The Breakdown - Why Some US Congressmen Are Asking Gensler About a Bitcoin Spot ETF

Starting point is 00:00:00 The SEC might just write this off as these two guys who care so deeply about crypto and blockchains and Bitcoin, just being loud again. But it sort of doesn't matter. What matters is that they're saying it, what matters is that they're articulating it. What matters is that they're writing it in plain English and asking for specific answers to these specific retiques. If the SEC and Chair Gensler do decide to respond, at least we'll have more insight into their position vis-a-vis these specific questions. In other words, we'll have a better understanding of what actually is holding a spot ETF fact rather than just making guesses at it. Welcome back to The Breakdown with me, NLW.

Starting point is 00:00:38 It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, November 4th. And today we are talking about why some congressmen are asking about a Bitcoin spot ETF. Before that, however, I want to say a big, happy anniversary to my wife, Jesse. It has been eight years today, each year better than the last, except for the hard ones in the middle. Let's forget those.

Starting point is 00:01:15 By the way, hard because of business things, not because of our relationship. That has been The Rock, and I love you, and I'm so excited to be on this journey with you. Now, with that said, I want to start today's actual show with an update from New York City. I told you guys yesterday that New York had gotten its first Bitcoin mayor. Eric Adams won his primary over the summer and then officially won the election earlier this week. One of the dimensions I told you about was this idea of a friendly competition with Miami. He had mentioned Miami and how he was coming to take all the jobs back that Miami had taken from New York City. And yesterday he actually referenced Miami again in a conversation on Bloomberg Radio.

Starting point is 00:01:59 Remember when Miami launched their own coin? They did it in partnership with Citigoin, which is built on the Stacks protocol. And in this Bloomberg radio interview yesterday, new New York City mayor-elect Eric Adams said, referring to Suarez, he has a Miami coin that is doing very well. We're going to look in the direction to carry that out. He went on to say that they were going to, quote, look at what's preventing the growth of Bitcoin and cryptocurrency in our city. What's more building on the economic empowerment dimension that is so clearly a part of why he, he's excited about crypto, he said that they really wanted to focus on building the pipeline of talent for crypto-related jobs, quote, because we can't have a one-sided city where certain groups and areas are doing well. This is such an obvious thing to look not just to attract

Starting point is 00:02:45 companies from the outside, but to also look to how those companies can attract homegrown talent, but I think it's great to see, especially in the context of Bitcoin and Crypt. Now, this is part of a larger push to make the city more economically friendly in general. He pointed to his borough of Brooklyn, which had seen 356% growth in tech startups over the last decade, and said, quote, we're too bureaucratic, too expensive, and too difficult to do business. Our agencies, they go into business, and are looking for ways to penalize or find them. We're changing that atmosphere altogether. This is the empire state, and we're going to build empires.

Starting point is 00:03:20 Now, the fact that he's talking about this, and Bitcoin and Crypto specifically, the day after winning the election is just awesome. Udi Wertheimer joked on Twitter that just because he wanted a Citicoyne, Bitcoiners had stopped supporting him. But then he followed it up with something that I feel acutely as well. He writes, I mean, if you told me when I first got into Bitcoin that in 2021, the mayors of both New York City and Miami would be that supportive of Bitcoin, I would have laughed at you. It was inconceivable. Such a huge win. This is a situation to watch for sure and to lend our efforts where available. But speaking of updates, let's shift to our main discussion. First, let's look at how the Bitcoin Futures ETF is doing in general.

Starting point is 00:04:02 Yesterday, Bloomberg ran a headline Bitcoin Futures Etf mania cools as Wall Street hits pause button. The article points out that many expected up to four futures ETFs to begin trading in short order before the end of October. But pro shares and Valkyrie remain the only two. The rest of the article is a little in the weeds, but it's a great reminder of how much market structure impacts things in unseen ways. Here's the meat of the piece from Bloomberg. The delay is due in part to reticence among futures commission merchants, which act as an intermediary between derivatives-backed funds such as the pro-share's Bitcoin Strategy ETF, ticker BITO, and the exchanges where those contracts trade. Known as FCMs, these firms, typically banks,

Starting point is 00:04:47 handle buy-and-sell orders for futures contracts on behalf of their clients, and then settle those trades with exchanges such as the Chicago Mercantile Exchange. In normal circumstances, it is a fairly mechanical out-of-the-spotlight relationship. However, the stunning appetite scene for BITO, which last month accumulated more than $1 billion in assets in just two days, among the biggest launches ever, has FCMs thinking twice. The cash influx quickly ate up the balance sheet of the firm acting as an FCM for BITO at its launch, putting regulatory capital limitations against the Bitcoin Futures exposure in sight, according to a person familiar with the matter. So again, this is a highly technical reason that there are delays in these other Bitcoin Futures ETFs launching.

Starting point is 00:05:27 Another one of those has to do with the structural limits as to how many contracts any one firm can have. Bloomberg again writes, the inflows of BITO have also forced the fund to push out purchases into further out futures to avoid breaching front month position limits. The ETF has already purchased December contracts just one day trading into November, Bloomberg intelligence analyst noted Tuesday. I think a huge level-up moment for anyone is to understand how much market structure issues impact the things that are explained simply by narrative so frequently. And I share this part just to kind of give you a sense of where things are now a week or two after the main ETF hype. But that is not the only update to this story.

Starting point is 00:06:12 NIDIG sponsors this podcast, and they're helping CFOs, traders, and risk managers safely and securely integrate Bitcoin into their operations. Learn more about what NIDIG does and how they do it at NIDIG.com slash NLW. That's NYDIG.com slash NLW. Many in our little world have been extremely and vocally critical of the decision to allow a futures ETF, but not a spot ETF. Now, to SEC Chair Gensler, the reason is the venue underneath and the assurance that he has and that the SEC has in that venue's protections against price manipulation. He sees venues like the CME as regulated in a way that passes mustard, so ETFs based on those futures products are kosher. Of course, not everyone sees it like

Starting point is 00:07:00 this. Many, like Masari's Ryan Selkis, have been beating the drum on this, saying that the real way to protect investors is to actually offer a spot ETF. Well, yesterday two congressmen added their voice to the mix. Congressman Tom Emmer and Representative Darren Soto, who are the bipartisan co-chairs of the Congressional Blockchain Caucus. Tom Emmer tweeted, while the trading of two Bitcoin futures ETFs in October is a step forward for the millions of Americans who want to invest in crypto through traditional methods, the onus is on the SEC now more than ever to allow Bitcoin-Spot ETFs to commence trading. I'm going to read part of the open letter that he and his colleague Darren Soto sent to Chair Gensler. While this is a step forward for millions of Americans who are

Starting point is 00:07:41 demanding access to simple ways to invest in Bitcoin, these products are potentially much more volatile than a Bitcoin spot ETF and may impose substantially higher fees on investors due to the premium at which Bitcoin futures typically trade, as well as the cost of rolling futures contracts each month. We question why, if you are comfortable allowing trading in an ETF based on derivatives contracts, you are not equally or more comfortable allowing trading to commence an ETFs based on spot Bitcoin. Bitcoin spot ETFs are based directly on the asset, which inherently provides more protection for investors. It is our understanding that previously the SEC chose not to approve a Bitcoin Futures ETF or a Bitcoin spot ETF due to concerns about the perceived

Starting point is 00:08:17 potential for fraud and manipulation in the Bitcoin markets. 90.47% of pricing of the CME-CF Bitcoin reference rate, BRR, which is the pricing index that CME futures ETFs use, is made up of the spot Bitcoin exchanges Coinbase, Cracken, and BitStamp. Therefore, to the extent the SEC has been and is concerned about fraud and manipulation and pricing of the underlying spot Bitcoin markets, that concern would have to permeate across both spot-based and futures-based ETFs. Since the SEC no longer has concerns with Bitcoin futures ETFs, given trading has begun on these products, then it presumably has changed its view about the underlying spot Bitcoin market because Bitcoin futures are, by definition,

Starting point is 00:08:52 a derivative of the underlying Bitcoin spot market. Spot-based ETFs have proven more efficient and are strongly preferred by investors as evidenced by their commercial success. We believe the same will be true for Bitcoin exposure in an ETF wrapper. Lastly, during the period in which the SEC has blocked approval of any Bitcoin ETFs, numerous spot Bitcoin investment vehicles have been offered. These products have amassed more than $40 billion in assets under management and are held by hundreds of thousands of investors across the country. Some of these products are currently trading on OTC markets and have voluntarily registered under the Securities Exchange Act of 1934 to subject themselves to the same reporting standards as ETFs. However, because these products

Starting point is 00:09:28 have been unable to register as ETFs with the SEC, public trading typically occurs at a value that is not equivalent to net asset value, and in fact, these products have recently been trading at steep discounts to their net asset value. Permitting futures-based ETFs while simultaneously continuing to deny spot-based ETFs would further perpetuate these discounts and clearly go against the SEC's core mission of protecting investors. The SEC is in a position to approve Bitcoin Futures ETFs, as reflected by the trading of these products. So it should also be in a position to approve Bitcoin Spot ETFs. Thank you for your attention to this important matter. We look forward to your response. So I think this is a pretty clear letter, but just in case, let's just pull out

Starting point is 00:10:07 the four or so key parts of their argument. First, they're saying that direct asset exposure inherently provides more protection than these futures products. One of the things that they don't get deep into but seems pretty clear is that futures are a lot more complicated an instrument to understand, especially for retail investors. Second, they're kind of pointing out the hypocrisy of the market manipulation argument, which has historically been the key argument against a Bitcoin spot ETF. The problem is that if you're concerned about manipulation of the price of Bitcoin, then it shouldn't really matter that futures products are traded on a regulated venue when the reference rate comes almost entirely from those spot exchanges where theoretically there's that opportunity

Starting point is 00:10:47 for market manipulation. Basically, unless the Bitcoin reference rate is itself coming from something that is unmanipulatable, then market manipulation ceases to be a strong argument against a spot ETF, once a futures ETF that still relies on spot prices as its reference rate is approved. Third, from an investor protection standpoint, their letter also points out that investors strongly prefer spot ETFs, and they actually reference numbers from things like the gold ETF. Finally, they also point out that there are already products that are akin to synthetic exposure to the underlying Bitcoin asset that are trading away from the net asset value of the underlying asset, which again, theoretically, pretty strongly goes against core investor

Starting point is 00:11:25 protections. Now, the SEC might just write this off as these two guys who care so deeply about crypto and blockchains and Bitcoin, just being loud again. but it sort of doesn't matter. What matters is that they're saying it, what matters is that they're articulating it. What matters is that they're writing it in plain English and asking for specific answers to these specific critiques. If the SEC and Chair Gensler do decide to respond, at least we'll have more insight into their position vis-a-vis these specific questions. In other words, we'll have a better understanding of what actually is holding a spot ETF back rather than just

Starting point is 00:11:59 making guesses at it. Not to be overly optimistic, but I would call that progress, albeit slow, government-style progress. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Why Some US Congressmen Are Asking Gensler About a Bitcoin Spot ETF

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