind of income and this lifetime guaranteed income product has come around. How is this different from annuities. Explain how this is working.

Yeah, you're absolutely right, Bob. There's a renewed interest in this as everybody's beginning to wrap their arms around longevity. We are realizing that we're living longer than any humans have ever lived in history. People aren't dying at 75 or 80. People are living into their 90s and hundreds. And the more affluent you are,

the more likely you will live into your 90s and hundreds because more affluent people have better access to health care. They take care of themselves better. They eat better. They have lower stress. And all of this adds up to, long lives. And at the same time, we've largely reduced, if not flat out, eliminated pensions in America. Less than 17% of private employers offer a pension anymore. We instead have 401ks, which

are insufficient to support most people in their retirements. We know that the average worker at 865 has less than $500,000 in savings. So this isn't enough to support themselves for a life that's going to go to 90, 95, 100 or more. And everybody's scared about it, and rightfully so, which is why there's a renewed interest in lifetime income, guaranteed income. The only game in town historically, as you noted, are annuity products. And they come with a lot of saddle. As you noted, high fees, limited payout, lack of flexibility, no benefit for errors when you die. A lot of problems with traditional. So how are these new products different than annuities? How do they avoid those pitfalls? Like we had to pay them 5%?

They're not annuity products. One of the most innovative new products is a company called Lifex, which comes from Stone Ridge asset management. Lifex is a series of mutual funds that when you invest, first of all, you cannot buy these things until you're 60 years old. These are ordinary mutual funds, but unavailable to people below the age of 60. When you invest, 100% of your money goes into treasuries. So this is just like buying any other treasury fund, ordinary routine mutual fund. You can add to it, you can withdraw, just like you can any mutual fund. But when you turn age 80, you are given a choice. You can withdraw all your money, just like you can any other mutual fund, or you can keep your money there and it locks, goes from an open-end mutual fund status,

to a closed-down mutual fund status. And at that point, you give up liquidity, but instead they will give you monthly income for as long as you live. But if you're owning a mutual fund that's owning treasuries, why can't you do this yourself? You essentially own a ladder of treasuries. What are you getting here? Because of longevity risk. In other words, what they're doing is taking everybody who buys this mutual fund and pooling the life expectancies. In other words, people who die after age 80, if you die owning this and you die before age 100, you and your heirs get nothing. It's the survivors who continue to get income all the way to age 100. In other words, you're betting you're going to live to 100, you're betting you're not going to die.

And those who do die... Because it becomes essentially a closed-end fund. It does. It's kind of like an old-school ton teen that were around 100 years ago. The bottom line is we're basically saying that everybody who invests in this fund, the money in the fund is going to go to the benefit of the survivors. This is what allows the fund to continue to pay income all the way to 800. Okay, so if you're 60 years old, you pay into this thing, and you die, when do you start?

collecting. You die at... You start collecting immediately when you invest at age 60, just like any other treasury fund, but at age 80, it becomes closed in and becomes illiquid. You're going to get income on an annual basis. If I die at 80, I don't get anything back. Correct. The money that was yours stays in the pool for the benefit of those who are still alive. And if I lived in 90, I'm still collecting. Basically, if you die, the game is to live as long as you can. Once you hit 80, That's exactly right. At 79 you get the money back. But at 80 you don't. Correct. So you have to decide, are you likely to live to 90, 95, 100? If you are confident in your long... And can I buy in at 75? Yes. You can invest in the fund all the way up until age 80, at which point the fund is locked. And only those who are in the fund as of age 80 are the ones who will be part of the pool to keep the fund going to age 100. And if I'm 79 now, I can buy into this.

Correct. And it would still, there's no penalty for late buying into that. That's correct. And it's normal treasuries. There's nothing else. It's an ordinary treasury. So it obviously is going to depend. The payout's going to depend upon what the, on treasury rates. Yes, exactly correct. The point is that this is not an annuity product, that this is a pulling effect, almost like an insurance policy. This is how insurers provide life insurance benefits. They're betting that there will be some people who cancel the policy before they die and they don't have to pay out. benefits. The point is that this is an innovative approach that is worthy of consideration as an alternative to annuity products, which up until now has been the only game in town with all the challenges of those investors. And where is this product, the status of this product right now?

It's on the market now offered by LifeX. Rick, always interesting. I know Blackrock has also floated us of another product. And what they're doing is taking their mutual fund product and turning it into an annuity, which creates the same challenges that people have always had about I know what it is. All right. Rick, always a pleasure to speaking with you. That does it for this week's ETF Edge, the podcast. Rick Aedlman has been my guest today.

Thank you for listening. Join us again next week or head over to etfedge.c.cmbc.com, and you can see all of our shows. InvescoQQQQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQQ, Invesco Distributors, Inc.