TFTC: A Bitcoin Podcast - #428: Examining BlackRock's Bitcoin ETF with Townsend Lansing

Episode Date: June 26, 2023

Marty sits down with Townsend Lansing to discuss BlackRock's Bitcoin ETF. Townsend on Twitter: https://twitter.com/TownsendLansing 0:00 - Intro 8:40 - Inflation hitting the UK 11:07 - Introducing Townsend, Blackrock ETF 19:10 - SEC approval 25:23 - APA 26:46 - How Bitcoin market could be affected 29:28 - People becoming aware of crypto risk 31:23 - How the grantor trust works 35:50 - ETF liquidity 42:12 - Bitcoin’s better security 45:30 - Will bitcoin financial products be treated differently? 48:05 - Approval is unlikely 49:52 - Bitcoin’s impact on finance 51:13 - Wrapping up Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠CrowdHealth⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Bitcoin Talent Co⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TFTC Merch is Available: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Shop Now⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the TFTC Movement: Main ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Clips ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Website⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Follow Marty Bent: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Podcast⁠⁠⁠⁠

what's up freaks it's your boy marty here to introduce this rip of tftc sat down with townsend lancic from coin shares to talk about the blackrock etf the grantor trust townsend uh has built a bunch of exchange traded products for coin share so he's pretty up to speed with what's going on really good episode if you're looking to get more clarity on the black rock etf before we jump in to the sponsors we got to read uh some boost we owe a lot of boost we're gonna last two episodes all right no we only have one episode what do we owe two or one it should be at least two at least two all right we'll go to at eric99 for rip 427 killerware

liquidity crisis with john titus very high energy rip 50 000 sats from eric 99 stay humble stack sats thank you eric at garth 20 000 sats he needs a good orange pill i agree i agree at user 8036787941155186 12 000 sats and he has a post on noster takes me to snort.social i know it's silly to post and recommend every second tftc rip but john titus absolutely nails it as it turns out at the very end of the conversation john is a bitcoin maxi who does not know it yet love to how marty bent orange pilled him namely not as bitcoin will reveal itself to john without help in a moment like that i think john's a bitcoiner doesn't realize it as well we'll get him there absurdient 10 000 sats good conversation open mind open discussions gotta have an open mind

freaks top four boosts from rip 426 bring lightning to utilities with sonota at eric 99 another 50 000 sap boosts with stay humble stay humble stack sats good advice uh at z man 60 20 000 sats good stuff it was good stuff highly recommend this rip sonota is really doing cool things at the intersection of energy and bitcoin at itsy bitsy hodl 10 000 sats seems like real time settlement with no counterparty risk as value is provided could really bring more accurate pricing in any market starting with energy should be a multiplier as mentioned since it is the base structure of society completely agreed there itsy bitsy auto and at mr cd brown three underscore 4021 sets now this is value and definitely tweaks my interest does it tweak your interest or peak

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the company's building out the financial and monetary infrastructure of the future go set up a profile there as well bitcoin talent.co tell them the tftc sent you and enjoy this rip with you've had a dynamic where money's become freer than free when you talk about a fed just gone nuts all all the central banks going nuts so it's all acting like safe haven i believe that in a world where central bankers are tripping over themselves to devalue their currency bitcoin wins in the world of fiat currencies bitcoin is the victor i mean that's part of the bull case for bitcoin if you're not paying attention you probably should be be probably should be i guess inflation is the topic of du jour in the uk it is for us yeah

at least on the desk how bad is it do you notice it yeah definitely you notice restaurant appetizers have doubled you know mains have gone up you know 30 40 percent um so bills are pretty dramatic uh my food bill is definitely on a 50 you know um you get sticker shock more than ever like i mean obviously you're anchored to old prices but you you look at things and think wow that is a lot more than i expected and it's also shrink inflation there's a lot of shrink inflation has been going on a lot where you buy something and it's 30 grams lighter than it used to be you know one bread roll a chicken slice short same price so um it's been going on for a long time yeah i'm a bit ignorant what's the uh the wealth gap like in the uk is it comparable

to the us are people really feeling it there or um yeah i mean there's it's probably comparable i think there's probably more in that social network but still i mean it's it's pretty i mean I mean, I'd say they're more wealthy in the U.S. than they are in the U.K. as well. But across the board, I think it's pretty impactful. Yeah. Yeah, it's interesting times. Like I was just saying before we hit record,

we're going to have that Weimar-style ping-ponging between deflation and inflation. Yeah, definitely. But, you know, muddle through and see what the bank is doing. I don't know what the bank is going to actually achieve, so we'll have to wait and see. Yeah. And it seems like Rishi really stuck his neck out this week and say, if I haven't solved this problem in six months, I failed. So really put the target on your back

there. I mean, I don't know if anyone can solve it until, I guess you could depress demand so much that, you know, but until you solve the structural inefficiencies that were created by Brexit and the pandemic, what can you do? I mean, there's just, there's not enough labor and we can't import things that we use efficiently anymore we import 50 from abroad mostly from europe and that's you know dramatically far more inefficient than it used to be you know three years ago so yeah interesting times great time to be alive interesting time to be in bitcoin exactly uh haven't introduced the freaky yet i'm sitting down with talson lansing from coin shares to talk bitcoin etfs trust whatever blackrock is launching um but as you may be able

to tell he's got an american accent living in the uk you've been over there for in europe for quite some time haven't you about 21 years in the uk and then four or five years in germany italy before that so proper expat at this point yeah yeah it's uh do you like the expat life i mean i've grown accustomed to it my kids are european my wife is european um so and america's changed a lot since i left so it's hard to judge it's sort of now it's home this is the place i've lived the longest you know i grew up in dallas 14 years and then since then it's been new york europe and london so pretty much that's um that's kind of my frame of reference now yeah to add some context for the freaks i uh wrote a newsletter about black rock's filing of the bitcoin grantor trust

chris ben dixon your co-worker uh dme said marty you got this all wrong you got to talk to my buddy townsend about what's going on here and so he introduced us we had a conversation yesterday i'm really excited to to jump into this topic obviously it's one of the largest topics of the week uh the last couple weeks and a lot of people are trying to grasp what exactly the structure of black rock's trust is and what are the chances that the sec actually approves it and obviously their filing has incited a number of other filings that um that have uh seen the signal that black rock put out there and like oh we got to get the market and obviously coin shares you guys offer a lot of exchange traded products and um you've been building

them not only uh in the crypto space but before you were heavily involved in the etf space so i think as a jumping off point um just let's talk about what you've been doing at coin shares and the products that you have and how that may compare to what blackrock's building sure i mean it's important they're different obviously because the european market the regulatory regimes and then necessitate different structures but at coin shares we've been building what are known as kind of extradited products on on digital assets the European market is far more developed in the US in terms of both the number of issuers the number of products we alone have 15 or 19

different products from two different issuers listed on major exchanges throughout Europe. So Zetra in Germany, Six in Switzerland, Euronext Amsterdam in Paris, and also Nasdaq Sweden. Those products cover not just Bitcoin and Ethereum, but they also cover a wide variety of altcoins. We also offer to share staking rewards in products where staking is possible.

We have about seven products that share staking rewards with kind of an annual or daily accruing, but annual percentage around up to 5% for things like Polkadot. So it's a much more robust market in Europe for exchange-traded products, mainly because the regulatory regime is a lot more friendlier and a lot more favorable. We've seen, with the exception of the UK, European regulators who approve prospectuses and also the listing authorities, much more willing to list digital asset products. So we have a very robust infrastructure. in the u.s obviously the quest for the spot etf has been going on for i think probably what since

2011 2013 maybe when the people have filed the first one um overall the u.s product the black rock product is is fairly simple it's a trust it's a trust um there are two ways to structure etps etfs in the united states you either use 40 act fund which is also a trust but it falls under the 40 act regime or you use what's called a grantor trust which doesn't fall under the 40 act regime the 40 act regime is the regulatory regime like the 33 act that that governs the rules you know relating to investment companies um the reason so just as case point when when the sec and the staff were to allow the futures backed uh bitcoin product they insisted it be wrapped into a 40 act fund that gives some extra protections it also has a wider regulatory regime

than you would find in different structures for a spot product it's unlikely you can use a 40 act fund um and if i get too jargony please jump in let me and remind me to explain myself um mainly because the eligible assets that are available to a 40 act fund are defined by the irs and they're part of split into good assets and bad assets and if if a fund a 40x fund has too many bad assets then it loses what's called its pass-through taxation i.e there's double taxation once at the corporate level and then also the investor level where traditionally a fund would only have a pass-through taxation where only the investors would be taxed that the fund itself doesn't isn't taxed on its on its gains from just dispositions of of what it holds that's really

important for most investors the granite trust structure allows for that pass-through taxation but it has some restrictions on like what you can hold and how you do it but in general that's the that's the accepted structure for alternative assets single asset it started with gold you some of your your might be familiar with gld which is the world's largest gold product um it was probably the first granite us to be sort of listed as as an etf in the united states it offers exposure to gold there are other products now out there as well but that is the like prevailing structure that blackrock is using for for the bitcoin product yeah the granter trust and does that dictate that you can only hold one commodity in the trust you only hold one asset and you can't

you have no discretion over that asset it's i mean getting more jargony the granter trust idea actually comes from inheritance tax it was a way of essentially granting an asset into a trust for inheritance purposes and therefore the rules are a lot like you know you can't give people discretion over how to use that it can't have you know has to be a limited set of assets the reason it is used because if you comply with the restrictions you get that all-important pass through taxation which means that you don't have double taxation investors if they're investing in investment product hate double taxation rightfully so they probably hate single taxation as well but they definitely hate double taxation and product structures like me try go to great lengths to

avoid that as well yeah yeah cuz we have the fees perform yeah management the performance it's like okay yeah yeah and so you know I think well really what happened is if you if you had a didn't have didn't have faster taxation every time there was a redemption the trust would pay a tax on that redemption right realizing gains and then also when an investor sold they would also end up paying that again so um in many ways it's it's a better structure it's a common structure i mean blackrock has not gone to the forefront of of innovation at all in this structure it's it's really off the shelf it's what we use in what is used in the u.s for all the precious metals

um so platinum palladium gold silver it's the exact same structure and it makes sense that i shares and the others are using this you know even the vinkelvoss twins who use a very well-known attorney um kathleen moriarty unfortunately passed away uh earlier this year but she was sort of kind of the godmother of of these types of structures with gld so she was a you know a real and so what they're doing is not particularly innovative in that sense um what's what's innovative is the question of whether the sec will prove it or not yeah that's the big question because we've had in the last few weeks alone we've had the sec file complaints with coinbase and finance or finance finance uh about their exchanges what

they're offering uh finance how they're maybe wash trading and the commingling funds and with coinbase uh the unregistered securities they may or may not be offering uh their their clients and so that's been the big question is you had this enforcement action happen against those two exchanges a couple of weeks ago and then quickly after blackrock came out with this filing uh and interestingly enough we'll be using and leveraging coinbase for their custody and that has a bunch of people wondering like was this enforcement against coinbase and binance sort of a clearing of the path so that these institutions could come in and say all right it seems like there's some clarity we can we can offer these products now i mean it's very expected if it's possible i

I have been the last decade and remain somewhat skeptical that a spot ETF will be approved from strictly analyzing what the SEC has said to every single issuer that has applied. Going way back even to the first application by the Vingal Boss Twins, and it's refined over time, but the message has been very, very simple in my opinion. And this is something that, you know, people who know Bitcoin can answer, but the SEC has said you have to be able to show to us that a meaningful, if not substantial amount of volume is trade for Bitcoin is traded on an exchange that has what's called a surveillance sharing agreement with the exchange on which the ETF will be listed. And that essentially means that the exchange where most of the Bitcoin is traded agrees with NASDAQ or NYSE, the securities exchange, that they will share information on possible market manipulation. the problem has been to date and and again i'm you know i'm not necessarily the right person to comment on the extent where the volume is that the vast bulk of bitcoin volume sits on exchanges that are generally offshore um the cme which is the one regulated exchange that would probably have a surveillance sharing agreement is still a very small part of of of that volume and i think

sec are going to have questions just to give a bit of context these questions did come up with gold um in the conversations way back when when the first gold product was listed the sec did raise them probably not in the same detail they're raising now which is something you see commissioner pierce point out every once in a while um it also came up when we launched the first palladium platinum products i was involved in building those um after 2010. the sec took a lot of comfort one from the fact that the futures exchanges were super important in trading and two that the otc market the spot market was run predominantly by regulated financial institutions mostly banks who were involved in pricing gold platinum platinum silver they used to be called a fixing

unfortunate word choice but um i think the sec is looking for similar market infrastructure or structure here and i question whether we've arrived at that point um that's one man's speculation but i i don't see how unless i shares or the others can really point to that volume shift that the sec is going to approve the product what type of volume are they looking for because binance is obviously the largest exchange in the world coinbase is number two Well, see, but not even so. One of the filings recently also pretended to have a surveillance sharing agreement with Coinbase, but they didn't, right? And the SEC pointed that out.

I was like, it's not the same thing. They want to see, I would say, off the cuff, a starting point of 50%, 50% being on CME or some other proper exchange, right? I don't think we're anywhere near there. I could be wrong about that number, but it's definitely not going to be 10%, for example, right? The SEC's fundamental concern, and Lisa, they've expressed from the multitude of rejections they've issued, has been we can't have a situation where someone can manipulate the price of Bitcoin, say, on Offshore Exchange X, and that manipulates the price of the ETF on the NASDAQ. The SEC is not responsible for the price of Bitcoin on Offshore Exchange X, and they admit that. But they are responsible for the price of the ETF on the NASDAQ. And if that's manipulable, they will not list it.

And they're waiting to see a market dynamic that gives them more comfort. But whether BlackRock, I mean, BlackRock is a big ship, right? It is a massive leader in the industry. And the SEC do have history of working with those larger institutions to kind of launch innovative products. it might be that they think they have an in or it might also be that blackrock feel that it's a timely moment for both a reputational and also positioning perspective to at least put themselves in the mix in case um in case the sec does loosen things but i don't see it as a significant game changer in the sec's analysis of whether or not they're willing to list it yeah because that's

when you bring up like price manipulation that's another headline that's been yeah and the news this week is the uh the true usd minting of a billion dollars worth of that yeah yeah wash trading ledge wash ring excuse me on binance the concerns that ftx have i mean those are the things that are going to indeed make the sec more conservative when they're looking at what they're going to want proper regulated exchanges to have a meaningful amount of volume Yeah. Yeah. And that's the big question, because again, BlackRock's what, 575 for 576 of getting these types of products approved. Yeah. And I think, you know, look, if anyone can do it, they can. But I mean, clearly, there's the other issue that I think a lot of people in your community are aware of is the so-called Administrative Procedures Act, which is essentially the APA, essentially sort of the rules under which the SEC is meant or any authority is meant to kind of regulate, right? And the big claim, the big fear that all the regulators have is that they're kind of deemed arbitrary and capricious by a court, and then they end up getting sued and so on.

It would be hard for the SEC to justify at this point without satisfying their previous request for a meaningful portion of volume on a regulatory exchange. that act if they were to kind of approve one product over another without satisfying those milestones they pretty much have laid out in rejection after rejection i mean literally it's the very first rejection was a bit waffly the second was clear and then the third one was like cut and paste until they refined that argument so they were insulating themselves from any in my opinion just kind of speaking as an ex securities lawyer i don't practice anymore but did have experience when i practice for the staff what i saw is an attempt to insulate themselves from any complaint under the administrative procedures act yeah yeah it's uh i've been apprehensive too

i've obviously the whole bitcoin community is a lot of you and not the whole a lot of the community is getting very excited for this etf's coming it's going to pump our bags It's going to be massive, bullish tailwinds for the asset. And I'm just having PTSD going back to the Winklevoss first, applying for it. I'm like, I've learned to never hold my breath for the ETF, essentially. Yeah, I think it's not all bad news. I agree with you totally.

It's not all bad news. I think BlackRock's filing is sort of another milestone in terms of institutional adoption support. So clearly BlackRock, institutional adoption, iShares, like it is a big mover in a space that has been more or less dominated by startups and more intimate companies. BlackRock's obviously, it's a vote of confidence for Bitcoin. And I think there's benefits from that. It definitely gets, you know, on our side, when we talk to institutional investors, admittedly, mostly European ones, they're taking notice. And they're wondering not so much on will that spot be that Bitcoin ETF be approved as like the seminal moment, but so much like, oh, this actually shows that one of the world's largest asset managers, owner of trillions of dollars of AUM, largest ETF issuer is taking this asset class more seriously, which is not an insignificant milestone, in my opinion.

even if it doesn't get approved in the next 12 months it's still an important milestone i think for you know post ftx i'll be honest with you here and i know probably um people in the u.s to work with traditional financial you know traditional stratify and institutional investors what i'll call kind of you know real money in that sense there was a lot of depression because ftx set us back quite a lot with a lot of people um in the sense that you know we were having a lot of institutional discussions and that dried up and i see what we're seeing now is a slow uptick and and this blackrock um news is another sort of for me smaller less meaningful milestone than an actual etf but still an important one and something that investors are paying attention to

because when i share blackrock speaks people listen to go back to that old dean weber dating myself yeah people uh people really like uh signals from uh institutions of that caliber if you will yeah as an etf provider when we talk to clients we're like look you know my share is interested there's legs here there's real this is a real asset you need to figure out how this fits your portfolio and that'll be a benefit it won't be as significant as the actual etf but it's still a benefit yeah yeah go back to ftx while it was incredibly painful for the industry and the uh i could i could sniff that sbf guy out from a mile away i was calling him out like two years ago and it obviously that company did build up a significant amount of

of risk that blew up eventually but i do think in the long run we'll look back as that blow up as something that was actually pretty beneficial because it helped people realize the risk inherent uh in this industry particularly the counterparty risk that exists and then um yeah uh on top of that it really helped drive home this demarcation between bitcoin and quote-unquote crypto and uh i think you have to imagine i imagine that black rock sort of had their hand forced by customers that were demanding like hey i want exposure to bitcoin And we, well, definitely. I mean, we've seen, you know, for years, for example, and you'll know this for a year, like a lot of the institutional clients or the institutional investors we speak to, they've had portfolio managers who trade Bitcoin in their PA, their personal accounts, but can't quite convince the institution to do the same. and we're seeing a bigger conversion of that as more and more clients as well as those portfolio

managers say look it's time to start to come up with a bitcoin strategy and so that's all good news i think it's good news i think it's a welcome news you know i don't want to i don't want to dampen the excitement because it is welcome news and it's something that we talk to clients about here in europe and i imagine a lot of people talking to clients in the u.s about i'm talking to clients off the retail side about the fact that you know the adoption is continuing to pace and the black rock iShares is a big signal that's the case yeah and so let's run with the assumption that it does get approved um i'm still skeptical but of all the filings that have been filed i would be lying to myself if i didn't think this one had the highest probability of getting

approved and so going back to like the grantor trust and what they're will actually be offering how does the product work from your view um sure i mean it's a so it's an access tool right it is a wrapper for exposure to bitcoin the way it works is a couple key things it's it's open-ended that's an important thing open-ended means it can issue and redeem freely and why that's important is because that is the mechanism that allows it to track the price of bitcoin so if we compare to the grayscale product which is close-ended when you're having a close-ended fund because it can't issue new shares and cancel old shares at will, is you have so-called discounts and premiums.

But an ETF tracks the price of its underlying because it's open-ended and it does it for a fairly simple arbitrage function. If it has what's called authorized participants, so these are institutional traders who work with the issuer, and if there's demand in the market for more securities, that AP has a contract with the issuer

where they can deliver a coin in and get the security. the security is mispriced in any way the ap can arbitrage that difference right with the underlying market or vice versa and essentially earn a risk-free return until that arbitrage opportunity eliminates i.e until the price matches the underlying and that's an important way all etfs exchange-rated funds essentially track their underlying is that arbitrage function so way it works is you will investors will hold a unit of the trust that unit will be traded on nasdaq or nyse i haven't looked at the filing i think it's nasdaq um and it will trade let's say it's you know one one bitcoin one security equals one bitcoin it will trade at the price of one

bitcoin um there will be a fee that fee will decay daily so let's say it's one percent so every day the fee will decay by one over three six five times one percent i.e the amount of bitcoin it's worth effectively will decay um and other than that it trades like an equity it just it you know you can buy and sell it like an equity it'll track the price of bitcoin it'll have a it'll have both a listed price so a daily price on the exchange and at the end of the day there'll be a net asset value actually what the what the trust itself says it's worth and will you be able to buy partial shares uh that will depend on your broker generally speaking fractionalized shares are up and coming but not as easily as a you can buy fractionalized bitcoin okay so if you're

buying into this trust if they don't have fractional shares you'll have to buy that's a facility that brokers may offer right depending on i mean blocker will price it so it's a lot less than one bitcoin i mean you know probably generally you aim to launch these at 10 to 20 dollars so and you can do that because you can designate how much it's worth relative to coin at the start right um but yeah you can't i mean you can't so fractionized shares are much more prevalent in the us but it's much more a function of the broker than the exchange how the broker allows you to accrue your ownership okay that makes sense and then another interesting thing about this particular structure when you compare it to gbtc particularly is that you'll be able to

take bitcoin in kind and there's some nuance with who will actually be able to take delivery of bitcoin from the trust generally speaking it's only the aps i haven't looked at it i don't think they're offering a physical redemption facility they might we do we do here in europe we allow investors if they want to dream redeem directly it's not as common in the us but it's possible but generally speaking if that's part of the open-ended structure is that they have a set of institutional investors who can take in kind for exchange securities and then who can And that's the primary market, the market that the APs trade on, which is where that tracking function comes from.

And yes, the APs are the authorized participants, typically broker-dealers, right? Yeah, they're typically broker-dealers who trade on exchange, and they're responsible for dealing directly with the issuer, and also with the markets as the market maker of last resort, if you will. So when a normal investor, like one of your listeners, buys in, if they trade through Schwab, that trade, if there's not enough, it will eventually make its way to an AP who, if there's not enough inventory, they'll go to the issuer and say, I need new shares. And they'll give the issuer a coin and get shares in return.

Yeah. That actually brings up a really interesting point. I actually had a discussion about this on another show yesterday is how do you, because Bitcoin is a whole new animal. There's only 21 million Bitcoin. It's much different than any other asset that's been put into this type of fund structure and again running with the hypothetical that it gets approved it gets some demand and you get a lot of bitcoin in this etf do you see any any problems with like share creation and the ability to get the underlying asset there shouldn't be i mean so every etf anywhere in the world is dependent on the liquidity of the underlying right so it is it can never be fundamentally never be more liquid than the underlying itself i mean there are cases where

you might be more liquidity but the actual limits of liquidity are tied to the limits the underlying which is sort of also kind of a it's a condition for launching an etf on on something that it has to have sufficient liquidity to allow for it um i mean every every etf suffers these problems like you see you know for example you might see when when the greek stock market closed etfs were struggling to you know redeem because they can't access the underlying so yes if if it if it has demand that exceeds what's available like volume liquidity marketplace then the creation redemption mechanism could break down um i based on my rudimentary understanding of volumes the bitcoin space i think that's unlikely yeah right likely i think you know it but again

it's you never know what's going to happen in the new landscape but right now what we're seeing we don't have any liquidity problems especially not in bitcoin yeah um and and i think you probably we could take down a few hundred million of of liquidity maybe split over two days um but you could still do it yeah because that's a big question there's 2.3 million bitcoin that are held on exchanges and the rest 17 some odd are held in wallets that individuals or businesses control and yeah this thing does catch on it's like so and then i guess the point i'm trying to get to is like how does the mechanism work do they have to get the bitcoin first to create the shares or the shares traded then they go go to bitcoin you have to deliver bitcoin so yes they

will have to go into the market and they will have to source liquidity so and if that means the price goes up then yes um we've not seen i mean even some of the gold platinum platinum silvers as a loose analogy a lot of examples where um the etf drove dramatically distorted the market but it definitely drives price it definitely has true and price yeah i mean I think after GLD launch went up, what, like 5x or something like that? I'm not talking out of turn to say that in the event, like any access, if essentially an ETF is an access tool and if it opens up Bitcoin for a number of investors, institutional and otherwise,

who aren't trading directly on exchange now, then that will be a new source of demand, which presumably on the basic theory of economics should drive price. yeah now that's an important clarification there they have to go out and get the bitcoin before they can issue shares for that bitcoin same in the u.s and also here we don't ever issue shares unless we have the bitcoin delivered first okay in our wallet as soon as we confirm it's in all it we issue the shares it's on the wallet we never issue shares yeah that's the that's the one thing i was worried about if they're like issuing shares and they go out to market they can't get

the bitcoin that seems like uh yeah um and so how how do you particularly here in the u.s again if black rock gets approved you see what's the typical sort of landscape and distribution of etf shares of particular assets do you think this is a winner take most winner take all generally it's first to market wins that as you see with bito right i mean yeah they launched the futures, they take me 99% of the AUM, I think a couple others came after them got nothing. So it is true that the first I think the first ETF provider in the US to launch will be the winner. Yeah, that's the I mean, you get then you get a you get subsequent people who launch, it's very hard to differentiate in the space. So what do you compete on price,

which is good for the event right i mean but you know you saw it with gold gld launched at 40 basis points a few came in and now i think gold in the u.s trades is cost as low as 17 and a half maybe even lower i have to mean i'm 100 but and that would be the yeah that would be the expected um sort of process if if people try to compete will um blackrock have the ability to re-hypothecate the bitcoin within grants or trust generally speaking no no the trust can't do anything with the assets that is yeah actually i'm pretty 100 certain that's one of the things about the grand trust is once you give the asset to the trust there's no discretion or control over that asset it's essentially for the pastor taxation

you've given that asset and the trust has to just hold it okay it can't do it so as a policy from a product developer perspective we would not permit that either as a product developer whether in europe or in the us yeah i guess that's one of the big worries out there is if black rocket masses uh large sum of bitcoin in this trust and then they're going out and doing like block fi trying to get you on it when i was in the gold space people used to accuse us us and also world gold council i you know um state street of re-apothecating gold but it didn't happen i mean I mean, the gold sat there in the vault, still does. It's not, generally speaking, something that ETF issuers are interested in,

especially in these types of assets. The gold, it just sits there. Yeah, because as we've seen throughout time, FTX, BlockFi, Celsius, extremely risky. Yeah, I mean, look, there's an element of trust. It's not trustless. It's intermediation, but yeah. yeah we discussed this yesterday when um we had our call that's the other thing too like bitcoin has these native properties and you're you've sort of come up building these

these exchange traded products whether they be etfs or etps and um in the analog world gold precious metals and really just physical assets that sit in a vault yeah you can't really do anything with bitcoin it's completely different animal in terms of it being programmable and particularly from a security perspective like being able to custody it in unique ways via multi-sig multi-institution multi-sig like how do you see the like traditional finance space embracing these properties of bitcoin to deliver better products obviously blackrock is going with coinbase for for custody that is i'm sure their security is fine their their wallets are fine but they are one entity of many that could be involved in a multi-sig quorum like do you see

the products evolving to a point where they leverage these properties it's difficult i think um to see a product leveraging really at the same level you can direct crypto space mainly because that there's obviously a need for a certain amount of liquidity and functionality with the creation redemption process right and um there's a need for an independent custodian as well third party what we generally look for now at least in this stage of the evolution is is we try to diligence to the best of our ability um just the security protocols and the way it works and we need to marry that with the need to actually have an ability you know classic thing like we can't hide our key in a vault and switch right because i need to constantly take coin in

and transfer coin out like i can't and i can't have someone track up to the vault type as an example right and i don't know the full extent of the the properties you're talking about but generally speaking we're looking for an institutional quality custodian who offers the highest level of security protocols fits within the the quiddity needs that we have the creation redemption process which can quite you know we can get a creation we get multiple creations or redemptions or both in a day right and you're you know and and gives us kind of the level of security that we can then assure our investors functions um is that as is that as probably as innovative or as cutting edge or even as secure as some of the the newer developments

in in in bitcoin probably not i think we're not you know we're looking for a stable name that we can work with and that we know um we can reduce our our operational errors and have a lot of um scalability yeah i'm not saying that the solutions you're talking about don't allow for that but i think we tend to be a bit more conservative about that um and i'll speak for my own sense is that when i diligence custodians i was based sort of on the way the gold custodians worked and then educating myself and the company is educating me about you know how and the best of breed security protocols and trying to marry those two yeah yeah i'm going back to like the uh creation and redemption process like obviously bitcoin is going through its

monetization phase and a large portion of the people that hold this asset hold it for the long term do you see like these types of products acting differently than traditional exchange traded products in the sense that people actually don't redeem them as much or do you think no i think the investors i mean i think people tend to be counter cyclical they you know um they buy when the market's falling they sell when the market's high um in our own experience we have one of the first um digital crypto bitcoin products out of sweden um you know and it's made a lot of people very wealthy um you know relative to other and you know we've seen them selling as as as you know prices top especially when you want 65 people will take profits um i don't think they're

i'm not i'm not going to make too much speculation about the crypto community but you know the huddle idea which is as much of kind of a belief in the community as the future of bitcoin i think is probably less prevalent than types of investors that we we attract they have they tend to have three to five year investment strategies they'll figure out where bitcoin fits in that portfolio they'll have targets for sale you know um they'll have a wide variety of tax harvesting issues as well and so on and they'll look to act they will not be fervent believers um in the same way you know um nor would they be thinking that you know bitcoin's the the last vestige of protection against you know the end times for fiat if i if i don't want to mischaracterize the pessimistic view

of the community but you know is it not pessimist it's optimist so we got the lifeboat but you know they're they're much more attuned to gains and losses and to their portfolio strategies than than i'd say the traditional bitcoin investor who's huddled for years yeah that's why i like talking to you because he's bringing a very um agnostic view to this you're just building products Yeah. I mean, I freely admit that. I think it's amazing what's happened. I can see the arguments, but I'm more about building financial products on underlines that people have demand for. And if I can do it, like Bitcoin, if there's liquidity and there's robustness, and I can do it in a way that provides people access, but is honest and honorable, then I'm definitely happy to build product. Yeah. So what do you put the probability of this getting 10% that low? I'm very skeptical. I am. I just don't see it. Unless someone comes to,

I'm going to monitor the filing and see what kind of reports they file. Unless someone comes and shows me that the conditions are satisfied, or unless there is an unknown political drive behind it which i guess maybe i'm you know mispricing that i see it as ten percent yeah i think the latter might be the case i think uh yeah i could you know i could be completely mispricing that so maybe the rational brain in me is like looking at the facts and i should be looking at the towns and i don't know if you know this people call me marty jones because i put my tinfoil hat on every once in a while fair enough we'll see yeah we'll see tinfoil hat is on right now it seems uh it's almost too perfect the the series of events you have the file yeah

it could be right it could be a yeah jerome powell this week crypto has staying power um it does seem like there's no clearing of the way to roll off the red carpet for for blackrock um we could be back here and be like damn i was wrong and i mean either way we're a winner right i think you know either way if it gets if it doesn't my prediction is correct and if it does then institutional adoption has another major milestone which is really good for us yeah yeah the uh i know you're agnostic towards it but um do you see bitcoin changing the way like fine i mean we touched on a bit earlier with like multi-second stuff like that but like i mean i think some of the technology will automatically

you know i was you know i think i would think that at some point you're gonna need to shift to real world use right and and bitcoin will find its way and i think obviously there's real world i mean like non you know techno centric use but um i think finance is already looking to to learn the lessons of you know distributed ledger technology and and bitcoin and obviously it's driving even more the question of fiat currency i mean you've seen that come up more than it ever did even when gold was at its height i think bitcoin has made people question current inflationary environment you know what is the role of ever printing fiat and how can we adjust against it so um i'm hopeful

i'm hopeful that you know eventually there'll be um uses that expand beyond the kind of just the crypto community yeah yeah fiat wasn't like a really well-known term until i would say like last five or six years no gold bug no definitely not i mean i didn't learn it until i was working the gold but i had a lot of people who the gold bugs are as fervent about gold as the crypto communities about bitcoin and beyond end of the world you're kind of like now here i am again right i mean it's uh we love our gold bucks they have yeah they have a manual bitcoin they just need to realize that bitcoin's gold with wings definitely yeah um well i appreciate you coming on and breaking this down for us because obviously it's big news this week do you think there's

anything we didn't touch on that we should probably mention about the product structure about structure so if there are any follow-up questions i'm happy to you know write some stuff down apologies forgot jargony but no i think it's great i look i really appreciate the opportunity i think what you know obviously the audience you build and what you're doing is really really fascinating so well done on that um and and thanks for letting me speak it's been it's been really interesting yeah we have uh we have an agnostic financial product builder on the show and i think it's good we have to check you have to check your priors every once in a while i'm obviously all in socially professionally financially um sometimes

we need some some pragmatic thinkers that are just looking at this cut and dry i mean i think You know, I also heard of Bitcoin very early, but I was very cautious and sort of that caution has just developed an agnostic approach. But so far, Bitcoin has resisted every single agnostic doubter, you know, agnostic or doubting Thomas out there. So, I mean, it's got real legs. And I think, you know, every day it survives and continues is another day that doubters are proven wrong. Yeah. I don't know. He could be agnostic working with Chris. He's one of the, uh, We have a lot of really interesting chats. We have a lot of really nice discussions. What do you, what do you disagree with him on most?

Oh, I mean, well, I mean, I think, look, I tend to, as I'm agnostic for them, sort of, I am, I don't remain kind of a believer in intermediation. I don't think just intermediation for, is it good in and of itself? I think obviously there are a lot of flaws in the way intermediaries work but i still think they provide um some value i tend to be more much more of an institutionalist and then chris and i converge on some libertarian beliefs around like the over overreach of regulation um as well so we sort of debate around like our intermediary is good but we also sort of agree that regulation the administrative state has grown to a point where it's pretty uncontrollable yeah yeah as is evidence here in the united states it's a pretty

big show i mean nowhere else can you get arrested for importing the wrong type of fish even though you didn't know it right go on to government land and i mean yeah there's no doubt um yeah that's one of the marty jones lines is are we actually free um yeah chris and i debate that a lot as well well i know uh it's late afternoon on a friday i don't want to hold you up on your friday afternoon before you go and buy a very expensive dinner because inflation's going crazy like argentina apparently they're all out yeah listen marty thanks so much for having me real pleasure to speak to you and maybe if i make it back to texas we can catch up in person yeah you gotta get your ass back to texas a lot going on down here you gotta come to the

Bitcoin Commons. We'll have some of the hardcores push you away from any intermediaries. Everybody working here is like trying to eliminate all the intermediaries. I know, I know. All right. Townsend, it's been a pleasure. Thank you for the work you're doing. Thank you for educating us. Great. Enjoy your weekend. You too. Thanks very much. All right. Peace and love, freaks. Thank you.