The Breakdown - Larry Fink Is Coming for an ETH ETF Next

Episode Date: January 17, 2024

In public comments after the Bitcoin Spot ETF approvals, BlackRock CEO Larry Fink discusses an Ethereum ETF and real world asset tokenization. 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, January 16th, and we are still getting used to our post-Bitcoin ETF world. We're going to talk all about that, but before we do, 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 at the show notes or go to bit. slash breakdown pod. All right, friends, happy Tuesday.

Welcome back after a long weekend here in the U.S. Today, we are talking all about the new world we live in. And we're going to start with a set of media commentary that I think is very important. Now, to frame this, let's look at a headline. BlackRock CEO Fink says he sees value in having an Ethereum ETF and turn to a tweet from Travis Kling. Travis writes, you got to give this boomer his credit. He stepped into crypto in June 2023 and said, hold my beer. Completely dominated the narrative for seven

months. Now he's about to run it exactly back with Eith. Impressive. After launching with this new pack of Bitcoin ETFs, BlackRock CEO Larry Fink went on a media tour to talk about Bitcoin and the crypto industry. The most prominent appearance was on CNBC with Aaron Sorkin. Fink said over the past two years, he has become a quote, big believer. He said, I'm a believer in it because I do believe it's an alternative source for wealth holding. I don't believe it's ever going to become a currency. I believe it's an asset class. Even if Bitcoin is never used as a global currency, Fink said, it would still appreciate in value. Quote, I believe it goes up if the world is more frightened. If people are more fearful of geopolitical

risk, they're fearful of their own risk. It's no different than what gold represented over thousands of years. It's an asset class that protects you. Think even referenced the increasing scarcity of Bitcoin, adding that, unlike gold, where we manufacture new gold, we're almost at the of the amount of Bitcoin that will be created. Now, this was a huge point on Twitter slash X because of the long-term affinity of older generations for gold over Bitcoin, seeing a new standard bearer for Bitcoin making that connection directly, despite the fact that he's representing a very different demographic, one that historically would have been more interested in gold was a telling moment. Now, moving on, Fink explained his thesis that ETFs will continue

to take over the investment landscape, but also that they are just the starting point. He said, I think ETFs are step one in the technological revolution in the financial markets. Step two is going to be the tokenization of every financial asset. To me, this is where we believe it's going. Now, as he's done before, Fink rejected the Bitcoin versus blockchain paradigm that has dominated these types of conversations for so many years. He said the Bitcoin and asset tokenization were both technological changes that can allow us to move forward. Now, honing in on the new ETFs, Fink said he was very happy with the day one flows. He added that BlackRock wasn't specifically looking to take assets from the Grayscale Bitcoin Trust, but did note how much cheaper

the new ETFs were. Fink brought up some of the last-minute negotiations with the SEC, stating that BlackRock had pushed to allow in-kind creations and redemptions. This would have allowed marketmakers to use Bitcoin directly in creating shares of the new ETF. The SEC ultimately denied this feature, forcing the ETFs to accept cash only. Fing suggested that in-kind creation would have allowed holders of GBTC to transfer their Bitcoin into other products with no tax ramifications. According to Fink, this would allow Grayscale to hold on to their customers a little while longer, but that, quote, over the long run, when you start adding up the fees,

people are going to start thinking about redeeming and then ultimately going into an ETF. When asked about the spot Ethereum ETFs, Fink refused to comment on whether these products would have to be approved by the SEC or whether the regulator would once again be dragged into court. Instead, he added, I see value in having an Ethereum ETF. As I said, these are just stepping stones towards tokenization. I really do believe this is where we are going to be going. We have the technology to tokenize today, making a grand proclamation about the promise of

asset tokenization alongside digital identity, Fink said, you want to talk about issues around money laundering and all of that. This eliminates all corruption by having a tokenized system. Now, interestingly, Fink wasn't the only CEO on cable news talking about Bitcoin. Vanguard CEO Tim Buckley also showed up on CNBC to talk about what he believes belongs in a long-term investment portfolio. He pointed out, once again, that Bitcoin has no intrinsic value or cash flows and said that his firm doesn't steer people towards those kind of assets, including gold. Buckley says that Vanguard doesn't intend to launch a Bitcoin ETF, and he didn't appear to back down from the choice to prohibit customers from buying Bitcoin products. Bitcoin author Terrence Michael wrote, have you stopped to realize the CEOs of the two

largest financial institutions on the planet are now arguing about Bitcoin? Eric Weiss from the Bitcoin Investment Group wrote, Larry Fink founded BlackRock and is the CEO. He doesn't answer to anyone. Abigail Johnson worth $30 billion is the CEO in error of fidelity. She doesn't need to worry about getting fired. The CEO of Vanguard is just a CEO who can get fired tomorrow. New things take courage. Vanguard and Buckley don't have it. Dan Tapiero talked about Larry Fink's conversion to a Bitcoin head saying, Truth Machine. Larry Fink articulating inherent value proposition of Bitcoin, Bitcoin Code, Magic at the Distributed Network and its record of permanence. He gets it. Real World Asset tokenization next step in growth of digital asset ecosystem. Summing it all up,

the intern account said, it sounds like Larry Fink got racked with his absolute boys last week, had an epiphany about crypto and is now fully entering the crypto rabbit hole. Now, while some people are really skeptical of tokenization, because A, it's been something people have been talking about for a very long time, and B, it kind of has the feel of just the next narrative. Kaborga-Brox has a little bit of an explanation about why we should pay attention. He writes, 97% of people who laugh at Larry Fink and his comments on tokenization being his next focus area don't understand how broken capital markets are. Fixing it is not a choice. It's a matter of survival and competitiveness. People also laughed at ETFs. Now, it's a $9 trillion industry. People haven't given a serious thought

on what modern capital market should look like for decades. As a result, the market got stuck with a hodgepodge of half solutions in silo technologies, which then attracted bad regulation. Companies are betting that this is changeable. Serious efforts in capital are starting to flow into this space. It's less so about blockchains than rethinking and remaking capital markets. I believe efforts today are meaningfully differentiated from old blockchain this, blockchain, that's stories. Now, of course, the Ethereum folks also drew the connection between Fink's comments on Ethereum and on tokenization. Eric Connor wrote, Larry Fink wants to tokenize stocks, bonds every financial asset he can. What platform do you think BlackRock wants to do this on?

Serafim writes, if Coinbase was comfortable launching their own L2, there is no reason BlackRock won't. Private blockchains are a failure, and Fink knows that Ethereum is the way, especially since institutions are already using it. Chainlink God, however, didn't buy it. He said 100% a private permission chain. I do see a future where those assets can be bridged over to other permission chains and eventually even permissionless chains, however, the token themselves will likely remain permissioned. BlackRock has no interest in breaking K. Y.C. and AML laws. Now, following the Fink interview, Gary Gensler also talked with Sorkin about the Bitcoin ETFs. It was put to Gensler that he made the decision to approve the ETFs either reluctantly

or begrudgingly. He responded, this has been considered for a long time and something had changed. I'm a deep believer in the rule of law and respect for the courts, taking a new court decision into consideration we moved forward. I think this is the most sustainable path forward. When asked about Bitcoin directly, Gensler said, Bitcoin itself, we do not approve, we do not endorse. This is a way that investors can invest in that underlying non-security commodity called Bitcoin. He added, investors should be aware that the underlying asset is a highly speculative volatile asset, and amongst its use cases is illicit activities. Gensler reinforced his position that Bitcoin

is a speculative store of value, adding that its only payment use cases for illicit activity. Joe Kernan, however, jumped into note that U.S. dollars are far more used for money laundering, an other illicit activity, and getting a little fired up, Kernan pointed out the case for Bitcoin as a hard money. What's more, he called out Gensler for teaching the merits of Bitcoin at MIT, and then changing his position as the head of the SEC. Gensler could only respond, quote, No doubt there are innovations within this field around a ledger system. It's just an accounting system called blockchain technology. However, asked whether Ethereum ETFs would be coming next, Gensler said, I look at what we did this week as its cabin to one non-security commodity called

Bitcoin. Investor Fred Kruger wrote, there will not be an EFTEF under Gensler, Warren. I get that the Bloomberg boys think there will. I get that Fink would like one. I'm not morally opposed to one myself. But I think this video of Gensler is pretty clear. This is a one-off for a clear commodity. People buying Eath with the idea this is happening in the near future are making a big mistake. The Bitcoin ETF barely passed. It was a three-to-two vote. Warren still hates it and feels it is somehow illegal. No way they are doing a second one back-to-back. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types

of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown.

Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, DBA, Cracken. Now, analysts seem to agree with this point. Although markets have rushed ahead to speculate on Spot Ethereum ETFs, T.D. Cowen wrote in a report, late last week. Our expectation is that the agency will not be approving ETPs for any other

crypto tokens anytime soon, as we believe the SEC will want to gain experience from Bitcoin ETPs before it approves in Ethereum or other crypto token ETP. The weight might be as long as 26 months, but it likely would be after the election. The report stated that Bitcoin ETF approvals were consistent with their thesis that Gensler's SEC was, quote, taking a go-slow approach modeled over how the agency established rules for the asset-backed securities market. Analysts noted that Gensler's term as chairman isn't set to expire until 2020. and he could maintain a Democratic majority on the committee until then, stating that this was, quote, yet another reason we believe Gensler is in no hurry to act.

J.P. Morgan analyst took a similar view, stating, in our opinion, for the SEC to approve Spot Ethereum ETHs in May, it would need to classify Ethereum as a commodity rather than as a security. This is far from given, and I wouldn't put more than a 50% chance to the SEC classifying Ethereum as a commodity before May. Now, that reason that May date is coming up is that it's the final deadline for an SEC decision on the current batch of spot Ethereum products. The research report highlighted that the SEC is, quote, still signaling that it continues to view all other cryptocurrencies outside Bitcoin as securities. Now, on that topic of tokenization, credit ratings agency Moody have weighed in.

Moody's noted that the use of tokenized investment funds is on the rise, but claim that these new products represented increased risks due to a lack of experience from issuers. Multiple tokenized funds are already available with the majority investing in U.S. Treasury bonds. These products are still very small compared to their counterparts in the traditional finance world. Moody's report said, quote, tokenized funds potential applications extend beyond merely enhancing asset liquidity. These funds have a variety of other possible functions, including serving as collateral. They noted that asset tokenization requires additional technological expertise. Regular funds already come with risks related to the underlying assets and prudent fund

management, and tokenization, they said, layers technology risk on top. Still, regardless of that additional risk, Moody's recognized that this trend is only increasing. Funds, have already been issued by Franklin Templeton, Goldman Sachs, and even the Hong Kong Monetary Authority. Still, presumably, some of what comes next is going to be about how well this damn Bitcoin ETF does, right? We left last week not being totally resolved on how well it had actually done. Well, now that two full days of trading have been completed and settlement lags are beginning to resolve, we have a much better picture of how the Bitcoin ETF launch played out. The new products attracted nearly $1.5 billion worth of inflows in total across the first two days.

BlackRock led the way, capturing around half a billion dollars in assets under management. Fidelity trailed close behind, with around $427 million in AUM to close the week. Bitwise saw a sharp drop-off after the first day, ending the week with around 226 in AUM, and the middle of the pack filled out nicely, with ARC and 21 shares, VanEcken and Vesco gathering almost $200 million in AUM between them. Now, settlement lags mean this data is still subject to revision, but this level of inflows would place the Bitcoin ETFs as one of the most successful ETF launch weeks in history. Of course, outflows from the grayscale Bitcoin Trust and higher-cost Bitcoin products

was one of the big question marks for the launch. GPTC appears to have seen around 580 million in outflows, but interestingly, the pro-share's futures-based ETF actually experienced 265 million worth of inflows, with analysts suggesting the product was heavily used by market makers hedging their exposure. Coin shares published their weekly report on Monday, taking in the broad range of flow data for global Bitcoin products, including international funds, Bitcoin funds experienced $1.18 billion in net inflows for the week across all products. That would place last week is the highest level of Bitcoin inflows over the past year.

CoinChair's head of research, James Butterfield, also noted that 17.5 billion in weekly trading volume across all crypto funds was a new record. And although some in the crypto industry were disappointed with the ETF debut, financial press was much more positive. The Wall Street Journal, for example, said that the Bitcoin ETFs were off to a, quote, monster start. And so, friends, that is where we are beginning this week. We've got new narrative formation, continued political battles, and finally, an ETF on the books. I'm excited to get into new topics as they come up and dive deeper into this 24. For now, that is going to do it for today's episode. Thank you one more time to the sponsor of today's episode, 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.