The Breakdown - BlackRock Bends The Knee on In-Kind Redemptions, Clearing ETF Approval Path

Episode Date: December 20, 2023

Was this the last step necessary for the anticipated mass wave of approvals in January? Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown 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 Tuesday, December 19th, and the ETF marketing battle has officially begun. 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 bit.ly slash breakdown pod. Well, my friends, we are heading into an exciting season. Bitwise have fired the starting gun on the Bitcoin ETF marketing war with a meme ad. The short 15-second video uses the actor from the most interesting man in the world, meme, which was originally a dosa-key beer

advertisement. Enjoying drinks in a luxurious leather furnished room, the distinguished man turns to the camera to say, you know what's interesting these days, Bitcoin. The marketing campaign expected to surround the launch of Bitcoin ETFs is expected to be ruthless. Commentators expect multiple Super Bowl ads, but asset managers are clearly not going to wait until February to start selling their products. With more than a dozen issuers, the marketplace will be crowded. Now, ETFs are generally viewed as a winner-take-all business, so getting off to a hot start will be critical for all asset managers. This could be especially weird, though, because it seems like there might be a mass approval all at once, which is a little bit different than we've

seen with other assets in the past. Beyond signaling that Bitcoin ETFs are almost certainly a done deal, the Bitwise ad also gives some indication on how asset managers will attempt to differentiate their products. Bloomberg's Eric Balcunas tweeted, early shots fired in the Bitcoin ETF marketing war. Good ad, in my opinion. Short, sweet, avoids using the ticker which you can't do, but yet you definitely know it's a Bitcoin ETF, and who doesn't like that guy? And when I say shots fired, I'm not exaggerating. Check out how crypto specialists is italicized. That's aimed at the guys, BlackRock, Fidelity, etc., portraying them as Wall Street opportunists and not real crypto people. Look for more of this, especially from Ark and Vanek.

Will Clemente writes, the Bitwise ETF commercial is just a precursor to the mass marketing blitz for Bitcoin that is to come from some of the largest asset managers in the world. Corey 2140 writes, how many of the big applicants are scrambling to get a commercial out ASAP now that Bitwise moved first? Yep, the rest of them. ETF store president Nate Garassi says, this is just the beginning of the marketing war and spot Bitcoin ETFs haven't even launched yet. The marketing competition will be something to behold.

Phil Back responded, Fantastic ad. When it comes to creativity and marketing, bet on the firm's native to crypto over the firm's native to asset management. Still, Stack Hodler summed it up best when they wrote, Bitcoin is at 41K and there's fear on my timeline. BlackRock, Fidelity, and Franklin Templeton

are about to pump more money into Bitcoin ads than most nations spend on defense. They are about to sigh up the masses into their spot ETFs. By the time they're done, people will be buying Bitcoin to save the planet. They'll be gluing themselves to highway to protest against no-coiners, and people think we topped. Keep calm and enjoy Christmas time. Now, staying on the ETF theme, after battling it out with the SEC over the past month,

BlackRock has bent the knee on at least one issue. BlackRock has been pushing hard to insist on launching their spot Bitcoin ETF with an in-kind creation and redemption mechanism. They have apparently given up on winning this argument with the regulator, updating their filing on Monday to require cash-only share creation and redemption. The in-kind mechanism would have allowed market makers to deposit and withdraw physical Bitcoin from the ETF. The BlackRock ETF will now require market makers to use cash instead with the underlying Bitcoin purchased and sold by the asset manager.

Over the past month, the in-kind mechanism has been reported as one of the final remaining sticking points for the SEC. Several asset managers had already updated their filings over recent weeks, making the switch to cash only presumably to fall in line with demands from the SEC. hours before the BlackRock update, Arc slash 21 shares modified their filing to go cash only as well. At the time, Eric Baucus again wrote, ARC bends the knee joins the Cash Creations Club in order to make it to the starting gate. BlackRock probably next. I know for a fact, Arkin 21 shares did not want to do cash creations,

even worked out a creative alt-way to do in kind. So if they're surrendering, that tells you the SEC is not budging, debate is over, which is probably good if you're looking for January approval because we're at the 11th hour with the holidays about to hit. Now, all of the updated ETF filings do contain a provision to allow in-kind creation and redemption should the SEC relax their position in the future. After BlackRock submitted as well, Balcunas called it, tweeting, BlackRock has gone cash only. That's basically a wrap. Debate over. In-kind will have to wait. It's all about getting ducks in a row before the holidays. Good sign. The updated filing from BlackRock also disclosed a new ticker symbol, IBIT. BlackRock had previously registered the product under

the ticker symbol IBT, so perhaps there were issues raised around using tickers which were too close to BTC, in order to prevent confusion or unfair advantages. As for whether cash-only creations and redemptions or a problem for investors, opinions are a little mixed. There was a brief scare last week that this mechanism would have detrimental tax implications, but that seems to have just been confusion around the specific trust structure of these ETFs. In-kind is the default mechanism for almost all ETFs, with the other noteworthy outlier requiring cash-only being the gold ETF. The major issue seems to be slightly increased cost to investors. By requiring cash-only, the cost of acquiring and selling Bitcoin would be internalized by asset managers rather than assigned

to market makers. This will likely manifest in Bitcoin ETF fees remaining a little higher than they otherwise could be. As for the benefits of going cash only, the major concern seems to have been market manipulation via an in-kind mechanism. There was also discussion around how asset managers would ensure that their Bitcoin was not sourced from bad actors. Cash only would also presumably force any new volume related to the ETFs through onshore exchanges. It could also simply be that in-kind required novel new systems to be introduced, while cash only is a well-established mechanism. Still, some are suggesting an even more plain reason for rejecting in-kind, which is the stubbornness of Gary Gensler.

According to reporting from Jeff John Roberts at Fortune, a DC insider said, Chair Gensler hates, hates, hates to lose. The implication being that refusing the in-kind mechanism was a final petty and vindictive move from a spiteful SEC chairman. Gensler's hands, of course, have been tied by the Grayscale lawsuit, so perhaps the best he could do was ensure that ETFs would be slightly more expensive and mildly more inconvenient for crypto-native market makers. Now, Vaneck namesake's CEO, Jan Vaneck, reestablished his Bitcoin credentials in an appearance on CNBC. He said, Bitcoin is the obvious asset that is growing up in

front of our eyes. Vanek explained reading the white paper and doing the work to understand Bitcoin several years ago and coming to the conclusion that this is going to be an accompaniment to gold. Now, Vanek, founded under Yon's father John, launched the first U.S.-based gold fund in 1968, so hard money investing is the family business. Vanek compared the transformation of Bitcoin into a legitimate asset class over the last cycle to the industrialization of China, stating, things change. Why are you surprised? Pushing back on the notion that a newer, better version of Bitcoin could come along, Banek said, there's 50 million users of Bitcoin, so it has network effects. I think it's impossible for me to imagine some other internet store of value will leapfrog Bitcoin.

Regarding the Jamie Diamond critique that Bitcoin is rife with criminality, he took a swipe at the J. P. Morgan CEO, saying, don't throw the first stone if you're associated with a bank or any other financial institution that's been involved with criminals in one shape or another. I'll leave it at that. The having was also brought up with Vanek saying that he, quote, fully expects all-time highs in the next 12 months. He noted, you can argue about it being a bubble, but nothing that has ever been in a bubble has then gone on to outperform itself. All in all, ETF excitement continues to increase. People are getting hyped. People are getting ready. 24 could start with a bang. Today's episode is brought to you by Cracken.

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by Payward Ventures Inc. PVI, DBA, CRACN. Now, a few more stories. Starting with, a federal judge has approved the settlement between Binance and the CFTC. CZ will be required to pay a $150 million fine, and Binance has committed to pay a $1.35 billion penalty alongside a disgorgement of $1.35 billion, representing, quote, ill-gotten transaction fees. The balance of the reported $4.3 billion fine will be dealt with under settlements with the DOJ and the Treasury in due course. According to a CFTC press release, the order-fifference, the order-fifed.

that Binance actively solicited customers in the United States and circumvented their own KYC procedures to allow at least two prime brokers to hold accounts. The order further finds that CZ and Binance, quote, were aware of U.S. regulatory requirements, but chose to ignore them and knowingly conceal the presence of U.S. customers on the platform. The CFTC also confirmed that the trading firms referenced in their complaint have now been off-boarded, and that Binance will continue off-boarding accounts which do not meet their compliance requirements. Under the consent order, Bynance and CZ have guaranteed that the exchange will improve corporate governance. This will include instituting an independent board of directors as well as setting up compliance

and audit committees. Last week, CZ stepped down as the chairman of the board at Binance U.S., and he's also transferred his voting rights through a proxy agreement, removing him entirely from governance decisions. Binance U.S. said CZ's interest in the exchange will now be, quote, purely economic. The domestic exchange stated on Twitter that they were not a party to last month's settlements, but reiterated that they do not have, quote, any outstanding enforcement matters with the DOJ, FinC, OFAC, or CFTC. Now, criminal charges are, of course, still to be finalized with CZ back in court for sentencing on February 23rd. Now, one more small Binance news. A hacker is selling

access to Binance's law enforcement request panel for $10,000. So basically, Binance uses an external system called Codex to validate law enforcement requests and facilitate access. This system is common to many financial institutions and social media platforms. Hacked access to these panels has become a growing problem, largely caused by the by compromises to the vast number of law enforcement officers onboarded into systems. In this case, Info Steelers, a publication which covers darknet activity and data breaches, has traced the source of the compromised accounts. Earlier this year, three computers belonging to law enforcement officials in Taiwan, Uganda, and the Philippines, were the victims of a global malware attack. This led to

their browser-based credentials being stolen, allowing access to Binance's law enforcement request panel. That access is now up for sale on a hacking forum with payment accepted in Bitcoin or Monaro. Now, to be clear, Binance itself has not been compromised. This simply highlights the vulnerability opened up by these law enforcement request platforms. Security consultant and journalist Brian Krebs reported on this growing issue last year, writing, some hackers have figured out that there is no quick and easy way for a company that receives one of these EDRs to know whether it is legitimate. Using their illicit access to police email systems, the hackers will send a fake emergency data request along with an attestation that innocent people will likely suffer greatly or

die unless the requested data is provided immediately. In a recent interview, Derek Jekubak, the head of Binance law enforcement training, said his team frequently deals with fraudulent requests, including from private investigators posing as police. He said, we are very lucky to have a team of almost 30-X law enforcement people because we know how law enforcement requests should look like. Now, this issue is known, with some preventative measures being considered in the Senate. The Digital Authenticity for Court Orders Act would require digital signatures on court orders requesting surveillance, domain seizures, and content removal. Now, that bill hasn't moved since

2021, which sounds about right for Congress, and would only address a small segment of U.S.-based problems, while it appears that the vulnerability is much more systematic and related to tens of thousands of law enforcement agencies worldwide. To put the frustration crisply, maybe we should, you know, design every single institution as a gigantic honeypot of personal information, and then require them all to hand that information out whenever they receive a bogus request from a cop in Uganda. Now, moving over to the other star of the show. over the last year, to which of course I'm cynically referring to FTX, one party that has had a good year, thanks to them, is Galaxy Digital. They of course landed a deal to liquidate the FTX estate,

and according to reporting from the Financial Times, Galaxy have tripled their assets under management this year to 5.3 billion. Galaxy won the contract to sell off crypto assets and trust shares owned by FTX in September. The mandate was to sell these assets into the open market in lots of 100 million per week, and that process is rumored to now be near completion. It's unclear from the reporting whether this massive boost in AUM is attributable to FTCS assets prior to sale, the general recovery in crypto markets, or even the acquisition of some well-priced assets from the estate. Andrew Bond, a senior research analyst at Rosenblatt Securities, said that winning the FTCS liquidation

deal was, quote, massive for Galaxy. He added, it opens them up to win other mandates that will potentially be much more profitable. Stephen Kurtz, the global head of asset management at Galaxy, told the Financial Times that his firm would be interested in acquiring the assets from other bankrupt crypto companies. Among the assets which have caught Galaxy's eye is the FTX venture portfolio of real estate and tech companies. The crown jewel of that portfolio is, of course, a sizable stake in AI startup Anthropic, which was last valued at nearly $5 billion during a funding round earlier in the year. Kurt said, we have a crypto venture team that has been investing off our balance sheet for five years.

That subsidiary has done quite well with investments in fireblocks and Polygon. Referring to the acquisition of the FTX portfolio, Kurtz added, the record that we have on that side of our asset management business means that we'd be a good candidate for something like that. Anyways, guys, slightly shorter one today, but hard to see anything other than the excitement around the ETF just blinking red in front of us. As I was recording this, we were getting some new consternation from Elizabeth Warren, so of course that'll be tomorrow's episode.

But for now, Basque in the other side of the theme, the move to the new future and the ETF related momentum. One more big thank you to my sponsor for today's show, Cracken. go to crackin.com slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other. Peace.