On The Brink with Castle Island - Michael Sonnenshein and Craig Salm (Grayscale) on the GBTC ETF Application and Market Commentary (EP.302)

Episode Date: March 28, 2022

Michael Sonnenshein and Craig Salm of Grayscale Investments join the show. In this episode we discuss: Grayscale's filing to convert GBTC to an ETF and their advocacy campaign. The comment process (details at: www.grayscale.com/comment) Reactions to the Biden Executive Order. Grayscale's product lineup and the future of active vs. passive crypto products. The metaverse, NFTs and other areas of interest for crypto asset managers. To learn more about Grayscale visit www.grayscale.com

On today's episode, I sat down with Michael Sonnonshine and Craig Salm from Grayscale Investments. It's always great to catch up with Michael about the state of the industry. And I was excited to have Craig on this show to discuss some of the legal complexities around Grayscale's application to turn the Bitcoin Investment Trust into an ETF. So we spent a bunch of time on that topic. And we also talked about the broader suite of products that Grayscale has launched over the past year, talked about the Biden EO, and much more. So I think you'll enjoy this one.

Without further ado, here's my conversation. with Michael and Craig from Grayscale. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion.

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people started to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. All right. Welcome back to On the Brink and very happy to have Michael Sonnenstein and Craig Salm from Grayscale. Michael, you've been on the podcast, I think, two or three times already. So we'll save the introduction for you. Craig, welcome to the pod. We'd love to just hop right in. And why don't we get a quick background on you before we hop into the meat of it? Yeah, sure. Thanks so much for having me, Matt. So I joined Grayscale as the first lawyer back in January 2018. There's actually a history even before I joined Grayscale of me, knowing Michael for about a year and a half to get a job. We could probably go into that in a separate podcast. But, no, no, Matt's going to have.

have to have us back on when I can tell the whole world that rejected you for a job first time around. So we'll save that for another pod. But yeah, so I'm chief legal officer at Grayscale, responsible for all of the investment management, capital markets, helping with product creation, compliance, you know, all the regulatory efforts that we do here at the firm. Yeah. That's great. Well, I'm excited to have you on. And obviously, legal is going to be a big part of what we want to talk about today. Why don't we hop right into it, guys? One of the things I wanted to have you on to talk about is just this conversion process of GBTC into an ETF. You guys have a massive campaign underway right now with comment letters. So maybe just set the stage for us in terms

of where that product is today and what you guys are trying to accomplish. Yeah. So, Matt, this is the firm's number one priority and has been for years. Those of you who are less familiar with either gray scale or this product, what Matt is referring to is the gray scale Bitcoin trust and it trades here in the U.S. under symbol GBTC. It is the world's largest Bitcoin fund. It owns about almost three and a half percent of the outstanding Bitcoin supply and has been around since 2013. What's interesting about GBTC is that when we initially structured it, we actually intended for it to ultimately become an ETF. In fact, we chose the same legal structure for GBT as you see for a lot of other commodity-based ETFs like GLD and others.

And over the years, GVTC has become, you know, what many would argue, the investment option of choice for investors looking for access to Bitcoin right within their portfolios, whether it's next to stocks or ETFs or bonds or whether investors are looking to deploy Bitcoin exposure in tax advantaged accounts like IRAs and others. What's amazing about GVTC is that it's had a long and very positive relationship, not just with the investment community, but with the regulatory community. And so the fund itself passively and solely hold Bitcoin. And it actually began trading here in the U.S. in 2015 as symbol GBT. What then kind of transpired with the fund as it continued to grow is that we actually approached the SEC to ensure that we could continue to

advance the ball on ultimately having GBT become an ETF. And so in 2020, we were able to have the fund become an SEC reporting company, the first digital currency. investment vehicle to become SEC reporting. And those that don't know what that is, it essentially causes the company to now have to adhere to a higher standard of disclosure and financial reporting, such that GBT now files 10Ks, 10 Qs, and 8Ks. And so we've really continued to work proactively with the SEC, even though they have continued to deny a lot of Bitcoin ETF applications, believe, that over time, we will continue to address any concerns they may have about the underlying Bitcoin market. I think where we find ourselves today, Matt, is in an unfortunate,

on-level playing field. So last year, the SEC began to change their mind a little bit about Bitcoin ETFs and approved the first batch of Bitcoin futures-based ETFs and have since that time continue to deny or reject spot Bitcoin ETF applications. And so for those people that aren't as keyed in on this topic, what that really means is that the FTC is okay with an ETF that holds Bitcoin futures, right, which is a derivative of Bitcoin, but they're not okay with an ETF that holds Bitcoin directly. And our view of that is that it really does create this unfair playing field.

It forces investors who are waiting for the familiarity and the protection of an ETF to use the Bitcoin Futures ETF simply because that's the only one that exists when really investors should have that choice. We feel that it is incumbent upon us to continue to advocate for investors and encourage investors to advocate for themselves as part of this process. So maybe, Craig, you want to talk about the 19B4 process, the 240-day timeline and kind of how that's shaping up. Yeah, sure.

So I'm sure we give the long story back in 20, 2016, 2019. Sure, sure. Yeah, so this is a process that we've been involved in since all the way back in 2016, when you saw the first wave of ETF applicants go to the SEC seeking to have this type of product approved. And back then you had both, you know, quote, physical or spot-based Bitcoin ETFs like what GVTC would be, as well as futures-based Bitcoin ETFs.

And at the time, grade scale, several other issuers were in front of the SEC, but ultimately the SEC was not comfortable. with approving either spot Bitcoin or futures-based Bitcoin ETFs because of what they cited to be the potential for fraud and manipulation in the underlying Bitcoin markets. And if that's the concern, then it really makes a lot of sense that you would deny both the spot-based and the futures-based ETFs because both types of ETFs would be priced based on the same underlying Bitcoin markets. That risk permeates both products.

And so there was one official disapproval order, the now famous Winkleboss Disapproval Order, about 120 pages citing all the SEC's concerns. And Grayscale saw that and realized the commission is not ready. So we voluntarily withdrew our application, knowing that we could just then go back to operating GPTC as is, continuing to build more AUM, gain more investors, more trading volume in OTCQX. As Michael mentioned, we also had the opportunity to get in front of the SEC again, not in the context of seeking to convert GPDC to an ETF, but seeking to make it an SEC

reporting company. And what that did, as Michael mentioned, was making more transparent, more robust, subject to SEC reporting standards, meaning 10Ks, 10Qs, audited financial statements, things like that. And I think that was really important for a lot of our more institutional and regulated investors because their risk, compliance, legal, and other advisors really need that kind of regulatory framework to get comfortable with any investment. So we accomplished that major threshold. That was January 2020, making GBT the first digital currency investment vehicle to BSC reporting. So a really major milestone. But then fast forwarding to last January, we had a new share come in that expressed

more receptivity to the Bitcoin markets, but specifically in the context of the CME Bitcoin futures. And so we had positive statements over that summer. Fast forward to October, and we actually saw the first Bitcoin futures ETF start trading. That was a very monumental event for all of crypto. And what it's signaled to us is, well, if the SEC is now comfortable with the futures-based product, it should also be comfortable with spot-based products like what GBTZ would be. Again, because if you go back to what those underlying concerns have always been around the underlying markets, if you signal you're okay with the futures product, you must also be okay with the spot-based.

product. So last October, we refile the application to convert GBT into an ETF. And that's what kicked off this 240-day review period, where the SEC invites the public to submit their own letters, expressing their views on how they feel about this application and why they think or don't think that the SEC should approve it. Yeah, but that 240-day process, I don't think many people know. I mean, Matt, if you think about what it takes for the SEC to get comfortable with a new rule change, like is the case here for a new ETF, I think some people may think that, you know, writing into the SEC may be the equivalent of, you know, calling the cops on your neighbor or something like that.

That's not the case here, right? The SEC set up this process so they actually could hear from the investing public views in favor of or in perhaps views not in favor of a new rule change. So I think that's a really important thing that people understand about it. Yeah, I mean, it's a great demonstration of a democratic process at work. and showing that our regulators want to take in as much information as they can so that they're being thoughtful about this and considering all the risks and where are the benefits and so on. And again, going back to the SEC reporting context that Grace Gall voluntarily became a part of,

I mean, the level of questions and engagement we got from the commission at that level was really impressive. You know, they are asking questions around, how was Bitcoin being used, how is it being traded, how do you think about custody and pricing and all the investor protection things that they are and should be really focused on? And so in the context that we're facing the SEC now, the 1924 process, they really want to make sure they're taking in all the information available. So there's letters right now on the SEC website you can see from investors, from market participants, academics, you know, others that have a really strong view on this issue. And knowing that this is a really important process. And knowing that a lot of the average investor might not necessarily know

that they can become a part of it, we launched a campaign a couple of months ago to really enable and activate our investor base and the rest of the U.S. public to let them know that this is something you can be a part of. You can express your reviews and here's how you can go do it. So we created a public website, grayscale.com slash comments that explains the issue and allows anybody who visits to submit a letter to the SEC if they're interested. And last we checked this morning, I think a little over 2,600 letters have been submitted to the SEC on this issue. So I don't know if that's a record, but it's definitely, you know, extremely impressive and really it's encouraging to see it. I think it's great what you guys have done in terms of set this up and be a lot more vocal about it.

I mean, from where I sit, it's a little bit hard to kind of rationalize the SEC's posture here. So you have this futures ETF that is approved, several of them that are approved. The SEC has this mandate around investor protections. This is a clearly inferior instrument than a spot product. There is tracking error there. There's a lot of roll costs. This clearly will not track the price of Bitcoin in the way there's spot product would. And if I look back to where you guys were in 2015 and you know, you look at the Winklevoss denial, you look at the Bitwise denial. It's clear that the SEC is zoned in on two things. One, qualified custody and two, kind of the spot market and how that works. And qualified custody is a

solved problem. And as you point out, the futures ETF has approved. And so the functioning of the spot market, they seem to be comfortable enough for the futures contract. And I think the Fidelity letter had some good data that the futures actually drives the spot and not vice versa. So I guess my question is, is it possible that this is just not a facts and circumstances issue at this point? And the SEC is doing a power grab for oversight on the crypto spot markets and just will not approve an ETF until they get jurisdiction. over a much bigger part of this market. Or maybe I'll pause there.

You know, is this a political issue at this point as opposed to a facts and circumstances issue? I think it's becoming quite a bit of a political issue. I think that's right, Matt. I think what's been interesting about the development of the asset class for the eight years that I've been involved in it is there hasn't really been one regulator that has raised their hand and said, as this asset class grows, we're going to fold this into the domain that we oversee.

And instead, because of the ever-evolving nature of crypto, it's getting bits and pieces from various, you know, governmental authorities and regulators. What is encouraging, despite the confusion that may exist there, is that there is now bipartisan support for digital currency and certainly for digital currency ETFs. We've seen submissions from various reps and senators. You want to maybe touch on some of those, Craig, that we've seen come out recently? Yeah, so I mean, we are seeing support, as I mentioned, from investors, from market participants, academics, but also policymakers, and importantly, bipartisan support. Because they're seeing that, you know, if America is going to stay competitive with the rest of the world and if we want the Silicon Valley of crypto and Web3 to not be in Singapore or some part of Europe or Canada, then one of the ways that we can do that is by further bringing crypto and Bitcoin in Web 3 into the right of time. perimeter. And one way you can do that is by approving regulated, registered investment vehicles like a spot Bitcoin ETF. And I think a couple of regulatory developments that have been really

important that happened over the last couple of weeks. One is this executive order from the White House where that was the first time we saw a cohesive strategy from the top level of the U.S. government saying that we want to think about how to regulate this space so that we can, one, promote innovation allow it to flourish while also protecting investors and consumers. And to see that really perfect balance being struck and expressed by the president, I think was really encouraging and something that's having an influence on a lot of policymakers as they're thinking about their own views on crypto and Web 3. And then even within both parties, you know, I think the Republican Party for a long time has been a very clear proponent of crypto, whereas the

Democratic side has been a little bit harder to convince around where are the benefits, how is it really democratizing finance and enabling the underserved or underbank to be a part of it. And I are seeing even within the Democratic Party a lot of positive statements coming out from different more of the policymakers, the younger generation of Congresspeople. I think, though, Matt, like it's important, though, that for this conversation, it's not necessarily going to be an issue that's solved in the context of how crypto is treated in general in D.C., right? Our team has been and currently is still spending a ton of time in D.C., educating policymakers and staffers on these types of issues,

but specific to the GBTC conversion to an ETF, this is an investor issue, right? You know, the last count I think it is, Craig, there's over 800,000 accounts in the U.S. that own GVTC, right? It's individuals, it's retirement accounts, it's held inside mutual funds, it's held inside ETFs. I mean, it's really all across the board, retail, institutional, you name it.

And so this is really a measure of whether or not the SEC can fulfill its mandate and protect investors or it's going to continue to kick the can down the road until they are maybe looking for some sign or some attribute that develops within the crypto market that somehow gives them more comfort to approve these kinds of products. Yeah. So there's political issues at play. another really important development that happened last November is following the futures-based ETFs being traded, we saw subsequent disapprovals of spot-based Bitcoin ETFs. And what that does

was, what that did was create this new legal argument that our attorneys at Davis-Polk have submitted in the context of this 19B4 comment letter period, expressing the view that by approving futures-based Bitcoin-TFs, but denying spot-based Bitcoin ETFs, you now potentially have a violation of something called the Administrative Procedure Act, which at a high level says that you have to treat like situations alike. You can't discriminate against issuers. And if you are doing that, then you're acting arbitrarily and appreciately, which is a violation of the APA. So one of the many letters that have been submitted to the SEC on their website is Davis-Polk laying out these arguments. We think they're quite persuasive and we look forward to

engaging with the commission on them. But what they really get to is that the reason cited to date for why the futures ETFs are trading, but not the spot ETFs, is because of two things. One is the futures-based ETFs trade and are registered under the Investment Company Act in 1940, whereas the spot-based ETFs are registered under the Securities Act in 1933 and the Secures Exchange Act of 1934. And there have been some arguments that the 40 Act has more investor protections, and that's why you could get more comfortable with the futures-based ETF. But we would argue that that's a distinction without a difference because those investor protections are not focused on the underlying markets or the assets being traded. So it's not like the 40 Act is regulating

Bitcoin markets or Bitcoin itself. Instead, it's protecting at the fund level to make sure things like accounting and custody and conflicts of interest don't exist and so on. So those investors protections are important in the context of Bitcoin TF approval are not really applicable. And then the other arguments that have been cited are the CME Bitcoin futures are regulated by the CFTC. So those are the assets that are inside the Bitcoin futures, whereas Bitcoin is not regulated today by the CFTC or the SEC, at least not a surveillance level and the type that you would see on a national securities exchange. But similarly, those differences don't really apply in the context of ETF approval because, again, the pricing, which is the underlying issue, the SEC has cited to date, is something that would affect both the spot-based ETF and the future base VTF. So those two distinctions, we really think they are a distinction that of a difference.

In that APA angle, I thought was very interesting. And I know it's in the comment letter right now, but is there a process to get some sort of a hearing on that issue? Or what would be the actual legal process in order to get someone to opine on whether or not that argument is valid? Yeah. So right now it's just in the context of the SEC comment letter period. another great thing about this whole process is the commission's required to read through and address all of those comments.

So the Davis-Polk letter will be one such comment that they will have to address over the course of our 240-day would be period. Yeah, we need the Matt Walsh, Nick Carter letter, okay? Well, hey, you tell me where to submit, actually. Give me that URL again. We'll blast it out. Grayscale. Should we flash the QR code on camera? Yeah, grayscale.com slash comment.

And it lays out the steps pretty succinctly for you. So we'll definitely get on that. You guys mentioned the executive order. There was a school of thought here that the SEC was not going to do anything until this EO came down. And there was all sorts of rumors about what was going to be in the EO. I'm curious what your just general views were on that executive order and what impact that will have not only on your business, but on the whole landscape here. I think, you know, from our seat, you know, given kind of the rumor mill that you just mentioned, this was largely a lot more positive than I think. most people in the industry were expecting. You know, instead of kind of squandering or, you know, any kind of innovation here, I think instead, this was really a call to wake up, don't be asleep at the wheel, start doing the work, start doing the research to figure out how we're going to embrace these technologies, and really get back to this idea of American competitiveness as we think about technological innovation.

I think obviously the proof will be in the pudding over the next, whatever it was, 60 or 90 days that that were called on, you know, various governmental agencies. But I think to Craig's earlier point, how powerful a message that sends from the highest levels of the U.S. government to all of the, not only the regulatory community, but also to the investor community. So I think it's a little bit of a wait and see game, but nonetheless a lot more positive than I think a lot of folks could have thought this would have winded up. Yeah.

And I think the U.S. really needed something like that because we're unique in that we have not one unified financial regulator, but many. And so if you look at other countries in contrast, Singapore has a monetary authority of Singapore, the UK has the Financial Conduct Authority, Canada has the Ontario Securities Commission, whereas in the U.S., we have all these different agencies that each have purview over some use case of crypto in different ways. So the fact that we got something from the top level down saying, this is what you all need to do to weigh the risk and some rewards of crypto and Web3 is really important. So now we have a focus on that. And I think we all agree that a lot of narratives around crypto are often misinformed for the worse,

whereas now we'll actually have studies that are being done and we'll be able to see how can we allow this innovation to flourish? How can we protect investors and consumers? Do existing rules and regulations work as is? Or should we go to Congress and think about rewriting some of the rules so that they can allow crypto to continue to flourish within the U.S.? And maybe coordination, right? Maybe coordination is the key here, right?

Because to your point, IRS, CFTC, SEC, Treasury, Office of the Control of the Currency, FinC, I mean, the list goes on and on and on. So to see greater coordination amongst these groups who are all having to come out with either certain policies or certain postures around crypto or certain elements of them, I think would also be really welcomed by the community as a whole. You guys also hit on something that I think is really important that this does not turn into a partisan issue where, you know, you have the Elizabeth Warren wing of the Democrat party that's obviously quite hostile to this. But then you have folks like Richie Torres in New York,

who's written a great op-ed piece this week in the New York Daily News, a liberal case for cryptocurrency. And you're starting to see some fractures in maybe the Democratic side of this. And so from where I sit, this is really a bipartisan issue that should be about job creation and about, you know, keeping this industry in the United States. Do you guys see momentum here for this to continue to be kind of a bipartisan issue? I don't see how it could end. And actually, you know, it's so tragic. and unfortunate, everything that we're seeing unfold in Ukraine and Russia right now. And I think in a lot of our conversations in D.C., even just over the last couple of weeks, many people have actually taken notice of the fact that crypto was one of the ways that

humanitarian aid got to Ukraine faster than any other method possible for actually getting value into the hands of people who really needed it. And so it's unfortunate that it has to be those circumstances under which crypto shows another compelling use case to maybe some folks that would have historically been skeptics or naysayers about it. But again, kind of goes to show just the state of the world that we're living in, the need for financial innovation, the need to be able to move value seamlessly, instantaneously for free. And I do think that's a use case that definitely resonated.

Yeah. And then on the other side of the coin, we're seeing that. No pun intended. we're seeing that Russia is not actually able to use crypto to evade sanctions. So you're having the positive use cases really have a spotlight shown on them. And then the negative sides, you're realizing, well, that's not really an issue. So I think that's one example of a bit of regulatory overhang that we've seen sort of wash away over crypto. And then this has really started over the last couple of years.

I think the colonial pipeline hack where those funds ultimately were able to be recovered is another example shining a positive light on crypto that it can be monitored, it can be regulated, and it can fit within the regulatory perimeter. So, you know, once we start to see these things happen, it's just a matter of time before you have more policymakers and regulators realizing that, you know, this is something we should allow to flourish and we can allow it to fit within the U.S. framework. I think the way that this really starts to become a bipartisan issue is just that people need to do more things like commenting and people need to be more engaged in.

just the political process here. I've started to get active with a group called GMIPAC, which is pushing forward some pro-crypto people to run for some of these seats and advocating for certain policies. I'm curious if you guys have a view just on what everyday people can do in order to promote their politicians being more actively engaged on this issue. Yes, I mean, we're members of a couple of trade associations and advocacy groups, blockchain association, Adam, which is the association of digital asset market. Those are two trade associations focus on various issues. And, you know, they're really boots on the ground in D.C.

We also donate to Coin Center, which is, you know, the most well-known think tank and advocacy group. And I think a lot of the reasons why you're seeing more policymakers, realizing the benefits of crypto, while you're seeing in these hearings that have been held in the House and Senate, where you have senators and members of Congress really asking very well-informed questions and not so much just trying to get an answer they're already expecting. Which is different, right? If you look back a couple years ago, like, that was not happening. The level of knowledge that these folks are taking into those hearings is totally, totally changed. Yeah, they're actually asking questions and looking to hear what the answers are and then

adjusting their thinking based on those answers. So that, yeah, a very positive development to see. and I think it's a reflection of all of the hard behind the scenes work that blockchain association, Adam, Point Center, and others have been doing behind the scenes. And Matt, people are in fact and can reach out to their local policymakers on this, right? Whether it's, you know, issues directly related to crypto, whether it's the GVTC conversion. What you're actually seeing is that many, if not almost all of the comment letters being submitted, people are actually stating what state they are a resident. of in their comment letter. So you actually can see really just how coast to coast, red state, blue state, I mean, every single submission here and really this SEC decision that, you know, that 240-day clock winds down in the beginning of July, this affects, you know, a lot, a lot of

Americans. And it's, you know, from coast to coast, regardless of their political affiliation. And people want to see this through. They've been patient. And we think that, you know, the time is now. Yeah, and we've, you know, there's over 2,600 letters that have been submitted. We're going through them as they're coming in. Before the White House executive order, two common themes we did see were, you know, investors want this. If one of the mandates of the SEC is investor protection, well, one way you can accomplish that is by allowing GBT to operate as a more optimal vehicle to better track NAV as an ETF. The other theme we saw was something we've already mentioned around if you've now allowed these futures-based products to trade, you logically should also be okay with a spot-based product

because it could better track MAB. It's the actual underlying asset. It has the same risks that you have expressed over the futures-based product. But then following the White House executive order, we are also seeing this America leadership and competitive argument made because one way you can do it is by just further bringing crypto within the regulatory perimeter. Our neighbors to the north have have Bitcoin ETFs, Matt, right? What can't we? And we've seen the impact on flows in this industry when that happened. You know, the investors tried to get their capital up there. So I think that's a great point. I want to kind of press on the product side of the house a little bit here, talk about your roadmap. But Craig, you brought something interesting up that I did want to get

your guys' perspective on around just how GBTC performs relative to NAV. And at times that product has traded at a premium. It's now trading at a discount. But how does that change your guys as just day-to-day, depending on where that product trades. And how do you think about that? Yeah. So, you know, GBTC and all of our digital asset products are structured to eventually become ETFs. But because the U.S. regulatory environment has not permitted that type of product, we pursued product structure and what we believe to be the next best thing. So what that's resulted in is this four-stage product lifecycle where each stage results in the products becoming more accessible to more types of investors. So all of the products start off as a private placement

under Rule 506C, which is an exemption SEC registration, which is something that you would have with an ETF. And what that means is the products are only available to accredited investors at first, and those investors are subject to at least a one-year holding period. So it's as restrictive as it can be. And you might say to yourself, why are US regulars okay with that being offered to accredited investors, but not retail investors like what an ETF would be? The answer is, is it a tradeoff in investor protection in saying that if you have an investor that's of a certain net worth or level of income or sophistication, we'll let them invest in a structured Bitcoin investment vehicle, provided they also hold it for at least this one-year

holding period. It's just a risk-based determination. So it's the first stage of our product offering. The second stage is knowing that the shares originally created in the private placement could be freely tradable after one year, we developed a public quotation on the over-the-counter markets for their shares to trade. So that's what GBT is doing today. It's trading on those public markets.

But because you have this lag between the private placement and the public quotation, historically when we had premiums, you didn't have authorized participants, which are market participants that exist for an ETF that could come in, create more shares to bring that premium down to NAV. Conversely, because of this product structure, we don't have redemptions. And so if there's a discount, you can have authorized participants like what you would have with an ETF, come in, redeem shares, and bring the discount, up to NAV. And so that's why we say one of the best ways to really solve this current situation

for GVTC is to allow it to convert to an ETF so that you can eliminate both premiums and discounts and have a track NAV, which is just the more optimal way to invest in Bitcoin. Yeah. And so Matt, I think when we look at GBTC specifically today, you know, it trades probably now about a 20, 25% discount to its net asset value. So all things being equal, if the SEC were to approve GBT to convert to an ETF, investors who held GBTC shares at the time of that conversion would see the authorized participant process that Craig just mentioned, both have the ability to create and redeem shares that would close out that discount to net asset value. So if you're buying shares today at 75 cents on the dollar, you would expect that the GVTC shares would close

and bleed up towards that net asset value. And so when we talk to investors today, as they think about their Bitcoin exposure, do they take a dollar and do they go buy Bitcoin in the spot market? Or do they say, I have a long-term view for Bitcoin, I'm happy to buy Bitcoin exposure at 75 cents on the dollar, believing that over time the SEC will get comfortable and approve this ETF conversion. Yeah. And certainly, you know, people who are buying GBT and tax-advantaged accounts

are probably taking more of the long game on this anyway, thinking that there'll be some sort of conversions. So let's talk a little bit about the products on the house. You guys announced a new product this morning, actually. So by the time we air this, it'll have been out for a few days, I think. But talk a little bit about just the general product suite as it stands today and what you guys are excited about. Sure. So today we launched our 18th investment product. It is the grayscale smart contract platform, excluding Ethereum Fund, what we hear from investors is that they continue to want to diversify their exposure within their digital assets leave. And for a lot of investors who may have conviction just in Bitcoin or just in Ethereum, over time, we see them continue to expand their holdings,

whether it's because other crypto assets have use cases that resonate with them, or they believe in the investment theme around them or they like the governance structure or features or development work going on, whatever it may be. And so a lot of our product roadmap recently has really revolved around not just creating single-aft products, but actually going more so into creating diversified investment products. So this new fund that we launched intends to give investors the ability to make one investment and in doing so, give them exposure to all of the digital asset ecosystem that is surrounding smart contract platforms, but exclude Ethereum.

And that was a purposeful decision on the part of the Grayscale product team, believing that many of the investors for whom this product is appropriate likely have their Ethereum exposure. And so as we're monitoring developments in the smart contract ecosystem, system, things like Solana and Cardano and Avalanche and, you know, all these different ecosystems are developing new smart contract functionality, competing with one another for, you know, speed and utility of their networks. And we think that as investors continue to appreciate these different sub-thames or subcategories of the crypto ecosystem, that we can really help

be a conduit to having them access that, rather than them having to create their own baskets of various crypto assets altogether. That makes a ton of sense. I mean, over the years, it's been fascinating for me to watch just in terms of speaking with LPs and folks that are maybe not in this on a day-to-day basis, just what narratives get them excited. I mean, back in 2015, when you guys were launching these products for the first time, it was probably just Bitcoin.

People were excited about. Now you see people coming out the space knowing absolutely nothing about Bitcoin or Ethereum and just liking NFTs or liking gaming and wanting to. to the Metaverse and things like that. So what narratives are actually driving the bulk of fund flows right now for Grayscale? What are people excited about? Well, certainly we've seen a lot of excitement around smart contracts and smart contract technologies.

And so the continuance of thinking about crypto exposure through a thematic lens, I think, is really important. We continue to view the totality of the Grayscale product suite is really giving investors the tools to either leverage some of the themes we've identified or for investors to put their own baskets together. So for a lot of folks, we certainly see a lot of enthusiasm and excitement around privacy and privacy preserving digital assets. So at gray scale, we have a product for Zcash and a product for Horizon. I think a lot of investors continue to be excited about metaverse opportunities in the emergence of gaming. So we were certainly early proponents of

Decentraland and the Monotoken and developed a product for that. But I think at the end of the day, what's most important here is the appreciation amongst investors that it is still early days, no matter how much they're seeing crypto in their financial media on TV, conversations they're having. It's still early days. It's too early for anyone to pick a individual winner and really diversification as you think about crypto holdings. I think for most investors, it's the name. of how they're thinking about their, you know, their exposure. And when you speak to investors, are you having a lot of conversations around active versus passive? And I'm curious how you just see that side of the market unfolding in terms of

will we see more active products? You know, it's certainly going to be interesting to see how that unfold. I think what has been exciting and encouraging to watch from our seat is really what we look at most closely in many of these assets, which really is liquidity. You know, even talking to you today, so much of the liquidity within digital assets is really concentrated in that upper 10, upper 15 digital assets by market cap. And so when you think about active management, I think that is probably one of the largest challenges is that as a fund would grow in the active space, where the manager is finding alpha is oftentimes going to be in smaller cap tokens, which becomes more and more difficult to take on a position or take off a position if it is a smaller

market cap, if it is a lot more thinly traded. And so certainly a challenge for active managers are going to be being able to beat benchmarks, which often are looked at at things like Bitcoin, Ethereum, and some of the largest cap digital assets. Over time, I think we're believers that market caps and liquidity of the entire ecosystem will continue to grow, which I think will give rise to more opportunities. for active management, but still early days for it. Yeah, and a lot of investors are still looking for access through the structured investment vehicle model that gray scale offers.

Yes, you can go to a Coinbase or Robin Hood. Those are becoming easier, but they're not allowing you to invest in the structured and investment vehicle with reporting and audited financial statements and tax information statements, robust disclosures, doing that alongside all the other assets in your brokerage account and portfolio. And that's really a lot of the focus and the value that will. we're adding to the crypto ecosystem. Yeah, certainly the wrapper and just the regulatory standing would be a lot easier.

And I think you're right, Michael, on the kind of performance versus the underlying is you also don't have maybe the sophistication on the active side yet in this market and historical track records and things like that. It's just a lot easier to underwrite as an investor, or more difficult to underwrite, rather. Switching gears here a little bit, you guys mentioned DeCentraland. What is your just general posture towards gaming and NFTs and just the explosion? and just the explosion of talent that we're seeing in that space?

Is that translating to demand on the investment products ad? Yeah, I think that the conversations we're having with investors is one that is certainly demonstrating enthusiasm for the metaverse. And, you know, unfortunately, we're still at a phase of the development of metaverse platform that kind of reminds me of like 2015, 2016, when people were throwing around the term blockchain without really knowing what it meant or understood the utility of it. And so the confluence of companies like Facebook rebranding and a lot of other large players really beginning to focus their efforts on this. I think it's certainly creating a really encouraging narrative

for investors around it. What's been interesting to see from our seat is the fact that this ecosystem is actually moving even faster than we could have possibly imagined. That's to say that the ways in which users and developers are moving along the progression of these platforms is just unprecedented. There's constantly, constantly a new setting of the bar of, you know, graphics and utility and the experience and moving from things that look somewhat game-like to things that are approaching kind of photo realism and really giving people these more authentic experiences that they can actually have in the metaverse. I think similarly with NFTs, many investors are certainly watching firsthand how explosive the growth of NFTs have been,

but there's also an appreciation that I believe for many folks are grappling with, which is that this initial foray into NFTs, these digital form of art, and a lot of the ways that NFTs are being deployed and valued and spoken about today is, again, just a really, really early use case for how NFTs in general can be utilized in real-world applications. And so I think a lot of folks are waiting patiently to see how the emergence of NFTs can begin to affect things like ticketing and provenance and ownership of all kinds of assets, not solely just digital forms of art, which obviously has been very much kind of the flavor of the last couple of months. Yeah. And all that's the reflection of how vast the use cases for crypto and Web3 have become. We're well beyond the currency or the more varied use cases of smart contracts. We're talking about gaming now and entertainment.

Computing and infrastructure is another theme that we're seeing. Privacy is becoming its own theme. And I think that also really goes to show that just tying this back to our early conversation about regulation, there's no unitary use case. And so it doesn't really make sense to have one single regulator focused on it. Think about what are the use cases? what are you trying to protect against? And then divvy that up based on which regulator should or should not have jurisdiction over those use cases.

That's tough, right? And I think we've seen that firsthand. As a regulator, they actually have a pretty tough job because as soon as they kind of wrap their heads around a use case or a particular aspect of this ecosystem, we continue to see the human capital in this ecosystem continue to push the boundaries, developing new use cases, new attributes, and kind of seeing the ecosystem, continue to evolve. So there is a challenge there around that very issue itself. Yeah. Yeah, it's kind of like the early days of the internet, which also was a technology that offered the ability for many use cases. So there wasn't one regulator that focused on the internet. And we actually have this

do no harm policy during the Clinton administration that said something similar, but probably in an even more open way around the internet of that, you know, let's figure out what this is first, where are the benefits, where are the risks, do the studies, and then make sure that to the extent we are regulating, we're not doing anything that will squash the internet before we can actually discover all of its benefits. And the result of that was, you know, Silicon Valley is in the U.S. It's not in another part of the world. And so I think the hope is that from this executive order, we'll have a similar mindset so that we can keep competitiveness around crypto and Web 3, the next stage of the internet within the U.S. as well.

It's such an important point. I mean, imagine a world where the internet was a lot different and it was just regulated like a telephone company or if it was just regulated like the U.S. Postal Service. It's like the internet is a lot of things. It does allow you to communicate via email. Similar to sending a letter, it allows you to do a phone call, but it should not be put into that bucket unilaterally. So I totally agree. So I think the kind of call to action here, I know you guys have to run in a second is I want everyone to be aware. of the comment letter and where we can send people to learn more about Grayscale. So maybe to close it out, just where can we send people? Sure. So the best place for people to visit is grayscale.com slash comment. Whether you have been, you currently are, or maybe at some point in the future, plan to be a GBT holder investor, a Bitcoin proponent, a digital asset proponent. we invite you to have your voice heard.

This is an important part of the process. And, you know, Matt, as we mentioned, while we have been and will continue to put the full resources of gray scale behind this initiative, it is really important that investors participate, academics participate, really anyone is welcome to participate in this process, to really ensure and hold the SEC accountable to this process and that they're doing right by investors. So we really appreciate folks' comments and do believe that these comments will be read

and will resonate with the SEC as they weigh this issue. Well, it's great to have you both on. I'm looking forward to doing this again soon. I'm hoping that the next time we do it, we have the approval of the Bitcoin ETF. But I don't want to say that you're not going to be allowed back on until that happens. I know that's out of your hands. But I appreciate you both joining today. Thanks, Matt.

Thanks, Matt. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit Castle Island.V.C. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.