The Breakdown - Bitcoin Spot ETF Approval Incoming?

Episode Date: October 13, 2023

Today on The Breakdown, NLW catches up on everything that's NOT the SBF Trial, including promising news on the Bitcoin Spot ETF front, JPMorgan Onyx, and more. Today's Sponsor: Kraken Kraken Pro is the one-stop destination for pro traders - https://k.xyz/TheBreakdownPod Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Friday, October 13th. Ooh, spooky. And today, we are catching up on everything that was not the SBF trial. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Bigger's. bit.L.L.S. Breakdown Pod. Hello friends, happy Friday. It has been another wild week in crypto, although frankly, the SPF trial has been really overshadowing everything. And so what we're going to do today is go briefly through a set of different stories that got a little bit lost in the news,

but which I think are significant in terms of where things are headed. First up, we move over to the ETF world, where ARC and 21 shares have amended their spot Bitcoin ETF filing, seemingly in response to concerns raised by the SEC. The S1 filing now includes sections addressing risk factors including segregation of assets in custody, illicit transactions on the Bitcoin network, and environmental concerns. SEC filings are required to include a comprehensive list of potential risk factors that could impact the price of a security being offered.

Now, Bloomberg analysts viewed the amended filing as a likely indicator that the SEC had provided constructive feedback for like the first time ever on the ETF application in an attempt to move towards approval. Bloomberg ETF analyst James Safart says, this all signals to us that ARC and 21 shares and likely others are talking with the SEC about things that they want cleared up in these documents. Good sign for future approval, in my opinion. Finance lawyer at Davis Polk, Scott Johnson said, Just skim change pages on this. If these are actually responsive to SEC comments, it doesn't look like the agency is putting up any unnecessary roadblocks via disclosure review.

Eric Balcunis, the senior ETSF analyst at Bloomberg said, agree with Scott. I also heard separately that none of the comments were that new or insurmountable, which is probably why Arc was able to address it all in two weeks flat. To that, Chris Camp responded, these changes are relatively minor, and there are a hugely favorable sign that approval is coming. Why do this kind of fine-tuning if you're just going to reject? Now, the market seemed to agree, given that the GBT discount narrowed to 16.5% on Wednesday in response to the news. That's the tightest it's been since the beginning of the year. Many, of course, have been looking to the discount on the grayscale product as an indication of how likely markets think it is that a Bitcoin

ETF is to be approved. Summing it up, Jake Trevinsky wrote, it ain't over till it's over, but all signs point towards SEC approval for Bitcoin spot ETFs. Next up, J.P. Morgan have used their onyx blockchain infrastructure for the first live settlement of a collateral transaction. The transaction was conducted between BlackRock and the UK Bank, Barclays. BlackRock used JP Morgan's tokenized collateral network to turn shares in one of its money market funds into digital tokens. They then transfer the tokens over the Onyx blockchain to Barclays for use as collateral in an over-the-counter derivatives trade between the two institutions.

Now, J.P. Morgan's blockchain division has been hard at work building infrastructure and testing functionality for years. This first use of the system in a real-world environment then could serve as a milestone as more financial institutions begin using blockchains as replacement infrastructure for financial transactions. Ty Loban, the head of Onyx digital assets at JPMorgan, explained that the blockchain settled the collateral transfer almost instantaneously. That is obviously a dramatic upgrade over the one-day-or-more settlement times typically experienced using traditional electronic banking rails. Loban said this speed boost could free up a huge amount of locked capital

currently required to make collateralized transactions function on slower settlement times. Tom McGrath, the Deputy Global Chief Operating Officer of the Cash Management Group at BlackRock said, Money Market Funds play an important role in providing liquidity to investors in times of high market volatility. The tokenization of money market fund shares as collateral in clearing and margining transactions would dramatically reduce the operational friction in meeting margin calls when segments of the market face acute margin pressures. Ed Bond, the head of trading services at JPMorgan, said the bank

eventually hopes to offer a wide range of other assets as forms of tokenized collateral, including equities and fixed income. Now, alongside their tokenization platform, JPMorgan, also operates a blockchain-based system called the JPM coin. This system allows wholesale clients to make dollar and euro-denominated payments with near instant settlement speeds at all hours of the day or night. The bank said it had processed $300 billion since its launch in June of this year. JPMorgan is also operating a blockchain-based system for repurchase agreements or repo transactions, which are integral to interbank funding markets. The bank is exploring the possibility of tokenized deposits for use in cross-border settlement. Now, if you're trying to get a sense of what this

means or how good it is, go to the YouTube channel or wait until tomorrow, I guess, for the conversation that I had about this with Scott Melker. Basically, this is a middle space where the tradfi and the crypto world really mix. It's not necessarily just a real-world asset trend kind of story, but there's certainly something significant here. And now a word from our sponsor. Today's episode of The Breakdown is brought to you by Cracken. Cracken Pro gives advanced traders a customizable,

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Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc., PBI, DBAC., CRACN. Moving over to politics, which we obviously normally don't cover, but we have been, given that a current crypto-friendly leader is the House Speaker Pro Tempor, and at the end of last week it appeared like Tom Emmer, who has been a vocal crypto defender, might be in the running to be the next Speaker of the House. Well, right now, as we're recording, confusion reigns as Republicans attempt to vote a new speaker

in. After the dramatic ousting of Kevin McCarthy last week, the GOP have convened days of meetings in an attempt to narrow the field on a replacement. On Wednesday, the major candidates were Steve Scalise and Jim Jordan. Crypto advocate Tom Emmer, who had been considered a frontrunner late last week, was not put forward as a contender. Scalice managed to secure his party's nomination on Thursday afternoon, but senior party members expressed doubts that he could attract support from a majority of members in a House vote. A frustrated Scalise dramatically withdrew himself from consideration on Thursday night, stating that, quote, it wasn't going to happen today, it wasn't going to happen tomorrow.

I withdraw my name. He added some parting shots for his disruptive colleagues in the GOP saying, some folks need to look in the mirror and decide if they are going to get back on track. Now, of course, without a sitting speaker, Congress is more or less paralyzed than unable to conduct regular business. Beyond crypto legislation, the gridlock threatens to hold up even more pressing issues, like the authorization of military aid, and the funding of the government, which is set to expire again in a few weeks. Now, as disappointing as it might seem on the outset, that someone like Tom Emmer isn't looking to be the next speaker, it may be for the best, given how big a challenge the next speaker

is actually going to have. As Representative Mike Collins from Georgia put it, we should just have a lottery. If you lose, you have to be speaker. Staying in the political realm for just a minute, SEC Chair Gary Gensler is taking more criticism for stonewalling elected lawmakers, but this time it isn't even about crypto. On Thursday, James Comer, the chairman of the House Oversight and Accountability Committee, wrote to Gensler in a final attempt to obtain requested documents. Comer had previously asked for documents related to coordination with EU regulators on ESG and climate-related issues. Comer warned that he would have, quote, no choice but to subpoena the documents if the SEC does not start cooperating with requests. Comer noted that, quote, to date the SEC has not produced

documents that are substantively responsive, and to date the overwhelming majority of documents produced, have been publicly available on the SEC's website. Now, of course, these experiences with the SEC echo complaints raised by Financial Services Committee Chairman Patrick McHenry in an oversight hearing in late September. McHenry has also threatened to subpoena Gensler and the SEC if they do not cooperate with those requests. Still, the commentary from the peanut gallery is very consistent on this, which is basically talk is cheap and you need to actually do it. Michelle Nightingale writes, Congress needs to stop threatening and actually do something. Huffing and puffing does absolutely nothing. Stephen Chip says, wow, yet another letter with tough language. Just subpoenaed Gensler already.

Over in CFTC land, that organization and the Federal Trade Commission have filed complaints against former Voyager CEO Stephen Erlich. The CFTC accused Erlich of defrauding customers by misleading them about the strength of the company and doing business without proper registrations. The FTC is suing Erlich for lying that Voyager customer deposits were protected by FDIC insurance. Ian McGinley, the CFTC's enforcement director said in a statement, Ehrlich and Voyager lied to Voyager customers, while representing that they would treat customers' digital asset commodities safely and responsibly. Behind the scenes, they took shockingly reckless risks with their customers' assets, leading to Voyager's bankruptcy and

huge customer losses. Now, one interesting note is that the CFTC lawsuit made it clear that the agency considers certain crypto tokens, including Bitcoin and USDC, to be commodities and within their jurisdiction. And from the Intrigo meter, the lawsuit contains numerous conversations between Erlick and unidentified professional athletes, in which Erlick is concerned about the financial health of unnamed counterparties. In one example, Erlick said, My biggest fear is that Firm B is a house of cards. Not for us, but will blow up the industry.

The CFTC notes that Firm B later went bankrupt. Now, as we get all this news, it's hard not to notice that it has been a very quiet time in markets. Spot trading volumes on Coinbase have declined again in the third quarter, coming in at less than half the quarterly volume from the same quarter last year. Indeed, Coinbase volumes have been falling consistently since the final quarter of 2021. The most recent quarterly figures showed just 76 billion in trading volume, the lowest level since Q4 of 2020.

That said, this quarter's fall in Coinbase volume was smaller than the previous quarter, and relatively minor compared to the precipitous drops seen in 2022. This could be a sign that volumes are beginning to stabilize at bare market lows, and worth noting, even though volumes are at cycle lows, there's still more than double the previous cycle low in early 2020. Also worth noting is that although Coinbase volumes are down dramatically, they've still recently gained market share due to the continued loss of confidence in Binance. Binance spot market share has fallen for seven consecutive months since the exchange was sued by the SEC and the CFTC.

The drop-in volume on Binance has been accompanied by a spike in website visits across competing offshore exchanges, with both HTX and gait.io having seen their web traffic more than double this year. Price action isn't faring much better than trading volume. After a hot start to what is affectionately known as October, on Sunday Bitcoin failed to break above the 28,000 level and has begun heading lower. This week saw Bitcoin's price collapse by over 4%, falling back below the 27,000 mark on Wednesday. Prices appear to stabilize overnight on Thursday, ending the week-long slide. Alongside price drop, some sentiment metrics have also been falling. The premium on Bitcoin futures contracts known as the basis rate has reached its lowest level in four months.

Monthly Bitcoin futures typically traded a slight premium to spot markets, usually seen as compensation for delayed settlements. This annualized premium is often between 5% and 10% under normal market conditions, but this week fell below 4% for the first time since mid-June. Now, while some of the macro uncertainty related to recent domestic and global events have given Bitcoin a slight narrative boost, these market sentiment indicators seem to indicate it could be, as Burnaway put it, not October, but October. One last thing to keep an eye on, the SEC's deadline to respond to the grayscale Bitcoin ETF decision is tonight at midnight. If the does nothing, grayscale's application to convert GBTC to an ETF formally comes back to life.

Something to keep an eye on for the weeks to come. That, however, is going to do it for today's episode. I hope you are heading into a wonderful fall weekend. Thanks as always for listening. Thanks one more time to my sponsor, Cracken for supporting the show. And until next time, be safe and take care of each other. Peace.