The Pomp Podcast - #950 Michael Sonnenshein On When We Should Expect A Bitcoin ETF

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Michael Shunensine is the CEO of Grayscale Investments. Grayscale is a trusted authority on digital currency investing and cryptocurrency asset management. In this conversation, we talk about the Bitcoin spot ETF, regulation, the crypto industry, institutional asset participation, and much more. I really enjoyed this conversation with Michael, and I hope you guys enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. Today's episode is brought to you by Exodus, the world's leading desktop, mobile, and hardware

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Starting point is 00:01:23 leading desktop, mobile, and hardware crypto wallet. Go to exodus.com slash Pomp today. Today's episode is sponsored by Abra. They're based in California and they're backed by top VC firms. Abra is an all-in-one, simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral, and earn interest with up to 13% APY on stablecoins and 7.15% APY on Bitcoin. You can join nearly 2 million users by downloading Abra from the Google Play or Apple App Store. If you download the app today, you will get $15 in free crypto once you fund your account. You came, you invested, now conquer. Abra, conquer crypto. Go check it out today. This episode is brought to you by DeFi Technologies.

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Starting point is 00:02:46 visit their website at defi.tech. i'm really excited about what these guys are doing i've become an advisor to the business and i highly suggest you go check them out go to their website at defy.tech today anthony pompliano runs pomp investments all views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of pomp investments you should not treat any opinion expressed by pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Michael, how are you? I'm good. Good to see you. Absolutely.

Starting point is 00:03:24 Great to see you as well. Let's just start with probably the most important question, which is the Bitcoin spot ETF still has not been approved in the United States. You all have the Grayscale Bitcoin Trust, and I know that you've been pretty vocal about getting that convert it into the spot ETF. Talk to us just about where we stand with that situation and kind of what your thought process is in terms of when it'll get approved. Sure. So I think we got to take a step back and really think about how the SEC's thinking has evolved around this. So if you rewind even just a couple of months, Pomp, there was literally just a blanketed no. There were no Bitcoin ETFs allowed to come into the market. And that was

Starting point is 00:04:05 fine because at least the SEC was approaching this with a level mindset, no futures-based ETFs, no spot-based ETFs. And then a couple of months ago, they approved the first 40-act Bitcoin futures ETF. And that was a big deal. It's a big deal for those of us in crypto, big deal for the investment management industry as a whole. And what we found was, wow, now the SEC is starting to really move along, move along in their thinking. Maybe their thinking's evolved because they'd always said that they had issues with the underlying Bitcoin market. Were there going to be issues around fraud or manipulation? Was there enough surveillance of the underlying Bitcoin market? And what was interesting is that the SEC said that 40 act registered products, right? So

Starting point is 00:04:49 products that hold Bitcoin futures contracts, they had certain protections that they favored for investors that 33 act products, which would just be spot products, products that hold Bitcoin didn't have. And so all of a sudden, the SEC kind of had this kind of unfair advantage, unfair playing field that they'd created by liking one set of regulation over the other. And then a couple of weeks ago, we saw the first 33-act Bitcoin futures product approved. So now what we said is, whoa, maybe the SEC isn't relying on these protections as much anymore. And those protections, interestingly, are not the kind of things that solve the SEC's issues with the underlying Bitcoin market. Instead, it's things like independent boards and custody

Starting point is 00:05:32 and accounting rules. So now we have this playing field where investors are forced into using Bitcoin futures products, both 40-act and 33-act products. And so many of us in the industry, at Grayscale included, feel that the next natural step for the SEC is to approve a spot Bitcoin ETF registered under the 33-act, where as Grayscale is doing it with our existing fund, GBTC, working proactively with them to uplist to the New York Stock Exchange as a bonafide spot Bitcoin ETF. So as you've gone through this, I think your logic makes a ton of sense in terms of their evolution, that they're kind of increasing acceptance that this industry is here. It's not going anywhere and investors want exposure to it. What has been the conversations with the SEC or even other

Starting point is 00:06:17 regulators and what is their appetite currently? And do you think that we get a Bitcoin spot ETF this year? So it's tough to put a timeframe on it, Pomp. I'd say that it continues to be a matter of when, not a matter of if, right? The full resources of our firm is behind this initiative, and we will continue to advocate on behalf of investors until that approval comes through. But I would say that in the, call it five, six years that we've been dealing with the SEC and regulators more generally, a lot has changed. So number one, let's remember that they have a tough job, right? Even think about how long you've been in the crypto industry and how much things have changed. It's tough as a regulator to develop really good regulations when the industry and the

Starting point is 00:07:02 asset class underneath it continues to change. New attributes, new features, new use cases. So in the one hand, we certainly sympathize with the SEC and other regulators out there. On the other hand, though, as you said, this industry and this asset class isn't going away. And so by investors not proactively continuing to advocate for this and then having regulators answer that call and bring these assets closer into the regulatory perimeter, they're really not helping or really protecting anybody. And so I will say that while it's frustrating to not have achieved a spot Bitcoin ETF just yet, that the level of knowledge and the level of education that regulators are bringing to these conversations has changed dramatically. We're never doing Bitcoin 101, 201 kind of questions. We're actually really diving deeply into protocols, into the integrity of blockchains, thinking about the use cases and really helping investors in the use cases that they're excited about having those narratives brought to regulators that they're looking at this through a fully informed lens. And so as we kind of continue through this, obviously, there's been multiple people have put forward applications.

Starting point is 00:08:10 most of those applications for the Bitcoin spot ETF have been people who aspirationally want to create an ETF. I think you all are probably, if not the only one, definitely the leader in terms of we already have an existing fund. It has tens of billions of dollars already in it. And we simply want to convert it. Is there any indication in terms of how the SEC thinks about the difference between creating a fund from scratch as an ETF versus the conversion process? And are there maybe historical examples of where they prefer one over the other? Or just like, how are you guys thinking about that? This is a great question. You know, we were down at the ETF exchange conference in Miami a couple of weeks ago, and we did our Twitter spaces and our friend

Starting point is 00:08:51 Michael Saylor jumped on and said that because of that differentiation, exactly what you're talking about, the fact that Grayscale Bitcoin Trust, GBTC already exists, has tens of billions of dollars, over 800,000 investor accounts that are already invested in it, that the SEC does need to look at it differently than the way that they might look at some of the other applications in front of them, which are just merely ideas on paper. And that's not for us to disparage any of the other issuers or any of the other products that are trying to come to market. We do believe in the future you will see multiple Bitcoin spot ETFs on the market. But at the moment, the SEC does have a product that is trading every single day in investor accounts, small investors,

Starting point is 00:09:33 large investors, retirement accounts, really as widespread as you can imagine with investors actually in all 50 states. So when you do think about how the SEC should approach this, they do need to understand that if they don't bring this under their purview and allow this to become an ETF, have investors have that familiarity, have that protection that the ETF wrapper provides, they're really not fulfilling their mandate in protecting investors. So when you start to think about this, the SEC at some point has to make decisions. They can continue to kind of kick the can down the road on these applications, but at some point they do kind of, you know, rubber meets the road and they got to say, hey, approve or not approved.

Starting point is 00:10:11 I believe that your latest application or kind of the current one, they have to make that decision over the summer. You know, one, is that true? And then two, if they don't approve it, what are the options that you all have? Do you just have to reapply or are there other avenues that you could pursue that maybe could help accelerate this? So because this type of product is entirely new and would be entirely new to the US market, it actually requires a rule change. And anytime there's a rule change, there's a standard 240-day period during which the SEC is evaluating the application. And importantly, during which investors can actually write in about the application in favor of it or not in favor of it. So that 240-day clock, to answer your question,

Starting point is 00:10:55 expires on July the 6th. So we have a couple of weeks left before the SEC's decision to approve or deny GBTC is ultimately reached. Once we get to that deadline, and of course, we and many, many investors are, of course, hopeful for a positive outcome, there are all kinds of options on the table, one of which we've talked about before publicly is the idea of a lawsuit. And the grounds of a lawsuit here would really be a violation of something called the Administrative Procedures Act. The APA or the Administrative Procedures Act really governs the way that regulators regulate. And so when they're looking at two issues that are alike, they have to look at them through a like lens. And in the case of what we have here, they're looking favorably and

Starting point is 00:11:40 allowing Bitcoin futures products into the market, but perhaps not allowing Bitcoin spot products into the market. The issue with that disparity is that both of those products, if they're really thinking about what their hesitations are, it has to do with pricing. The Bitcoin futures contract gets its pricing from the spot Bitcoin exchanges. Of course, a Bitcoin spot product gets its pricing from the spot Bitcoin exchanges. What we have here are two like issues that aren't being treated alike. That, in fact, could be grounds for a lawsuit to the SEC. Got it. And so how should people think about like the path there? Like, are there a precedent that they should look at and say, like, here's how past lawsuits have played out? Or is it something that like it would be for the courts to decide and we really don't have any precedent to look at? Well, I think there's two things. One, we could certainly always use more support. So our team's doing everything we possibly can to get these messages out there, meeting with the SEC, meeting with regulators, meeting with politicians, trying to ensure that this issue is out there and that everyone knows this is really an investor protection issue.

Starting point is 00:12:45 One thing that we actually did as a part of that 240-day process is we set up a website, grayscale.com slash comment. So we've made it as easy as possible for investors to actually send an email into the SEC advocating for GBTC to convert to an ETF. You don't currently need to be a GBTC investor. You don't need to have historically been one. You don't need to plan to be one. You could simply just be a Bitcoin investor or just a concerned investor in general. And the SEC does want to hear from you. A lot of folks think that calling into or writing into the SEC is like calling the cops on your neighbor. It's not. This is part of the process, and

Starting point is 00:13:24 investors can advocate for themselves by visiting grayscale.com slash comment and sending in a letter. And what a lot of people don't realize, because they are a regulator, is that the SEC does get sued. It does happen, and it does happen quite often. So there are some historical precedents out there that investors can look to. But obviously, the situation around the Bitcoin ETF approval is a unique one. Got it. And so when you start to think about kind of your communication efforts with investors, obviously, you all have run multiple national television campaigns, the whole drop gold campaign, which I think got a ton of attention. You continue just to kind of innovate, I think, in the messaging and in the way that you communicate both with

Starting point is 00:14:05 investors that are already invested, but also people who are potentially looking at these type of investment products. Talk a little bit about that kind of perspective or what is the approach there when you guys create these campaigns or these commercials? We have a lot of fun with this and really at Grayscale, it really is a team effort when we think about launching campaigns. You mentioned our very first national TV campaign here in the US, which was Drop Gold. And it was really driving the narrative around investors dropping gold for Bitcoin, thinking about it as a digital store of value or as a digital gold. And since then, we've really continued to push the envelope. The current campaign we have running is called The Inheritors. You'll see it on CNBC,

Starting point is 00:14:49 lots of different financial and news channels. And anytime we're trying to do this, we're really trying to demystify or break down barriers that a lot of investors may still have about crypto, despite how widespread it is. In this case, we're really trying to demystify the fact that some people still think crypto is only for a younger generation and only for males. And it's in fact not the case. So one of the things that we depict in this new ad campaign is actually seeing older generations getting involved in crypto and seeing people from really every walk of life and shape and size investor getting involved in crypto. And this is a lot of fun for us as a team. To see some of these products and ideas go from ideation all the way to execution

Starting point is 00:15:33 and then seeing them out in the world really resonates. And at the moment, not just having the inheritors campaign out there, but also really continuing to drive home the narrative around the GBTC conversion. So if any of you are in Penn Station in New York, riding Amtrak or in Union Station in DC, you'll see Grayscale has done station takeovers in each of those places to really show that investors that were putting this message out there in transit hubs while people are commuting and again, putting out those QR codes so people can write into the SEC as they're contemplating the GBTC conversion. So when you start to think about that communication, who ends up being the investors in these products? Is it retail investors? Is it institutions? Are you

Starting point is 00:16:17 seeing a change maybe like one of the most interesting parts of the Bitcoin market specifically is that it used to be almost all retail. And now it feels like there's been much more kind of Wall Street institution participation or institutional asset allocation. Are you seeing that also in the products as well? That's certainly the case. I think one of the crazy things about crypto,

Starting point is 00:16:35 not only how much momentum it has and how quickly it's come along, that unlike a lot of other new asset classes or new product types, it actually started with retail and made its way towards institutions, which is historically the opposite when new things have come on to Wall Street

Starting point is 00:16:51 or into the financial services realm. So at Grayscale, our products are held by really a really diverse group of investors. There are certainly retail investors, there are financial advisors, there are family offices, there are RIAs, there are mutual funds, there are ETFs. And then on the institutional side,

Starting point is 00:17:09 you have pensions, endowments, all looking for digital currency exposure, but in the form of a security that really gives them the comfort and the protection of what they're used to seeing. What's also interesting about this ever-growing group of investors is this idea of diversification, right? And Pomp, we've probably talked about this, you know, ad nauseum that investors want

Starting point is 00:17:29 diversification, seeking diversification. But something that I wanted to highlight that we're seeing is not just diversification beyond just owning Bitcoin or just owning Ethereum exposure. It's that investors are starting to appreciate that there are different subcategories or sub-themes within crypto. So when they look at something like equities, they look at financials and energy and healthcare and tech. And now when they're looking at crypto, they're starting to look at DeFi, they're starting to look at privacy coins, they're starting to look at smart contract protocols, they're starting to look at metaverse protocols. And so it's really encouraging to see investors' appetite and ability to ingest some of these new protocols and what some of the real world use cases are, and that they want to build out diversified crypto portfolios in the context of their overall investment portfolio. You also have other funds than just the Bitcoin fund. And those funds actually, for the most part, had been kind of single asset funds. So whether it was the Ether fund or others, you then started to build some indexes. I think you also have like a smart contract platform fund now.

Starting point is 00:18:34 talk about how you guys think about the creation of these products and kind of what is the bar or what is the framework that you use to say yes we want to launch this but maybe we don't want to launch a different product so there's two things i want to mention here one we obviously recognize our place in the industry and to be as transparent as possible we constantly have a maintained list on our website on our blog of all the assets that are currently in the grayscale family as well as all of the assets that are under consideration and under research by our team. The process by which we go through this really looks at everything around a given protocol. Who launched it? Where it was launched? Is it proof of work? Is it proof of stake? What's the underlying integrity of that

Starting point is 00:19:16 blockchain? Where does price discovery happen? What are the custodial solutions available to it? What are the real world use cases? What does developer activity look like? The list goes on and on. And really, if you zoom out and you look at the Grayscale family of products now, there are 17 different digital currency products. So 14 of them, to your point, are single asset products, one for Bitcoin, one for Ethereum, one for Litecoin, so on and so forth. And then, yeah, we have developed three diversified vehicles so far, our large cap fund, our DeFi fund, and then our smart contract platform fund. And what's really important is that investors are using each of these products almost as tools that they can decide how much they

Starting point is 00:19:56 want to allocate to when thinking about building a diversified portfolio. And so when you have these tools at your disposal, and we continue to launch more of these products, it really becomes some of the only products that are really access products that can complement one another when you're building your digital currency portfolio. So when you start to think about this, you're rolling out more products, you're gathering more and more AUM, you're going to convert the GBTC at some point into an ETF. And it feels like you guys are firing on all cylinders. But it's been mostly in a North American business as well. My understanding is that you all are looking at international markets, hiring for specific types of teams, etc. Talk to me about kind of how you

Starting point is 00:20:36 think about expansion, not just in products, but the rest of the business. Yeah, so we've been a we've been a US centric business and that we've been headquartered here in the New York area for the last eight years and remain headquartered here in the New York area. But our team has grown exponentially. And we think that there are certain findings and certain insight that we uniquely have based on the last eight years of experience that we want to bring into other markets. So we did just recently share publicly that we are going to be launching in the European market. We have not yet shared which markets within Europe we're going to launch in or what product types or product exposures we're going to offer, because we're really taking the time to be

Starting point is 00:21:14 methodical about it. The European market is quite fragmented. And so there's differentiation in each those markets of how investors think about investing, where they may be on their digital currency journey, how regulators think about this asset class in different jurisdictions. And so again, we want to be really thoughtful about that approach, but you will certainly see Grayscale showing up in the European market soon. Got it. What's the biggest risk to the Grayscale business today? Like when you think about it, I always think of CEOs as risk killers, right? And they're trying to figure out what are the risks that we have to address and make sure that we go solve them. What keeps you up at night or what are the things that you keep thinking

Starting point is 00:21:48 about? I think we play such an important role as do a lot of our peers and contemporaries in the regulatory conversation. How often we're now in DC and now moving into the European market and joining those conversations as well. There is a very healthy tension, I'd say, between impatience on the part of investors and users in this asset class with kind of how regulators are approaching it. And that's ultimately going to come to a head. And so I really hope that we can continue to have productive dialogues around it. What would be terrible is to see regulation get pushed through too quickly. That would squander innovation or would squander people's ability to access crypto. Instead, I think the calls to action we're seeing, whether it's the White House executive order

Starting point is 00:22:36 or what we've seen out of the UK, I'm really thinking about these areas as hubs of innovation that can foster growth, foster companies, foster job growth. Those are the types of things that I think are really, really encouraging. And so I'm hopeful that we and others can play an important part in the regulatory construct conversation and ensure that as regulators do put forth new legislation, that it's done in a really informed way that really helps to solidify the asset class of staying power and how investors are going to access it. When you start to think about kind of the evolution of the industry, it feels like the more and more that these financial firms are participating, both in your funds, but also

Starting point is 00:23:17 just across the industry, it also feels like there's way more infrastructure, there's way more capital flowing in, there's way more intellectual capital flowing in. But in some way, the maturation of the industry means that people have to pay attention to other things. Back in 2015, nobody cared about interest rates and its impact on Bitcoin. Now it seems like everyone cares about that. What do you personally do just to kind of stay on top of the industry as it moves and matures and different market participants come in?

Starting point is 00:23:44 And there's just so much going on. Like, what do you do to just make sure that you're informed and that your team is continuing to execute in that ever-changing environment? Yeah, we have a really robust research team, certainly thinking about consuming a ton of financial media basically 24-7. But ultimately, I think what I'm paying most attention to these days is really plumbing, if that makes sense, right? The plumbing of the financial infrastructure today does not really accommodate crypto. And I think that that is going to be one of the largest catalysts that we're going to see over the next, call it, 18 to 24 months. Today, there are such

Starting point is 00:24:23 fantastic entrepreneurs building order management systems, indices, trading tools, tax lot reporting, you name it, around crypto, but it's not yet connected to that legacy financial system. And when that happens, the opportunity is going to be broadened up to a much larger audience. And I think you may see, to your point, even more connectivity to sensitivities like changes in interest rates or changes in geopolitical tensions, things like that, that today are affecting crypto, but I think we'll have a much more integrated approach as that plumbing and as those bridges get, you know, get filled. Got it. One of our sponsors is eight sleep. Uh, they got this thermoregulated bed and, uh, I've known you for a while now. I know that you literally, if I

Starting point is 00:25:06 message you at 6.00 AM, I'm getting a response. If I message you at seven 30, I'm getting a response. How do you keep the energy? Like, give me what's your sleep schedule. How much coffee do you drink every day. Okay. So, um, you can often find me at a Starbucks, um, and or stocking my fridge with Starbucks. Um, truly what gives me energy is the people at Grayscale. Uh, we've grown from about nine employees at the start of the pandemic to 65 today. Um, we have some of the brightest minds in crypto and so much of the human capital that's joined the company is coming from traditional financial services and is really invigorated by what we're building all together. That is truly what gives me the energy and the excitement to get up every day and do what we do. It's not work.

Starting point is 00:25:53 I love it. I love what we do and I love our people. And that's really kind of the core of kind of that driver of getting stuff done every single day. I love it. Michael, thank you so much for taking the time to come talk to us. I am actively cheering for you all to be able to convert GBTC into a Bitcoin spot ETF. I think that while there are plenty of concerns that have merit and are definitely worth being skeptical or critical of the market and making sure that kind of things are safe for investors, it feels like you and many others in the market have done a pretty good job to explain to both regulators and the market in general as to why now the time to go ahead and get that Bitcoin spot ETF launched. And so hopefully the next time we

Starting point is 00:26:38 talk. It'll be because the spot ETFs coming, GBTC is being converted and all will be good in the world. But wouldn't that be great? Thanks for having me. This is awesome. Of course. Where can I send people to find you on the internet or find out more about Grayscale if they're interested? All right. So follow me at sun and shine on Twitter, follow Grayscale at Grayscale on Twitter. And certainly if any of the arguments we're talking about resonate with you about converting gbtc to an etf please visit grayscale.com slash comment um your voice matters um as the sec is contemplating uh our application i uh i love it man so thank you so much for coming on and uh hopefully uh hopefully we get some good answers here coming into uh into the summer we'll talk

Starting point is 00:27:24 soon indeed thanks all right later buddy thanks so much for listening to today's episode i really hope you guys enjoyed this one make sure you're subscribed on apple spotify or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.

The Pomp Podcast - #950 Michael Sonnenshein On When We Should Expect A Bitcoin ETF

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