The Breakdown - Is BlackRock's Bitcoin ETF Application A Political Message?

Episode Date: June 16, 2023

World's largest asset manager BlackRock has filed for a Bitcoin spot ETF. They've been approved for 575 out of their last 576 ETF applications. Given that there are no indications that the SEC has changed its tune on spot ETFs, the industry is left asking: what does Larry Fink know that we don't? Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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, June 16th, and today we are talking BlackRock ETFs, Tether Fudd, and whether they are trying to kill crypto to control crypto. Before we get into that, however, if you were 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. a link in the show notes are going to bit.ly slash breakdown pod.

All right, friends, the news has been coming hard and fast, so let's dive right in. On Thursday morning, CoinDesk's Ian Allison, the same Ian Allison behind the FTX Alameda Research balance sheet scoop dropped another mammoth story, which is that BlackRock is close to filing a Bitcoin ETF. Eric Balcuna is the senior ETF analyst at Bloomberg writes, holy crap, they did it. BlackRock has officially filed for a spot Bitcoin ETF. EF. Huge. Coinbase is the custodian. Couple thoughts. One, this is a shocker. The filing, not the partnership with Coinbase. Two, there's been no signs at all SEC willing to approve, but BlackRock is very connected, so maybe they know something?

Three, could be a big win for Arc who has live spot filing that's ahead of them in line. Another intriguing piece to this, Coinbase gets custody win but stands to lose both in clients and with fee pressure on trading costs if a spot ETF is approved. Think about it. Why the hell would I pay Coinbase 40 to 100 basis points for trade when the ETF is one basis point? Interesting in the Bitcoin filing where they list all the things that could adversely affect the price of Bitcoin, and there's many, they list the exchanges, which are, quote, largely unregulated and may be subject to manipulation, which is, of course, the SEC's issue with approving ETFs. Jake Trevinsky, the chief policy officer at the blockchain association wrote, the SEC has adamantly refused to approve a spot Bitcoin ETF for years of view so entrenched

that it's litigating the issue against Grayscale right now. Knowing the SEC disagrees BlackRock, BlackRock wants to list a Bitcoin ETF on NASDAQ. Everyone gets how big this is, right? So anyways, all of this was at first just a report from CoinDesk, but then later in the day we got confirmation of the details. The fund will be named the I-Share's Bitcoin Trust. Its assets will, quote, consist primarily of Bitcoin held by a custodian on behalf of the trust, Coinbase will be that custodian, and pricing will be benchmark against the CME-CF Bitcoin

Reference rate, which draws price feeds from reputable U.S.-based spot exchanges. Now, as you guys know, the pathway to a spot Bitcoin ETF has been rocky, to say the least, over the last few years. The SEC has at this point approved numerous Bitcoin futures ETFs. They have held the line in refusing to approve a spot ETF. The regulator's reluctance to allow spot ETFs to trade famously led to gray scale, the sponsor of the largest Bitcoin trust in the world, to sue them. Now, that case is still being litigated, but the central argument from Grayscale's side seems to be,

if the primary concern is price manipulation, which is what the SEC keeps saying, and the reference price feed used in Bitcoin futures ETFs is the same that would be used in Bitcoin Spot ETFs, how could there possibly be a difference when it comes to the approval of these two different types of ETFs? Basically, Grayscale is saying either those ETFs shouldn't have been approved or spot ETFs should be approved. Now, a lot of the mainstream reporting is focused on the idea that BlackRock may be simply too big for the SEC to ignore. The firm is, of course, one of the largest players in the ETF and fund management game, with over $8 trillion in assets under management across their wide-ranging products.

Now, the sheer size of BlackRock's footprint is often fodder for people who wish to see the worst in companies. I'm avoiding using the word conspiracy theorists, but we do see some evidence that BlackRock can, when they want to, put their thumb on the scale when it comes to American corporate and financial market policy. example, BlackRock CEO Larry Fink has been an outspoken supporter of corporate ESG scoring, often using the voting power at controls to push for change on the boards of companies. It's widely presumed that Fink had a hand in influencing the Gensler SEC's rulemaking around

ESG. Still, some were skeptical that even a firm as large as BlackRock had the clout to push through a spot Bitcoin ETF with the SEC. Turnkey Lab CEO and Friend of the Breakdown Tyrone Ross noted that other financial industry giants have already attempted this play and come up short. He tweeted, Fidelity's Bitcoin ETF filing got rejected January of last year. Say it with me, Fidelity. However, as Corey Hofstein, the CIO of Newfound Research pointed out, Fidelity has been vocally bullish on crypto for some time, though. I saw their filing as just being in line with their stances of firm. BlackRock doesn't seem like the type of shop

that's going to file something they think will get rejected. Unless that is, they're using the filing to send a broader message. Too many committees to get that through otherwise. Now, one of the big confusions throughout the day yesterday was whether the fund was filed as a trust or an ETF and what that even meant. In the Bitcoin space, Alan Farrington was screaming about this, as did Marty Bent for a while. But others weren't so sure it mattered. Again, Bloomberg's senior ETF correspondent Eric Balcunas tweeted, to all those saying the BlackRock filing is a trust and not an ETF, do you consider GLD to be an ETF? Well, this is the same thing. Lots of structures under the ETF umbrella. Nothing like grayscale Bitcoin trust. This is the real deal. Swan's

Clibson says, it's okay to call it an ETF, guys. Securities Act of 1933 filing under Form S1, not Form N1A, like 99% of stock ETFs, will trade on exchange and be redeemable to the issuer, way better than GBTC. Now we'll wait to see if the SEC approves BlackRock spot Bitcoin ETF. Gori also pointed to a tweet noting that BlackRock had succeeded in 575 out of the 576 ETF applications it has ever filed. Now, the main issue around trust structures for crypto products is, of course, redemptions, with Grayscale being the main example of what can go wrong when share redemptions are not freely available. Now, if there's nothing to indicate that the SEC has changed its stance necessarily on ETFs, most people are still taking BlackRock more

seriously than they might some other financial institution. Investor Adam Cochran tweeted, I'm a skeptic and a pessimist, and even I think the BlackRock ETF filing has good odds. Very different structure than other efforts by a behemoth who doesn't lose. 1930 Act Redeemable Trust with Redemptions unlike GBTC and proposed rule change filing. They came to play. Now, that latter part that Adam was noticing is that alongside their trust filing, BlackRock had submitted a 111-page rule change proposal for the SEC to consider. There were some even more scorchingly bullish takes than that.

Kamikaze Heath tweeted, BlackRock filing a spot Bitcoin ETF is the holy grail. With a Tradfai Titan offering a black hole for spot Bitcoin through retail retirement accounts, crypto officially graduates into the thermonuclear eternal stock Ponzu with a 401k permabit. I have never owned more Bitcoin than right now. Others were more measured in the context of what it might mean for Bitcoin overall. Wayne Vaughn, the CEO of Tiaryon tweeted, The BlackRock Bitcoin Spot ETF might not be as bullish as everyone thinks.

Recall that the Bitcoin Futures ETF launched with regulators boasting, it would be used to, quote, tame Bitcoin. The iShare's Bitcoin could be tradfiz tool to short Bitcoin into oblivion. Gary has a plan. And indeed, a lot of the discourse is around the political dimensions of this. Patrick McHenry, chairman of the House Financial Services Committee, tweeted, Your move, Gary Gensler, the SEC must not pick winners and losers based on inconsistent factors. I'll be watching this closely. Star Killer Capitals, Lee Drogan wrote,

Larry Fink is an extremely powerful Democrat, and the timing of the filing feels very much like message sending, a shot across Gary and Liz's bow. He's telling them to knock it off. Nicole Acheson wrote my take on the BlackRock Bitcoin ETF filing, big news. BlackRock is the world's largest asset manager. Second, it's not going to happen and BlackRock knows this. Rather, it is sending a political message. Larry Fink is a prominent Democrat.

Some others see this as BlackRock being opportunistic in what they might anticipate as an upcoming loss on the part of the SEC in the Grayscale lawsuit. Jake Chivinsky again from the Blockchain Association writes, bullish view. They think Grayscale wins and SEC approves the ETF to look reasonable. while still trying to kill the rest of crypto. Barishview, they're just making a point but will leave the S-1 ineffective until exchanges get regulated. Now, one question is whether this could actually serve Gary Gensler's purposes. Scott Johnson, a securities lawyer and general partner at VB Capital,

wrote, this is actually very insightful when you consider SEC doesn't seem intent to take out Bitcoin and it would cut deeply into earnings at U.S. spot exchanges. If they think a spot ETF is inevitable, sooner may be better in their view. SEC could be looking to cut down a big chunk of earnings on the spot exchanges who are enemy number one right now and see the spot ETF as inevitable anyway. Nate Garassi, the president at ETF store, says, My current theory on I shares Bitcoin ETF filing. BlackRock essentially hoping to broker a deal between the SEC and Coinbase. Everyone wins.

SEC gets regulated crypto exchange. Coin gets to keep business alive. BlackRock gets a spot Bitcoin ETF. Eric Balcunis responded, pretty solid theory, although not everyone wins, namely all the people who spent so much time and money with filings over the past 10 years. Grassy responds, that's all part of the plan, particularly with Grayscale. SEC is probably going to lose the Grayscale suit. This allows them to stick it to Grayscale, who sued them. And this, I think, gets to the sum up that a lot of people are feeling that this

might be about, which is an idea that this is somehow Tradfai killing crypto to be able to control crypto. Stephen Lubka from Swan writes, The true government attack vector is not a ban. It's having BlackRock and Goldman pump spot ETFs and all the coins end up held by those ETF issuers. Bitcoin goes to $1 million, but no one owns any actual coins, just pay for Bitcoin. Reflexivity Research founder, Will Clemente writes, Soros Fund Management last week, crypto is ripe for a trad-fite takeover. The next week, BlackRock about to file a Bitcoin ETF.

Are you really going to sell your magic internet coins to the suits and on? Later, we'll also added, If BlackRock's spot ETF application gets approved, it is undeniable that Operation Chokepoint 2.0 was orchestrated to drive out crypto-native companies and bring in large traditional firms that are buddy-buddy with the U.S. government to try and control Bitcoin slash crypto. Crypto analyst Miles Dutcher said something similar. The SEC is quote-unquote killing crypto so they can control crypto, the playbook. One, cut the on and off-ramps to starve the ecosystem of liquidity,

limiting existing crypto businesses' earnings. Two, create a dubious regulatory environment to deter new startups from entering the space. Three, purposefully deny regulatory licenses to crypto businesses and take legal action against them. Four, pave the way for Tradfai institutions to take over the space by granting them the appropriate approval. Today, BlackRock filed for a Bitcoin ETF. The SEC doesn't like the idea of crypto cowboys controlling the industry. They'd rather give licenses to companies they know they can control, or companies that control

them. Now, one last take on all this BlackRock stuff that should be brought up is a concern based on a disclosure in these documents around what BlackRock would do in the case of a hard fork and what that might mean. I Am Rahman Panda writes, Devil is in the details. BlackRock wants to hard fork Bitcoin in order to control the Bitcoin network. This is effing 2017 Hashwar again.

Which Bitcoin fork is the quote-unquote real Bitcoin. You bought I-Share Bitcoin ETF thinking you bought Bitcoin. Instead, BlackRock sold you Bitcoin Satoshi Vision. BlackRock would never say Bitcoin original network in its legal fine print, but network at BlackRock's own discretion. The thread goes on from there, but you get the gist of it. Lawyer METC writes, I don't even blame the people with ridiculous takes after reading the BlackRock Bitcoin Trust S1.

The SEC's quote-unquote disclosure regime, designed to inform investors, has simply become an exercise in a lawyer stuffing in as many risk disclosures into the filing as possible, just in case, to the point where it's impossible to parse out what's truly relevant, completely defeating the point of the disclosure in the first place. Most lawyers I've interacted with who do these things acknowledge how absurd it is. One of the many reasons why a modified disclosure regime for tokens would be most helpful, If we can cut down on this bullshit, then disclosures will actually be helpful to the investing public. Now, the offending line that everyone is talking about here is something along the lines of,

in the event of a hard fork of the Bitcoin network, the sponsor will use its discretion to determine which network should be considered the appropriate network. The fear is that BlackRock will choose not the original Bitcoin. What Mead is saying is that this is likely just a disclosure because lawyers do this every time. But I kind of like CoinCenters Niraj's take, who said, is it that what everyone does in the event of a hard fork? Look, I think the questions around BlackRock's interests and incentives and their control and their power to exert relative to the Bitcoin network are good ones to ask.

I highly encourage everyone, even if you are excited and bullish about this filing, for which there's much reason to be, to still keep that modicum at least of skepticism of what happens when massive, massive Trad V financial power comes into contact. with something that is nominally an uncontrollable, decentralized network like Bitcoin is. At the same time, I don't think that that means we have to assume that they're just setting everything up to turn around and sell us BSV instead. And what's more if they tried to, I don't think it would work. But this is truly a pretty unexpected change in this moment. Those of you who've been listening to me for a long time might have remembered in 2022 pre-FTX

destruction that I used to talk about something called post-narrative institutionalization. And what that referred to was the idea that throughout the end of 21 and early 22, and even really the middle part of 2022, despite the fact that prices were falling and despite the fact that we were clearly in a bare market, institutions just weren't fleeing the space. They were building out infrastructure and seemingly biding their time and getting ready for whenever the next bull market came. Now, of course, the revelation of Sam as one of America's greatest fraudsters in history made it so that institutions weren't just not talking about what they were doing trying to get press. but we're actively trying to distance themselves, at least in some context from the industry as a whole. BlackRock coming back in and dropping this ETF proposal, kind of has to be seen as a return to that post-narrative institutionalization, except one might even go farther and say that we are back in narrative institutionalization mode. Because BlackRock, ultimately at the size that they are, as the world's largest asset manager, can't do anything without its shaping narratives.

And that has to be something that they consider when they do anything. So friends, that is where we were at with that particular conversation heading into this weekend. And we haven't even yet gotten into all the tether fud. I actually think I am going to leave that perhaps for tomorrow, for the weekly recap, and just wrap here with the BlackRock story because, boy, it is enough to be interested in for one day. Appreciate you listening as always, and until tomorrow, be safe and take care of each other. Peace.