Unchained - Why It Looks Like BlackRock Could Win America’s First Spot Bitcoin ETF - Ep. 509

Starting point is 00:00:00 Hi, everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto eight years ago, and as a senior editor of Forbes, was the first NatureaMedia reporter to cover cryptocurrency full time. This is the June 23rd, 2023 episode of Unchained. Secure your crypto accounts with a secure email service. Proton mail is end-to-end encrypted, meaning that no one, not even Proton, can access your emails. Go to Proton. dot me slash Laura. Co-pilot is a best-in-class personal finance app for Mac and iOS, designed to give you a complete view of your financial life. Use code unchained for a free two-month trial and get started today to see your money in a whole new way. With the crypto.com app, you can buy, trade, and spend crypto in one place.

Starting point is 00:00:53 Download and get $25 with the code Laura. Link in the description. Today's guest is James Safert. research analyst at Bloomberg Intelligence. Welcome, James. Hi, Laura. Thanks for having me. Longtime listener, first and caller. Great to have you. Last week, Black Rock, the world's largest asset manager, filed for a spot Bitcoin ETF. What were the SEC's previous objections to approving spot Bitcoin ETFs? And how does this application address those concerns? To start, the Winklewals twins were the

Starting point is 00:01:27 first ones to file for a Bitcoin ETF back in 2013 when Bitcoin was 100. And basically over the last decade, we're literally coming up on a decade next month, they've whittled away at all of the SEC's concerns. Not all of them, but as far as they're concerned, they've whittled with that the key ones. The one main thing that are hung up on in the most recent denials, specifically the gray scale GBC application last year, they want a regulated spot market and they want it to be of significant size. Those are terms they use of significant size.

Starting point is 00:02:00 I think in the gray scale denial, they also, they want it of significant size, but they want also a surveillance sharing agreement. So they either want a regulated market or they want a surveillance sharing agreement with the spot market, both of which need to be of significant size. So those are terms that the SEC uses. And that fact is what makes this application possibly different. Aside from the fact that it's BlackRock, right? So BlackRock is the largest issuer in the United States for ETFs. They take up about 33% of the market based on our estimates. So they are far and away the largest.

Starting point is 00:02:33 Well, that's a lie. Vanguard is close behind at like 28%, but they would never file for an ETF. So the fact that BlackRock, who obviously they have ties and know what's going on in Washington's filing is a huge thing. But the difference in their application when it first came out on Thursday, their perspectives didn't highlight anything that was like extremely uniquely different about their filing. But the next day, we saw what was called the 19B4 filing, which we can. get into the differences there if you want. But the key note there was which CoinDest broke this first was they have in their align basically saying that they have a surveillance share agreement between NASDAQ and a spot exchange market, which is critical. Now, I'm going to assume

Starting point is 00:03:14 that it's Coinbase. It's not guaranteed that it's coinbase because it's not named, but BlackRock is using Coinbase as a custodian. Coinbase has other partnerships with BlackRock for pricing and their institutional clients. So the theory is that it is Coinbase that's a spot market. The question is, is it of significant size? And what's your take on that? Do you think it is or not? So if you read like any of the other language that the SEC has done, so like there's been 30 plus denials of spot Bitcoin ETFs,

Starting point is 00:03:42 they shouldn't approve this, right? Based on the language they've used in the past, like they probably shouldn't approve this. That said, they've done things where they like kind of are flexible in some areas and super rigid in others. So I mean, if you look at any charts of the, breakdown of like the Bitcoin spot market, right? You have Binance at 50, 60 percent of its trading volume, right? But if you narrow that down to USD exchanges, exchanges that have USD on ramps,

Starting point is 00:04:10 all of a sudden, Coinbase is a significant market. If you look at the solely things with US dollar pairs, also Coinbase is the significant market. But if you're just looking at Bitcoin as a total market, which is how most people would look at it, then Coinbase is definitely, in my opinion, not a market of significant size. Maybe you could argue that. in combination with the CME futures market could be enough to surveil the market. Yeah. So essentially, if the SEC wants to say the whole Bitcoin market, then I would argue that Coinbase probably isn't.

Starting point is 00:04:37 But if you want to get narrow, narrow things down, you might be able to say it. And if you look, basically, we had Bitcoin futures ETFs, the first one to launch, launched under what's called the 1940 Act. And then we had other ones that ultimately got approved under this same 19B4 process, their 1933 Act products. And when they got approved, they spent half the time. those approval letters saying why they were approving this and why they weren't going to approve a spot Bitcoin ETF. It was it was borderline impressive how much time they spent saying when approving

Starting point is 00:05:07 why they weren't going to approve a spot coming. So that was why we were confident gray scale wasn't going to get approved. But in that letter, the reason that they said the CME futures market was a market of significant size was because they determined the market was only CME futures market. So if your only market you're comparing it to is the CME, then all of a sudden and the CME futures is a market of significant size. So if they do something similar like they did with that approval, then it doesn't get so far-fetched. And by when you say similar, you mean by limiting it to US dollar BTC pairs. Yes, exactly. Something along those lines. I don't, there's no way to know exactly how the SEC is going to do it, or even if they do that at all.

Starting point is 00:05:47 Like I said, coin, like no matter how you slice it, no matter what source you look at, finance is far in a way the dominant player, especially after FTCS, is no longer around. Yeah, which of course is probably not the SEC's favorite crypto exchange. So earlier you said you could also talk about the 19B4 filing. So go ahead and tell us a little bit about that. Yeah. So a 19B4 filing is basically it comes from an exchange usually in partnership with an issuer in this case when you're trying to file for an ETF.

Starting point is 00:06:20 And you need to get a rule change that allows these things to happen. Right now it's against the rules of a spot Bitcoin ETF. So typically what would happen is an exchange like NYC or New York Stock Exchange or CBOE or NASDAQ will partner with an issue and filed. This is why we think you should change the rules to allow spot Bitcoin ETF. And here's all the reasons why. Here's your objections and why we think those objections have been satisfied. So on.

Starting point is 00:06:42 And these are like 80 pages, hundreds of pages sometimes detailing this back and forth. This is the filing that I Shire filed on Friday, and that's where we saw the spot exchange, surveillance sharing agreement that they're saying they have, which basically means they're going to share all the trade data from Coinbase with NASDAQ, and then NASDAQ is obviously regulated, so therefore the SEC can see that data. Oh, but was Coinbase named? Coinbase was not named. So Coinbase was not named in that 19 before. They just say, they just refer to it as a spot exchange market.

Starting point is 00:07:12 I don't know the exact wording, but it's basically, I'm operating a new assumption over the last few days that it's going to be Coinbase is ultimately that person. And honestly, I'm not sure why they didn't name Coinbase, which I actually don't have an answer for that. But the following day, I believe it was Monday after that 19B4 dropped on Friday, Bitwise had filed for a 19B4 application on NYC. So NYCy now has an application, doesn't have the same surveillance sharing agreements. And then also recently there was a lot of news about Invesco and Galaxy who have partnered for applications in the past, also filed with CBOE. So now there's active 19B4s at all three of the major exchanges. The first one that would come up is BlackRock and NASDAQ.

Starting point is 00:07:55 I should also add ARC investments, Kathy Wood, and 21 shares, which is a large ETF issue or in Europe. They partnered and filed for a 19B4 before this I shares one. That was actually delayed already, but that one doesn't have the differences with the surveillance sharing agreement either. All right. So before we get into kind of this horse race amongst all these different issues, Let's actually just talk about the fact that in recent months, SEC has kind of been on a tear with enforcement actions and lawsuits and all kinds of things against crypto companies. So why do you think Black Rock decided to file now? I have a lot of like theories. You can argue some of them are

Starting point is 00:08:33 conspiracy theories in some way. So there's two, there's two trains of thought here, right? Either Black Rock knows something and thinks there's an avenue here. And they, they know and they found a little narrow way to get through and they think Gensler is going to waver a bit on what's going on, or they just think they have a narrow way and they're filing for the chance anyway. So we'll start with that second one first. Even if the odds, I've said this on multiple occasions, but even if the odds of spot Bitcoin ETF approval for I shares being first are like 10%, right, even if they view the odds as like pretty low of them getting approval based on the fact that the SEC has a lot of experience denying spot Bitcoin ETFs, the chance that maybe we think we can get through and be the first is critical.

Starting point is 00:09:15 I mean, it's significant money. We saw BITO, the Bitcoin Futures ETF, the first one to launch. That thing took in a billion and a half dollars in two days. So that, and you're charging fees on that, obviously, that's significant money. Even for somebody like BlackRock, it's not nothing. And you're going to grow that over time. Being a first mover is a huge advantage. We saw the same thing with Spot Bitcoin ETFs in Canada.

Starting point is 00:09:36 The first mover purpose had a huge advantage over all of its competitors. So just taking that alone, taking out who BlackRock is, it makes sense why issuers are filing these things, right? Because they have to be there. And then everyone's following suit because they don't want to be too far behind. If you're a day or two behind BlackRock or whoever getting out first, that's not a big deal. All of a sudden, you're a couple months behind. That's a way harder proposition to make on a competitive landscape. Now, if we take the other side of things that BlackRock might know something, you have to go to kind of what's going on with Grayscale. There's the Ripple lawsuit, which Ripple might actually win. There's a, it's not,

Starting point is 00:10:12 If you asked me a couple years ago, I've been like, oh, yeah, SEC's got this closing shut. In this Grayscale case, we always thought Grayscale had a legitimate chance. Then after the oral arguments, it looks like we, my litigation analyst, my colleague, Eliot Stein believes grace skill is about a 70% chance of winning. That is not good for the SEC. So these all could be reasons why Gensler might be looking for a way to like save face a little bit, like back down. And if you look at all the allegations, obviously the finance allegation,

Starting point is 00:10:42 is separate from Coinbase, right? The lawsuits. There's a lot of things that they're being accused of there, including wash trading, which could question how much of their market size is actually 60% if there's a bunch of wash trading happening on finance US. Who knows what else is happening there? So that's another thing. Also going back, Gary's might be facing the loss at Grayscale. And he's focused on all these lawsuits. They're all on all coins or things that he's claiming to be securities. For the most part, the one thing he said, which you've covered, extensively is Bitcoin is not a security. Even though he said in the past that Ethereum is not a security, the SEC has said it in the past, he won't say it now. The one thing he's admitted

Starting point is 00:11:23 unwaveringly is, yes, we don't think Bitcoin is a security. So if he's going to give ground anywhere, it might be on Bitcoin, right? And Coinbase, they're not accusing them of fraud or these other things. They're accusing them of operating an unregistered securities exchange because they're claiming these tokens to be securities, which is regulation via enforcement, and you've covered that a bunch. But all these areas mean, like, if he's going to give anywhere, it might be on a Bitcoin ETF. And also, if he can then find a way to approve these things before being handed a negative decision from the courts, maybe this is the way to do it because he can say, look, there is a way to approve a spot Bitcoin ETF. You can't say that we didn't offer a

Starting point is 00:12:00 legitimate path because basically the lawsuit by Grace Gill is saying you approve futures ETFs. You're not approving spot. You're not treating like situations alike. And for those reasons, they're saying they violated the APA, the Administrative Procedures Act. And it looks like the courts are going to agree. And our base case before this was like the courts would send it back to the SEC and say, you can't deny for those reasons. So either approve or deny for other reasons. And we just thought gray scale was, I mean, the SEC was going to figure out another reason to deny gray scale.

Starting point is 00:12:28 Now with BlackRock here, obviously BlackRock is very tied in. So we think maybe they know something's going on that we don't. But again, you fall back on the fact that they're the only one that now has what's a surveillance own sharing agreement with the spot market. And maybe they just think this should be enough to get by with the SEC's concerns. And obviously, Hester Perth would agree with everything we're saying here. Like, she's been very adamant and dissented on all these decisions that the SEC has given for denying spot Bitcoin ETS. Yeah. And I saw some other analysis that, like perhaps she and another commissioner, Mark Uyeda, they're aligned and may have persuaded another commissioner or something.

Starting point is 00:13:08 But then the other thought that I've been having is that when you have all these, you know, exchange-traded products around Bitcoin in other jurisdictions that I've been trading for a long time, it does feel like in a certain point, you're right, like the U.S. just sort of needs to give. And you're right that, yeah, they're not pursuing regulatory actions on Bitcoin. So in a moment, we're going to talk about the differences between some of these different applications. But first, a quick word from the sponsors who make this show possible. Looking for a better way to track your spending and net worth? Copilot is a beautifully designed, privacy-oriented personal finance app that gives you insights you won't get from your banks. When you link your accounts, Copilot automatically tracks your investments performance and

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Starting point is 00:14:27 For extra privacy, Proton Mail is accessible with Tor. Plus, Proton is based in Switzerland, where your data is protected by strong, privacy laws. Join 100 million others who protect their privacy with Proton. Go to proton.com. back to my conversation with James. So one actually last bit on the BlackRock etiap that I have to ask about is, you know, as we've discussed, the SEC is suing Coinbase. So, you know, why do you think like BlackRock chose Coinbase as the custodian? Does that cause any problems? Because, you know, they are facing this lawsuit from the SEC. I mean, that is undoubtedly something that, like, I've gotten from other people.

Starting point is 00:15:10 You have to take that as a risk, which is why we don't think the odds of, like, this thing get approved are like 70 percent, like we think the great scale victory. Like, the odds are still stacked against BlackRock. My colleague, Eric Beltunis and I are roughly around 50-50, we think, maybe, which is way higher than most other people in the trad-fight space. But that said, like I said, the coin-based allegations are around completely separate securities. They're not accusing them a fraud. So I would make the argument that, like, they're not worried about their Bitcoin

Starting point is 00:15:37 custody program. And why would BlackRock choose Coinbase? They already have a partnership with Coinbase. They use them for pricing algorithms. They input on their side, unlike products they have, like Aladdin. And also, I believe they, it was about a year ago that they announced a partnership with BlackRock, Coinbase and BlackRock. So they're also, like, institutional clients of BlackRock, they use Coinbase to get access

Starting point is 00:16:01 to the crypto market. So I assume it's for customers. and other things like that, trading perhaps. So there's already a built-in partnership between BlackRock and Coinbase. And also there aren't all that many other people that you can partner with. Gem and I also does a custodian business. There's a few others. But Coinbase is obviously like relatively the leader in the space that are a public firm.

Starting point is 00:16:20 So it makes sense that BlackRock could partner with them. And if we were talking about other cryptos or some of the ones that the SEC was alleging to be securities, we wouldn't be having this conversation, I don't think. Yeah. And then just to take a step back, let's just, spill this out for any, especially more kind of recent listeners, because we've had Bitcoin futures ETFs for a few years now, but everybody's really been waiting for a Bitcoin spot ETF. So why is that? Yeah, I mean, a spot ETF is the holy grail, really. Like that's what you want.

Starting point is 00:16:52 Futures ETF, so in a futures ETFs, the way they work is futures markets are you buy every month, right? So basically, it's currently June. So right now, you might. might be holding a June contract, but as the end of June gets comes closer, you're going to have to sell those June contracts and buy July. In a typical market or typical Bitcoin market, it's in Contango, which means that next month is a little bit more expensive. So over the very long term, you're basically selling at a lower price and then buying it a higher price. So that eats away your returns. To be fair, the Bitcoin ETFs, the futures ETFs have done very well. They haven't lagged spot by much at all, a couple of percent here and there. But in the times before the Bitcoin ETF launched, that was like

Starting point is 00:17:32 60, 70% that the futures mark rolling front month futures was lagging spot Bitcoin. Now, a lot of that has to do with institutions coming in. Things are way more efficient. The carry trade that you might have heard of other people doing just isn't as profitable as it used to be. But also, we haven't been in a raging bull market. You were talking about what GPTC, the carry trade? Oh, no, no, no. So people would basically carry trade futures. So you could buy the futures and then you could handle, basically you could make money off the difference between spot and futures market. So if the spot market was different from the futures market, you could do things like post collateral and trade futures around that. And basically, as that went up, as the price went up and met the futures or futures

Starting point is 00:18:13 came down to meet spot or what have you, you could make money doing that. Okay. Yeah. So basically, those futures ETFs have done very well. If you want to trade Bitcoin and you want to get exposure to Bitcoin, there's nothing wrong with the futures ETFs that are out there. But that's, as many people would call it that's paper Bitcoin, their futures products, even though they do settle in Bitcoin. But you're not actually holding the physical Bitcoin in a trust somewhere. It's not on a wallet anywhere. You're just trading futures back and forth. And like I said, there was no bull market, right? So when you get into a really steep bull market, that's when those other months might be further away from the current month and where those costs of selling the current month and buying

Starting point is 00:18:51 the next could really start going up. So we haven't been since the futures ETFs launched. They basically top tip the market at the end of 2021 when they launched. So everything's been going down or sideways. It's slightly up now. So it'll be interesting to see what happens with that futures curve. But Spot is the thing that everyone wants because you know it's just held. An ETF, you can always create or redeem shares. So essentially, you could hand over Bitcoin and get shares of the ETF and get Bitcoin back. So that means the price and nav is always stays in line, which is not happening with GVTC. So basically, it's just an efficient market. ETFs are just a wrapper and a technology and it's a way to basically get Bitcoin on TradFi rails, if you

Starting point is 00:19:30 will. So it's just the most efficient way to do it. And it would hold physical Bitcoin. I should put physical in quotes. Yeah, yeah. And it's best for people who just kind of want to like buy and hold for the long term, whereas yeah, you're right with the Bitcoin futures ETF. It'll kind of get eaten away. So as we mentioned right after Black Rock filed, a whole bunch of other institutions did as well. So first of all, explain like why there was this flurry of activity right after, but then also talk about the material differences and the applications that for you, you know, you think could cause some of them to be approved versus others to be rejected. So right now, the only material difference between all of the 19B4 applications, as far as I'm

Starting point is 00:20:11 concerned, is that surveillance sharing agreement. There's a lot of other research in there. Bitwise has done tons of researches showed that the futures market on CME often leads spot, showing that it is a market of significant size for spot markets. So there's a lot of different things in there, and they all coalesce to show why, in my opinion, Bitcoin ETF should have already been approved as far as I'm concerned. But this surveillance sharing agreement that Coinbase and BlackRock have with NASDAQ is the real only main thing that's a differentiator here, as far as I'm concerned. We'll see if all these ETFs do lot. At some point, we're going to get Bitcoin ETFs, right?

Starting point is 00:20:49 And when they happen with the way ETS usually differentiate themselves is one is costs. Fees are going to come way down for what people are typically used to seeing for Bitcoin ETFs. But they'll also do unique things. Like one issuer might have, I talked about create shares or destroy shares. Usually what that's done is like in what's called a creation unit. So that creation unit could be you need 40,000 shares. But there are some gold ETS where you only need a couple thousand shares and you can take

Starting point is 00:21:14 delivery of physical gold. This is Bitcoin, so it wouldn't actually need physical delivery. So there might be some issuers that have way smaller creation unit sizes where you can buy the ETF. And as anyone could then go in and say, I actually want to take delivery of the underlying Bitcoin two years down the line or whatever have you by giving them a wallet address. So for the most part, institutions are the only ones that do those creation redemptions, but there are unique things. It'll be stored in a cold wallet. Some of them might say we're never going to do any lending of the underlying Bitcoin. Someone will advertise a much lower fee because they are going to lend out the underlying Bitcoin.

Starting point is 00:21:45 There's all these different differentiating factors that you could do. that they're not really outlined clearly in all these prospectuses. Most of these prospectuses are what people refer to as red herrings, because they have all this red writing all around the edges, which basically says it's not, it's subject to completion. It's not done yet. So we don't have fees.

Starting point is 00:22:02 Many of them don't have tickers. They just have basic things like we're going to list on this exchange. Some of them have a ticker. They all say what their custodian is, what their third party like administrators, anything along those lines and then a lot of risk disclosures. But for the most part, they're all pretty similar. They're all going to be trust that,

Starting point is 00:22:18 hold spot Bitcoin with different names, different partnerships. But the only real difference is that 19B4 application from iShares that has that surveillance sharing agreement. As far as I've seen this far, I have it. I need to keep diving in and reading more things. But these are like hundreds of pages in many cases. So it's hard to like really narrow in on what the difference is without like a scoop from some issuer saying here's the difference that we just filed for this, which is obviously

Starting point is 00:22:41 how Coinbase saw that that 19B4 application had the surveillance sharing agreement. I think it was buried on like page 36 of the document or something. So you mean coin desk? Coin desk, sorry, yeah, not Coinbase. So then of the different applications, which would you bet on as being the ones to be approved? So I don't know exactly how the SEC is going to handle this, right? So obviously, I shares, if they approve, if they're going to approve one, it would be the I shares 19 before application because it's the only one that's truly differentiated from the ones that have been denied in the past. Like I said, arguably, it's not differentiated enough based on the SEC's prior wording, but they could approve it.

Starting point is 00:23:16 So it would be I shares that would be first. Then NASDAQ, so they're in partnership with NASDAQ, Valkyri filed recently an updated prospectus. They gave us the ticker, BRRR, R, R, Printergo Burr, which is pretty good. Yeah, it's really good. I got to give my hats off to Steve and Leah over there running Valkyry. But they also changed from their listing from, I believe it was NICC, New York Stock Exchange, but now it's NASDAQ.

Starting point is 00:23:42 So theoretically, that 19B4 rule change, if it's approved, approved, BlackRock would theoretically be first, but that means NASDAQ has the rule change and is allowed to launch Bitcoin ETFs, which would mean that likely, I believe, Valcari is the only other issuer that has a filing at NASDAQ. So Valky might be second. The other ones are CBOE and NICC, and I don't know exactly how that would work. I would think if you approve on NASDAQ, ultimately, they would then approve on NIC and CBOE because then they have the surveillance sharing agreement.

Starting point is 00:24:16 with NASDAQ to be able to see it. But I'm not a legal expert. I've gone down a lot of rabbit holes in this front, so I don't know exactly how it would play out. My personal preference would be like, okay, NASDAQ wins, let those guys go first

Starting point is 00:24:29 and then everyone else should be able to launch on the same day. But that's not how the SEC works. Like I thought the same thing with Bitcoin futures ETFs, like pro shares was one day early on a couple others. And like, I just, it's weird to me that you're just giving one person all this. It's like a,

Starting point is 00:24:44 like I said, they took in $1.5 billion in the first day. Like, you're just handing somebody all that money. I would think it'd make more sense to just let everyone go from the start line at once. But I guess the argument would be that being more communist than capitalist, and that's not how our regulations work. So basically, there's a set timeline for like after this, so many days after filing, you can get approved and then you can list and things like that. So there's a set timeline. So the first one to file and start that clock is the one that would start everything going forward. And so, but you're saying even though it was 21 shares in ARC, like essentially because they don't have that surveillance sharing and you think it's just unlikely they'll be approved. So really the clock starts with BlackRock. Is that is that it? Yeah. So, so, so Arc and 21 shares, they filed in May. So technically, the way these 19 before applications work is you apply and then there's some time period that you see it posted on the exchanges website. So in the case of ARC21 shares with CBOE. And then it gets. posted to the SEC website that says, like, we're acknowledging it, and then it gets posted to,

Starting point is 00:25:47 like, what they refer to as the Federal Register. And that's when a clock starts. So then the SEC has 45 days to issue a delay, deny, or approve order. So every other time, every other spot Bitcoin ETF, they've delayed. So they go 45 days, 45 days, 90 days, 60 days. And at the end of that, it's 240 days. They either have to approve or deny. They can't delay. Every time they've denied one, they've waited to 240 days to issue the denial letter. But if one of these is going to get approved, it could happen after that 45-day period. And if we look at what happened with ARC 21 shares, they filed their 45-day date where they should have gotten a response from the SEC was technically June 29th. But the SEC came out on June 15th and said, we're going to delay this immediately.

Starting point is 00:26:34 So they didn't wait for the 45-day period. So the 45-day period, we don't know when it's going to be for I shares, because like I said, there could be a one week or two-week lag from when it hits the exchange website to when it finally hits the SEC register. So we don't actually know when it's going to happen. But I'm estimating that like that 45-day time period would be somewhere around August 19th, roughly, give or take seven to 10 days in either direction. So until we see it posted in the SEC website, I won't have any real clear timeline. But again, maybe that timeline, that date doesn't fully matter considering the SEC just delayed

Starting point is 00:27:09 ARC 21 shares two weeks earlier than they were supposed to. But again, if we see a delay on the I shares application, that's pretty much, that's a bad sign in our view. Because like I said, if they're going to approve it under what it's currently doing, they would just approve it based the way it's filed. Maybe some, basically there's some back and forth between all those time periods. So the SEC issues a denial or delay for XYZ reasons. And sometimes the issuers and exchanges will, like, here's more information. Here's something you're questioning and why it shouldn't be question and then maybe all of a sudden the SEC could approve. But typically if you delay first, the vast majority of time, I see them ultimately get denied at the end of that 240 day time period.

Starting point is 00:27:47 And that time period is probably somewhere in late February, early March of 2024. Okay. Yeah, but it's interesting that I guess they delayed on the same exact day that Black Rock filed, which I don't know. I don't know this world, but my thought is like, oh, that's because maybe they do plan to approve BlackRock. But anyway, I agree. No, that's a good notice on your part. Like it is very odd timing that they would just, oh, we got this Black Rock application for a rule change. Let's delay this arc one. Because theoretically, I don't know exactly how it would work with these other exchanges because technically right now it's just NASDAQ, like I said, that has its spot surveillance sharing agreement. But I would assume once it's approved on NASDAQ, the SEC is then just going to approve these

Starting point is 00:28:33 other ones, which are a couple days behind the NASDAQ ones. Okay, last thing then I definitely want to cover before we say goodbye, which is just that Grayscale obviously has been suing the SEC over the rejection of its application to turn GBT, its Bitcoin trust, into a spot Bitcoin ETF. So Grayscale has said that it expects a decision on that by the end of the third quarter. You know, you've been talking about, and I actually had your colleague on my show to talk about how we thought it was looking really positive for Grayscale. But when you look at, you know, what's going on on these Bitcoin ETF applications along with this pending decision, how do you think those two things will play out in terms of, you know, who will get approval first or like what that would mean, even if there is a win for Grayscale in this lawsuit and, you know, what are the prospects?

Starting point is 00:29:21 It could also become a spot Bitcoin ETF. Yeah. So there's a lot to unpack here. I have a lot of views on this. So I think I kind of mentioned early on that I thought Grayscale was going to win. And Gary could be looking for a way to make it so that the judge's decision either becomes irrelevant. The case gets thrown out because they approve spot Bitcoin ETF or it just goes that way, right? So like I said, if it's five.

Starting point is 00:29:44 But why would it get thrown out? I don't understand because it would like. Because then it can launch. So once an ETF is approved, then Grayscale can theoretically convert theirs to an ETF if they really wanted. Wait, really? And why is that? I don't understand why just because some other company. Once this 19 before rule change is accepted, if one is approved, right, then all of a sudden,

Starting point is 00:30:05 Grayscale's lawsuit is kind of irrelevant because they will be able to convert GBDC to an ETF because the rule change was allowed to allow for Spot Bickle and ETFs. So if one of these is approved, then Grayscale would theoretically be able to convert GBCC to an ETF. So there's two thought. So just understand. So the SEC's denial of Grayscale wasn't like particular to this whole process of turning GPTC into a Bitcoin spot ETF? It was just about the fact that no Bitcoin spot ETFs exist already or something like that. Correct.

Starting point is 00:30:37 Yeah, so the gray scale denial was basically saying, I think the word surveillance sharing agreement was in their 84 times. I don't remember the exact number, but it was almost 100 times they said surveillance sharing agreement in their denial letter to gray scale. So the reason Grayscale couldn't get their ETF approved is the same reason that no one else can get their ETFs approved, even though it would be way better for. all the end investors, they'd be protecting investors by getting rid of that discount, all those different reasons.

Starting point is 00:31:03 The SEC basically said, we don't care about any of that. It's about the underlying spot market and whether or not it's regulated or their surveillance sharing agreements. So there's two ways to look at this. Either the one way that my initial thought was like maybe BlackRock thinks Grace Hale's going to win their lawsuit and there's a potential that they could get approved to launch an ETF. BlackRock wants to make sure they're right there when it gets approved.

Starting point is 00:31:25 Or maybe they're using this as a way and the SEC is going to approve this before. or there's even a decision from the federal judges, and that way the SEC doesn't take a loss in federal court potentially. Or if they do, it's kind of irrelevant and it's like a loss in name only because technically the SEC, they say they prove that there was a way to approve a spot Bitcoin ETFs and that it was different from futures. I don't know exactly how all that work. I'm not a legal expert.

Starting point is 00:31:48 Obviously, Elliot Stein, my colleague obviously is. So he's the person I defer to on this. But basically, there's a few different reasons how gray scale situation ties. in to over here. But if one of these is approved, then Grayscale can convert JBC to an ETF. I don't know what the timing looks like between that that announcement and when they're allowed to do it. Also, Grayscale has been very adamant that they're going to convert to an ETF and lower fees, but there's no guarantee forcing them that they're going to. And I know a lot of people in the crypto and Tradfifide space that say there's no way they're actually going to convert and give up

Starting point is 00:32:23 that 2% in perpetuity. I don't think that's the case. I think they'd be dead in the water if they have the ability to convert to an ETF and then they don't do it. And there's so many people circling trying to crack open GBT and break open that discount that if they don't convert an ETF, something's going to happen to courts where they're going to be forced to, so they might as well do it themselves. And honestly, Michael Sun and Shine has been very clear. We want to convert this an ETF all the way back in 2015. They've been saying they're going to convert to an ETF. So I think ultimately, when one of these gets approved, GBTC will convert to an ETF. I'll eat Karelo if I'm wrong, but. Okay. And then there's just one last bit that you said,

Starting point is 00:33:00 and I feel like I maybe had a delayed understanding of what you were saying, but basically you were saying that if Black Rock, if Black Rock's ETF gets approved, then that would just cause the Grayscale lawsuit to get tossed out. And then the SEC would not have to like face a loss. Is that what you said? That's my thinking. I don't know exactly how it would work. But if basically, Grayscale's whole lawsuit their whole premise is basically you approve futures ETFs, you're not approving spot Bitcoin ETFs, and there's no reason for it. You're not giving us ground to actually be able to do it. They're saying you're not treating like situations alike. If all of a sudden, the SEC can come back to the courts and be like, look over here, we approve this one. And then Grayscale is

Starting point is 00:33:43 going to be able to convert because BlackRock figured it out and you guys couldn't. Like, I don't know how the courts would handle that. But theoretically, even if the courts do decide that the SEC violated the APA, it's almost like a very very very. loss in name only because Gary can be like, no, we found a way. We got the markets regulated. We got surveillance sharing agreements with the underlying spot markets. But Gary Gensler's a politician. So he wants to put feathers in his cab. You can see all the videos he posts all over Twitter about different things he's doing. He's a politician first and foremost. So if he can say, like, push that aside and say, no, they were wrong and we did this. We approved. We backed down

Starting point is 00:34:21 a little bit there. But we're going after the real fraudsters and the things that are actually securities. There's a way for him to spin this, essentially. It's my whole thought process. Wow. All right. Well, this has been such a jam-packed episode. I really appreciate you unpacking all of this activity on Unchained. Yeah, this has been fun. Thank you, Laura. Don't forget. Next up is the weekly news recap. Stick around for this week in crypto after this short break. Join over 80 million people using crypto.com. One of the easiest places to buy, trade, and spend over 250 cryptocurrencies. Spend your crypto anywhere using the crypto.com visa card. Get up to 5% cash back instantly, plus 100% rebates for your Netflix and Spotify subscriptions, and zero annual fees.

Starting point is 00:35:08 Download the crypto.com app now and get $25 with the code Laura. Link in the description. The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically. speaking. Nah, no more statistically speaking. I want hot takes. I want knee-jerk reactions. That's not really what I do. Is that because you don't have any knees? Or... The score bet. Trusted sports content, seamless sports betting. Download today. 19 plus, Ontario only. If you have questions or concerns about your gambling or the gambling of someone close to you, please go to conicsonterio.ca. Thanks for tuning in to this week's news recap.

Starting point is 00:35:49 Binance U.S. files court motion accusing SEC of unethical conduct. Crypto Exchange Binance U.S. has accused the U.S. Securities and Exchange Commission of making misleading remarks regarding the crypto platform. Earlier this week, Binance U.S. entered a temporary agreement with the SEC to keep all customer assets onshore, a move that the SEC claimed was necessary to safeguard investor assets. On Wednesday, Binance, its parent company Binance and CEO Chang Peng Xiao, called for the court to restrain the SEC from making deceptive external comments.

Starting point is 00:36:24 According to Binance U.S., the SEC's press release, which termed the consent order as, quote, emergency relief, conflicted with the evidence presented in court. The SEC's press release stated that the consent order was, quote, essential to protecting investor assets because, and here they refer to the U.S. trading platform, quote, Changpeng Xia and finance have control of BAM's platforms customer assets and have been able to commingle customer assets or divert customer assets as they please. However, the SEC's lawyers had previously admitted that there was no evidence of Finance U.S. customer assets being improperly commingled or diverted. On Twitter, James Murphy, aka Meta Lawman, a crypto lawyer with

Starting point is 00:37:07 expertise in securities law, said, quote, it's noteworthy that these allegations of misconduct are signed by Bill McLucas and George Canellos, both of whom served as head of the SEC's division of enforcement. Accusations of unethical conduct coming from these lawyers will definitely reverberate in the halls at the SEC. Although the lawsuit initially sparked some outflows at Binance, recent on-chain data shows a significant turnaround in favor of Binance, with $1.8 billion in inflow reported over the last week. Alongside regulatory hurdles, the exchange experienced an abnormal surge in Bitcoin price, jumping to over $138,000 for a few seconds. While Binance U.S. has yet to address this price, spike. Speculation points to poor liquidity for BTC against USDT on the platform.

Starting point is 00:37:54 In related news, Binance, not the U.S. entity, began the process of running nodes on the Bitcoin Lightning Network in an effort to incorporate the technology for its deposit and withdrawal services. Doe Kwan is convicted in Montenegro. Do Kwan, the former head of Terraform Labs, received a four-month sentence from a Montenegrin court. Juan, along with Terraform's ex-CFL, Han Cheng June, was found guilty of document forgery. Both were apprehended in late March in Montenegro, attempting to travel to Dubai on fraudulent passports. The sentences account for their 85-day detention period. Terraform Labs was behind the Terra-USD stable coin and its sister coin Luna, which collapsed in May 2022, wiping out $40 billion in market capitalization, a troubling event that has drawn attention

Starting point is 00:38:40 from authorities in the U.S. and South Korea. Kwan is currently detained in an overcrowded prison in Montenegro, alongside numerous organized crime figures. Kwan is isolated from other inmates at Spoutes Prison and is permitted outside twice daily for fresh air. The prison conditions are difficult, as described by Kwan's local lawyer, Goran Rodec, who asserts that Kwan and his associate Han are coping as best as they can under the circumstances. According to Human Rights NGO Civic Alliance, the prison is rife with gang violence and authorities have increased surveillance measures to keep peace. Earlier this week, Kwan had claimed in court that he was unaware of his Costa Rican passport's fraudulent nature. He said, quote, I traveled all over the world with a

Starting point is 00:39:24 Costa Rican passport. If I had suspected it was a fake passport, I would not have traveled to many countries. He obtained this passport through an agency in Singapore, the name of which he says he does not recall. FTX grapples with staggering legal fees. The financial quagmire deepens for bankrupt crypto exchange FTX, with legal and advisory fees reaching an astonishing $121.2.8 million in just three months, according to data compiled by the block. With Sullivan and Cromwell's fees accounting for 30.9% of the total at $37.6 million, the case is one of the most expensive relative to the value of claims. Ram Alawalia, CEO at Luwita Wealth, critiqued the high costs, claiming some procedures are, quote, not worth turning over when you bill at more than the $1,000.

Starting point is 00:40:10 thousand dollars per hour. The professional fees are already more than $200 million, as stated by Catherine Stadler, a court-appointed bankruptcy attorney. She described the proceedings as extraordinarily expensive, quote, equivalent to four solid person years of work, citing costs amounting to two percent of estate assets and 10 percent of reported cash. Stadler noted the challenge of operating within, quote, an unregulated financial system, and suggested a reduction of Sullivan and Cromwell's $42 million bill by $650,000 for overstaffing and excessive meetings. 3A.C Ventures launches in a move met with skepticism. Three Arrow's Capital co-founders, Sue Zhu and Kyle Davies, in partnership with OPNX,

Starting point is 00:40:55 have announced 3AC ventures, aiming for, quote, superior risk-adjusted returns without leverage. The pair are known in the crypto community for entering liquidation in 2022, after their over-leverage trading strategies caused their firm to face unpayable margin calls, which cascaded across the industry, prompting other bankruptcies. The announcement did not go unnoticed by the crypto community, which expressed uncertainty regarding the partnership between OPNX and 3AC ventures. Both organizations bear a tarnished history, raising eyebrows within the industry. Opinx, an exchange for tokenized crypto bankruptcy claims, launched in April 2023. In addition to 3AC, it has ties with CoinFlex, both companies having a challenge.

Starting point is 00:41:38 stumbled past. Despite community reservations, the two companies aimed to facilitate projects within the OPNX ecosystem and advanced toward a decentralized future. Meanwhile, OPNX continues to advocate its claims product as a solution for those affected by previous cryptocracies. Polygon considers an upgrade. Ethereum Layer 2 Scanlink solution, Polygon, is contemplating a significant upgrade to its main proof-of-stake blockchain. Mahalo Bielic, the network's co-founder, hosted a proposal for transitioning the chain's architecture to a zero-knowledge-based Ethereum virtual machine, Validium, a decentralized layer 2 secured by zero-knowledge proofs. If past, the $2 billion worth of assets, thousands of apps, and millions of users on Polygon Proof-Stake would transition to this technology.

Starting point is 00:42:24 The upgrade aims to bolster network security and decentralization, obliterate chain reorgs, and augment scalability by deploying zero-knowledge or ZK technology to the main POS chain. Unlike the previously launched ZKEVM solution, the main chain upgrade wouldn't be a roll-up, but a Validium solution, storing transaction data off-chain, reducing on-chain footprints, decreasing transaction fees, and elevating scalability. Brendan Farmer, co-founder of Polygon Zero, claimed this groundbreaking transition would lead to Polygon POS integrating with the Polygon 2.0 ecosystem, benefiting from unlimited scalability and unified liquidity powered by ZK technology.

Starting point is 00:43:06 If accepted by protocol governance, the upgrade could be activated on the main net by early 2024. If you're unfamiliar with zero-knowledge technology, I highly suggest you listen to the March unchained episode with Dan Bonnet and Ali Yahya. In related news, Polygon launched Polygon copilot and AI interface powered by OpenAI's chat GPT to support developers in creating decentralized apps on the Polygon blockchain. Ethereum proposal raises concerns of centralization. A reposed shift in Ethereum's maximum validator balance from 32Eth to 2048Eth sparked a lively debate. The proposal aimed at resolving the issue of larger operations having to spin up multiple nodes could increase network efficiency and reduce wait times in the validator activation queue.

Starting point is 00:43:52 However, the proposal drew mixed reactions. Advocates believe it will help large-scale staking operators like Lido streamline their operations and achieve what's known as, quote, single-slot finality faster. Ethereum Foundation researcher Michael Luder, who introduced the proposal, emphasized that it could alleviate the stress on Ethereum due to the burgeoning number of validators. Investor Eric Connor backed this sentiment, indicating it could simplify key management for those handling multiple validators. Those opposed, however, cited risks of centralization and the potential for heightened penalties for unintentional double attestations or slashing.

Starting point is 00:44:29 Cryptoanalyst Adriano Ferria on Twitter refuted claims that this move would lead to centralization, stating it would merely make staking large amounts less cumbersome. Meanwhile, Adam Cochran of Sinem Hayne Ventures voiced concern that this might disproportionately benefit, quote, wealthy staking services, while increasing slashing risks for users. Bickgo abandons acquisition plans for Prime Trust. Cryptocustody firm Bicko called off its planned acquisition of competitor Prime Trust, which is reportedly grappling with client and deposit losses amid growing business concerns. Following the announcement, Crypto exchanges Stably and Coin Metro notified their users

Starting point is 00:45:08 that Prime Trust had ceased all deposits and withdrawals as per the directive of the Nevada Financial Institution Division. According to Bickgo, the decision to terminate the acquisition came after extensive efforts to work on a way forward with Prime Trust. Sertic detects critical bug and Suey Network pre-launch. The Sui Foundation awarded blockchain security firm Sertic $500,000 for discovering a potential critical threat to the Sui network. The risk, dubbed the Hamster Will attack, could have resulted in the entire network falling into a never-ending loop, effectively bringing it to a halt without processing any new transactions. Quote, differing from traditional attacks that shut down chains

Starting point is 00:45:48 by crashing nodes, the Hamster Will attack traps all nodes in a state of ceaseless operation, Sertick stated. The issue was identified and addressed by before Sui's main net launch, marking a significant win for both Sui and Sertic. Darius Gore, head of communications at the Sui Foundation, stated, quote, we are extremely pleased that the program resulted in finding and fixing this bug well before Sui went live. Crypto-slooth Zach XBT raises over $1 million. Renowned blockchain investigator Zach XBT was sued by tech entrepreneur Jeffrey Huang, aka Monchi Big Brother, for an article published in June 2022. As the story goes,

Starting point is 00:46:26 ZackXVT accused Huang of embezzling substantial amounts from Formosa Financial, and now defunct crypto treasury platform co-founded by Huang. Zach XVT wrote, The lawsuit is baseless and an attempt to chill free speech. I intend to fight back and defend free speech. This case has sparked widespread attention, leading the crypto community to donate over $1 million to support Zach XVT's legal defense. Notable backers include major crypto businesses and personalities,

Starting point is 00:46:55 such as Binance, Sertic, and Justin Sun. The mounting legal expenses are estimated to exceed $1 million, and Zach XVT's attorney, Stephen Pally, warned of the potential risks faced by his client due to the lawsuit's exposure, such as threats of blackmail. Time for fun, Vince. Unchained Ginny Hogan gives us her take on the Binance v. SEC legal tessel. Last week, the SEC filed 13 charges against Binance.us,

Starting point is 00:47:22 which is, in my experience, typically 13 more than you want. It didn't have a huge effect on the price of Bitcoin, though. Crypto is like Trump. The more legal action you take against it, the more popular it gets. The judge overseeing the case did seem to see both sides. She called the SEC's strategy of using enforcement action to regulate crypto inefficient and cumbersome. Personally, I like my regulatory oversight sleek and simple, like an Apple Watch. However, she also expressed skepticism at Binance's argument that it was caught off guard since the SEC has been investigating Binance since 2020.

Starting point is 00:47:53 I don't know, though. sometimes things just slip past you. I have a warning on my car that I've been meaning to get to to the last six years. The good news for Binance is that the two sides reached a deal to keep Binance.U.S. open. In this agreement, funds belonging to Binance.U.S. customers would go into a special digital

Starting point is 00:48:08 repository that's only accessible by U.S. customers. That's so cool. Honestly, ever since McDonald's went global, we've had so few uniquely American things. I guess there was the insurrection, but that was years ago. Thanks so much for joining us today. To learn more about James and the recent ETF filings, check out the show notes for this episode. Unchained is produced by me, Laura Shin,

Starting point is 00:48:27 with up from Kevin Fuchs, Matt Pilchard, Zach Seward, Wanda Ranovic, Sam Shreve-Rum, Ginny Hogan, Jeff Benson, Leandro Camino, Pamajumdar, Shashon, and Margaret Curia. Thanks for listening.

Unchained - Why It Looks Like BlackRock Could Win America’s First Spot Bitcoin ETF - Ep. 509

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