WBD623 Audio Transcription
Grayscale, the SEC & Genesis with Michael Sonnenshein
Release date: Friday 24th February
Note: the following is a transcription of my interview with Michael Sonnenshein. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Michael Sonnenshein is the CEO of Grayscale. In this interview, we discuss Grayscale’s lawsuit with the SEC, Genesis’s lending practices and bankruptcy, GBTC and the intercompany relationships at DCG.
“A lot of regulators all around the world are looking to see how US regulators treat Bitcoin…I would say that anybody who is broadly involved in the crypto space, you want to see Grayscale win this lawsuit.”
— Michael Sonnenshein
Interview Transcription
Peter McCormack: Good to see you again, Michael.
Michael Sonnenshein: It's good to see you again.
Peter McCormack: It has been about five years since we last spoke. You were episode 23 of the podcast.
Michael Sonnenshein: I don't even know how to react to that. Five years? We're going to talk about everything that's happened in crypto over the last five years in this episode, right?
Peter McCormack: You said you've got an hour hard stop! But those days, it was just me with a little -- do you even remember it; we did it in London?
Michael Sonnenshein: I'm an honest guy, I don't remember it.
Peter McCormack: Did you know you'd been on before?
Michael Sonnenshein: I did know I'd been on before, but I'm impressed that it was five years ago. Wow!
Peter McCormack: Yeah, so you were at a conference in London and I can't remember who reached out to who, probably me in those days, and I turned up with my little case, set up my microphones.
Michael Sonnenshein: Okay, so this is 2018, 2017?
Peter McCormack: 2018.
Michael Sonnenshein: Okay, where was the Bitcoin price?
Danny Knowles: I can have a look.
Peter McCormack: Lower than now.
Michael Sonnenshein: Lower than now.
Peter McCormack: Yeah, lower than now.
Michael Sonnenshein: And people probably thought you were crazy and I was crazy.
Peter McCormack: Yeah, they still think that, they still think we're all crazy.
Michael Sonnenshein: Okay!
Peter McCormack: And now since then, it's now all this equipment --
Michael Sonnenshein: Amazing.
Peter McCormack: Six people work on the show and we're still all crazy.
Michael Sonnenshein: Congratulations, it's great.
Peter McCormack: Yeah, I mean it's been an interesting five, six years.
Michael Sonnenshein: It has.
Peter McCormack: Oh, here we go, it's a reason to celebrate, look at this. This is service. Wow, cheers! All right. You've had an interesting year.
Michael Sonnenshein: We've had a really good year.
Peter McCormack: Well, Grayscale may have had a good year. There is a question on everyone's mind which keeps coming up. It's been coming up a lot this week, right, Danny?
Danny Knowles: It has.
Peter McCormack: How do we say your surname?
Michael Sonnenshein: Why don't you try and then I'll correct you.
Peter McCormack: So, I've been saying, "Sonneshine", and then what else have we had?
Danny Knowles: It's a different pronunciation on the O-sound, is what I've heard.
Peter McCormack: We can't get it right.
Michael Sonnenshein: It's actually a lot simpler than it looks.
Peter McCormack: Okay.
Michael Sonnenshein: "Sun and shine".
Peter McCormack: "Sunandshine"?
Michael Sonnenshein: "Sunandshine".
Peter McCormack: That's a beautiful name, really.
Michael Sonnenshein: Well, thank you very much.
Peter McCormack: Are you bringing the sunshine for us?
Michael Sonnenshein: Always shining the sun on the crypto markets; how's that?
Peter McCormack: All right. Are you here for an interview or is this a PR tour?
Michael Sonnenshein: I think we're here for an interview, isn't that what you asked for?
Peter McCormack: You asked. Actually, do you know what's funny? Danny's the producer, he runs the show, and when was it, like four weeks ago you messaged me?
Danny Knowles: Something like that.
Peter McCormack: He's like, "You know, I think we should try and get Michael back on the show". I was like, "He's not going to come on the show, there's zero chance he's going to come on the show". Then, was it you who reached out to me?
Michael Sonnenshein: It could have been one of our agency partners, yeah.
Peter McCormack: And they reached out and said, "Do you want Michael on the show?" I was like, "Yeah, absolutely". I just assumed you wouldn't want to -- I didn't think you would be doing interviews at the moment.
Michael Sonnenshein: I'm doing a ton of interviews at the moment and thrilled to be here. Let's get into it. You've got a long list of things to ask me about, it looks like.
Peter McCormack: Well, let's see how rehearsed some of your answers might be! No, listen, there's a lot been going on. My primary concern is Gemini's a sponsor and so obviously I know they're a separate company, Genesis; but Genesis, DCG, Grayscale, the same group. A lot of my listeners have been caught up in Gemini, so I've got some interest in some of that area, but we also have got an interest in the SEC stuff, I really want to know what's going on with that. We need an ETF; we should have an ETF; there's a whole bunch of stuff. But I think let's start with Grayscale and just help people understand what the Grayscale Trust is, what is it, explain it?
Michael Sonnenshein: Yeah, sure. So, I can't even imagine what Grayscale was five years ago when we last had a conversation like this. What I will tell you is where Grayscale has gone to today. We are the world's largest digital currency asset manager, we manage probably about $20 billion, $21 billion of assets under management.
Peter McCormack: How much of that is Bitcoin and how much is the shitcoins?
Michael Sonnenshein: That's your words, not mine; there are no shitcoins in the Grayscale family of products. So, no, we have 17 digital asset products, so yeah, a dominant amount of the assets we manage are in our Bitcoin and our Ethereum products, but it's not necessarily an apples-to-apples comparison, right. Each of these products started at a different point in time, they've had different amounts of investor interest, different market cycles that they were launched into, etc. But really, people who are engaging with Grayscale are wanting crypto exposure, don't necessarily know how to buy crypto directly, don't want to buy crypto directly, how do you transfer it; how do you store it; how do you safekeep it? Instead, they can use an investment vehicle that fits into their brokerage account, their retirement account.
So, we have individual investors, institutional investors. Grayscale products are owned inside of mutual funds, inside of ETFs, you name it. And I'm sure what we'll spend a lot of time talking about today is our flagship product, our longest-running product, which is the Grayscale Bitcoin Trust, ticker symbol GBTC, which is the world's largest Bitcoin fund. It owns over 3% of all the Bitcoin outstanding in the fund itself.
Peter McCormack: Yes, we will; I don't care about the other funds, the ETH one and the Ethereum Classic one, I don't care. This is a Bitcoin show.
Michael Sonnenshein: I know where I am.
Peter McCormack: You know where you are, you know your home!
Michael Sonnenshein: But Grayscale does offer a very wide array of investment products because there are new and developing use cases in crypto beyond just Bitcoin, although Bitcoin is certainly where we've seen the most demand in our product family.
Peter McCormack: We keep away from the shitcoins.
Michael Sonnenshein: Okay, all right, as you wish.
Peter McCormack: Ticker S-H-I-T! No, I think the Bitcoin -- I think it was super-interesting when you guys launched it, because it was that opportunity for people who wanted exposure, didn't want to buy it; a great product.
Michael Sonnenshein: September 2013.
Peter McCormack: Very successful product.
Michael Sonnenshein: That's when we launched the Grayscale Bitcoin Trust, September 2013.
Peter McCormack: What was the Bitcoin price then? That was after Mt. Gox.
Michael Sonnenshein: No.
Peter McCormack: Oh, Mt. Gox was 2014, wasn't it?
Michael Sonnenshein: Mt. Gox was already up and running. I think the fact that back then, Mt. Gox was one of the only places you could actually buy some Bitcoin was a really compelling reason to start an investment vehicle that would allow people to buy Bitcoin exposure. Going through the hoops of getting money to Mt. Gox, buying Bitcoin, getting it off Mt. Gox, that was a lot to do and obviously was not successful for a lot of people, so that was somewhat of the actual impetus for even launching Grayscale Bitcoin Trust.
Peter McCormack: Were you at Grayscale from the start?
Michael Sonnenshein: I missed it by, call it four months.
Peter McCormack: Was that because you worked at SecondMarket?
Michael Sonnenshein: So, I did work at SecondMarket, so I started at SecondMarket working for Barry Silbert, our Founder, and when I joined, the division of SecondMarket that was focused on Bitcoin, I was the fifth employee. What became Grayscale and what obviously became the Grayscale Bitcoin Trust had about $60 million of assets under management and I joined to lead the sales effort. So, I've been with the business almost since day one. Those first four employees are no longer with the firm, so I consider myself then to be kind of employee number one, and today we are about 60 employees and again, about $20 billion, $21 billion of assets under management.
Peter McCormack: That's a good number.
Michael Sonnenshein: It is, and I was fortunate enough to be given the reins to take over as CEO about two years ago.
Peter McCormack: Yeah, because you were Managing Director when we first --
Michael Sonnenshein: I think I was.
Peter McCormack: What's the different role from Managing Director to CEO; thedifferent role for you?
Michael Sonnenshein: Well, I think for me starting out in sales, I spent the first of my many years at Grayscale really focused on building relationships, running around the world. I can't tell you how many people thought I had three heads when I was talking about Bitcoin changing the world, or about the use cases that we saw for Bitcoin emerging. And I think over time, as I progressed with the firm, I took on a more business development kind of a role, ultimately took on a leadership role as I became Managing Director and today I think as CEO, what's been so exciting about it is really continuing to focus these last two years, under my leadership, on those foundational elements that maybe Grayscale didn't have that I think have been really important as a springboard to the rest of Grayscale's growth, its next chapter.
So, we focused on our own broker dealer, our own registered investment advisor, I built out my leadership team, we've built out governance, we've built out processes and procedures. It's been really exciting to put all of that foundational work into the company. And although we're talking now amidst what's my third crypto winter actually, there's no question that all the work we've been doing as a team is really positioning ourselves for that next phase of growth as we come out of this crypto winter.
Peter McCormack: I think though once a salesman, always a salesman. I'm a salesman. I started out my career as a salesman in advertising.
Michael Sonnenshein: Interesting.
Peter McCormack: Yeah, so my first agency job was for a small advertising agency where I'm from, called Evolving Media. I was essentially Commercial Director at 27, just because it's a small company. And even though I went on to run that business and my own one, I think when you run a company, you're still a salesman; I'm still always a -- I'm a salesman doing this job, I have to sell sponsorships.
Michael Sonnenshein: Totally.
Peter McCormack: So, what's the sales role within something like Grayscale; is it the fact is the revenue model's quite simple, there's a percentage of the NAV and so your job is to sell as many shares as possible?
Michael Sonnenshein: Correct. As a salesperson at Grayscale, you're responsible for looking for new relationships, looking for deepening relationships with existing investors; and actually, a really important role, which is to bring data and intelligence back to the rest of the team as to what are investors saying; where are their interests; what are they confused about; what are they excited about? Because I think for us, we've really prided ourselves on being great at building products that investors want. It may not be exciting to you, but we're a firm that was in the metaverse probably about two-plus years before the metaverse became a colloquial term.
So, I think for us, we're always trying to be on the cutting edge of where investors' appetite and activity may be going in the months and years to come.
Peter McCormack: Okay. So, if there's a sales role, are there limitations to who you can sell to; is that regulated?
Michael Sonnenshein: It is. So, the Grayscale products are sold typically as private placements, so we're only selling to accredited investors, high-net-worth individuals, family offices, hedge funds, pensions, endowments, you name it. We have since eventually gotten into offering equity ETFs as well that obviously have a much broader audience of investors that can access them. But typically for our digital asset products, really looking at the accredited investor segment.
Peter McCormack: But can you sell internationally?
Michael Sonnenshein: We deal with investors that are able to come to Grayscale from overseas. That's usually done on an unsolicited basis, for investors who may be in the UK or in France or, you name it, may be coming to invest in Grayscale from overseas on their own.
Peter McCormack: So, could I do that; could I come to you?
Michael Sonnenshein: If you were an accredited investor, sure.
Peter McCormack: So, is it an accredited investor by the US rules?
Michael Sonnenshein: Correct.
Peter McCormack: Because it's a good buy price at the moment; it's a discount on Bitcoin. If you're successful in your lawsuit with the SEC…
Michael Sonnenshein: Well, let's talk about that.
Peter McCormack: Sorry, just one more question on that, just I'm trying to understand the whole thing. So, if you're selling, you're finding new customers, is there an account management role as well that you're keeping customers happy because you want to keep them buying?
Michael Sonnenshein: Absolutely. So, we have a pretty extensive investor solutions team. These are folks that are giving periodic updates to investors, helping to push through a lot of the research and content the Grayscale team is creating, we host webinars. I think it's really trying to find out the right touchpoints to keep investors engaged with the asset class as a whole.
Peter McCormack: We've taken on our first salesman for the podcast now.
Michael Sonnenshein: Okay.
Peter McCormack: Austin Green, who was previously at Blockworks.
Michael Sonnenshein: How's he doing?
Peter McCormack: He's doing great. I mean, he's two weeks in, he's just bedding himself in.
Michael Sonnenshein: Okay, so it's a little early to start judging his performance.
Peter McCormack: Well, no, he's been great, he's brought some great ideas. But I'm in that process now of handing over some of the relationships because I just don't have the time for it any more. But there is a thing where certain people still want a relationship with me or know I'm still involved; do you still have that?
Michael Sonnenshein: You know, there's an article you should read after we sit down and do this, and it's this concept of giving away your Legos; you remember the kids' toy, Legos that you build stuff with?
Peter McCormack: Yeah.
Michael Sonnenshein: Well, as you progress through an organisation, as you grow in your responsibilities, the idea is that you can only individually grow if you give away your Legos; so, the things you used to play with, the toys that you used to hold tightly, the things you didn't want to share, you can only really grow and progress if you hand those off to somebody else. So, that is certainly something that I had to learn as I came up the ranks through Grayscale. And yes, there are of course some clients who would of course rather speak to me because of our relationship, because of our history. But over time, I've given away my Legos.
Peter McCormack: I've given Danny most of my Legos, in fairness.
Danny Knowles: I've handed a few off to Ben!
Peter McCormack: Oh, you have, yeah. So, you have no customer contact at all now?
Michael Sonnenshein: No, I'm not saying that at all. There are definitely investors who do speak with me quite often, who I want to speak to quite often. It really just depends on the relationship.
Peter McCormack: It's going to be interesting to invest if you are successful with the SEC. I'm tempted, I've got to say, I've been very tempted. With such a high discount, it was almost half-price Bitcoin at one point. Where's the discount now?
Danny Knowles: It's about 45%-ish.
Michael Sonnenshein: Well, can I dive into that?
Peter McCormack: Yeah, let's dive into that.
Michael Sonnenshein: Because people need to understand what you're talking about.
Peter McCormack: Okay. Explain what an ETF is so people understand, and why an ETF is different from a Trust.
Michael Sonnenshein: So, the Grayscale Bitcoin Trust from day one, even before we had our very first investor, before we even took on our first Bitcoin, we always knew it was going to become an ETF. We purposely chose a legal structure that a lot of ETFs have today. So, it's a Delaware Grantor Trust.
Now, investors in the US, in the UK, all over the world, they use ETFs all the time. ETFs often are instruments that investors can buy in their brokerage account, their retirement account, you name it, and it's offering exposure to something. So, a lot of investors who want to invest in gold, well, they can buy gold directly, call a gold broker, figure out where to buy it; or, they can go on the brokerage account and buy shares of a gold ETF, where they're buying shares of a security and the value of that security is based on the value of the gold that's tied to it. The same is true if an investor wants to get access to oil or an investor wants to get exposed to all 500 stocks in the S&P 500. They don't have to go and buy all 500 stocks, they can just buy an ETF and the shares give them the value of all 500 stocks in the S&P 500.
In the case of Grayscale, here in the US, regulators have not allowed for Bitcoin ETFs that hold Bitcoin to come into the market. So, we have been on a path, really since day one, to make sure that we were not only launching a Bitcoin investment vehicle, but one that would eventually become an ETF. So, the Grayscale Bitcoin Trust is a series of shares that investors own and each of those shares is fully backed by Bitcoin. There's no cash, there's no leverage, there's no trading. If you own a share of Grayscale Bitcoin Trust, you're owning a piece of Bitcoin underlying that share.
Now, what we did was pretty interesting and I think pretty innovative along the way, where even though you bought into the Trust as a private placement as an accredited investor, starting in 2015 we actually created a secondary market for the shares, and that's when Grayscale Bitcoin Trust got a ticker symbol; ticker is GBTC. So anybody, you didn't need to be accredited any more, who wanted to get exposure to Bitcoin could start buying and selling shares of GBTC on the secondary market, and GBTC has been wildly successful. People from all over the world, not just the US, who have access to the US Securities Market can buy and sell shares of GBTC throughout the trading day at whatever the price is dictated by the market.
What we've seen in GBTC though is that the value of the shares sometimes has gone and been more valuable than the Bitcoin it owns and sometimes, like today, it's dipped below the value of the Bitcoin that it owns, because it is not an ETF. An ETF has an embedded mechanism that no matter what is going on in the market, no matter how many investors may be buying, no matter how many investors may be selling, there's always a mechanism that allows market participants to ensure that those shares go right back in line with the underlying asset it holds. It could be S&P 500, it could be gold, it could be oil or it could be Bitcoin.
Peter McCormack: What is that mechanism; is it because of redemptions?
Michael Sonnenshein: It's arbitrage mechanism. So, you have market participants that can create more shares of the ETF, or redeem or reduce the number of shares of the ETF in the market, so that the supply/demand dynamics of how many shares in the market always get the share price back to its net asset value, back to the fair value of what it owns.
So, because GBTC is not an ETF today, sometimes again it goes to a premium, sometimes it goes to a discount. And so, to the point you were making, today GBTC trades at about a 45% discount to its net asset value. So, to certain investors, they may say to themselves, "Well, I could put $1 into Bitcoin and I'll get $1 worth of Bitcoin. Or, I could put $1 into GBTC and actually control more Bitcoin, because I'm buying it at 65 cents on the dollar". And that's a trade that some investors may find attractive, depending on their time horizon.
Now, we can get into the next phase of this, or you might have a question, but we're still on a path to convert GBTC into an ETF; that's where we find ourselves today.
Peter McCormack: My only question on that is, do you guys benefit from either a premium or a discount, or does it make no difference?
Michael Sonnenshein: We, as an organisation?
Peter McCormack: Yeah.
Michael Sonnenshein: I would say that we are frustrated to see the shares trading at a discount, much the same way our investors are. We'd of course like to see the shares trading at NAV, or even at a premium to the net asset value; but ultimately, we view where we are today as a stepping stone to that ultimate goal we've always had, which is an ETF.
Peter McCormack: Companies like BlockFi were trading the premium, it was well-known they were trading the premium. How did you guys feel about that; are you ambivalent to that, or do you look at something like that and you see it's risky?
Michael Sonnenshein: So, what you're referring to is there was a time period whereas today, GBTC's at a discount, there was also a time period where GBTC was trading at a premium. So, for certain investors, they could have invested and the net asset value and actually monetised their investment at a premium and actually made a return higher than if they had just bought Bitcoin outright. We viewed that as something that was a market dislocation. And again, still in this same time period where GBTC is still not yet an ETF, and thus the premiums and discount are going to be there because that mechanism is not embedded into the product.
Peter McCormack: Right, okay. So, onto the lawsuit. Gary Gensler isn't the most popular person amongst bitcoiners, he seems to be holding this up. I think someone like Hester Peirce is probably a bit more pro. The ETF happening, she certainly seems to be more on the side of the bitcoiners within the SEC. I didn't even know you could sue the SEC, by the way.
Michael Sonnenshein: You can, they get sued all the time, it's just not always spoken about.
Peter McCormack: Yeah, so we don't need the full details of the lawsuit, but what is the top line; what is it you're suing them for; how long do you think this will take?
Michael Sonnenshein: So, here in the US, when you want to bring an ETF to market, you need to file an application with the SEC, the Securities and Exchange Commission. And there are broadly speaking two paths. Either there is already a viable path, because there are existing rules that your ETF can fit into and thus there's nothing preventing it from coming to market; or, in certain instances, the product, the structure, or the exposure it offers doesn't fit into existing listing standards, and thus the SEC needs to review the application and it can ultimately approve it or deny it.
What we've seen in the US has historically been no Bitcoin ETFs on the market and there would really be two categories of ETFs coming to the market for Bitcoin: Bitcoin ETFs that hold Bitcoin itself, spot Bitcoin, like the way GBTC owns spot Bitcoin; or, ETFs coming into the market that may own a Bitcoin futures contract. We know that there's a rapid developing derivatives market, CME Bitcoin futures. And so, the SEC's attitude had been, "No Bitcoin ETFs". And then, in 2021, they allowed the first Bitcoin futures ETF into the market, huge stepping stone for Bitcoin, huge for the asset class, huge for the investor community.
Peter McCormack: Why futures and not a spot?
Michael Sonnenshein: You should have someone from the SEC on and ask them that question.
Peter McCormack: Which is a better product for the customer?
Michael Sonnenshein: So, it's a subjective view, but certainly a spot Bitcoin ETF would be better, it just tracks the price of Bitcoin. A Bitcoin futures contract has all other kinds of costs and tracking error and all kinds of other issues associated with making it more expensive for the investor, more of a trading tool than a spot Bitcoin ETF, which would be more of an investment tool.
Peter McCormack: Do you have a gut instinct why they went for a futures rather than a spot?
Michael Sonnenshein: Well, we can kind of look at what they've said. What they've said is that a Bitcoin futures contract itself is a regulated contract, and a contract that I guess they could get comfortable with because it's overseen by the CFTC; whereas, the SEC has said, "We're not as comfortable with spot Bitcoin because the spot market for Bitcoin isn't as regulated", and there may be fraud, there may be manipulation, there may be all these other kinds of things that have given them hesitance about it.
We took it at Grayscale as a sign that the SEC was actually changing their attitude on Bitcoin when they started approving the first Bitcoin futures ETF.
Peter McCormack: You thought a spot one would come soon after?
Michael Sonnenshein: We certainly did because when you think about it, a Bitcoin futures contract, where does it get its price from; where does it get its value from? Well, from the underlying spot Bitcoin market, the same way spot Bitcoin would get its pricing from the underlying spot market. So, you're looking at two alike things. And what ultimately happened is that we got to the end of the application process with the SEC in the summer of 2022, they denied our application --
Peter McCormack: Along with countless others?
Michael Sonnenshein: Countless other spot Bitcoin ETF applications have also been denied on the same grounds. And truthfully, we have now over a million investor accounts that own GBTC, all 50 states, GBTC investors all over the world that are counting on us to do the right thing for them. So, we were really left with no choice but to actually file a lawsuit against the SEC, which we did immediately after the SEC rejection, that very same day. And so we're actually suing them now in court, in the Appeals Court in DC, and we believe we could have a decision challenging that SEC denial hopefully by as late as maybe the fall of 2023. So, things are moving pretty quickly on the court case.
Peter McCormack: So you get a decision, but if it doesn't go your way, can you appeal and the same for them? Do they have a history of appealing themselves?
Michael Sonnenshein: It really depends case by case. If we were to lose the case that we're currently litigating now, yes, we could appeal it. There's a couple of different ways that it could be appealed, depending on how the denial of this lawsuit would happen. But ultimately, we could actually even appeal the case at the Supreme Court here in the US.
Peter McCormack: Right, okay. And what are the grounds for your litigation; what are you saying? Are they moving goalposts, they're not making things clear?
Michael Sonnenshein: Well, I'll keep it as simple as possible. When you're a federal agency like the SEC and you're looking at two issues that are alike and you treat them disparately, you're actually violating the Administrative Procedures Act. The Administrative Procedures Act really ensures that federal agencies treat alike things alike and that they don't end up showing favouritism or acting arbitrary one way or another. So, really by approving the Bitcoin futures ETFs and not approving GBTC's conversion, or any of the other spot Bitcoin ETFs for that matter, the SEC has acted arbitrarily and capriciously, and that's the simplest, most rudimentary element underpinning the SEC lawsuit.
Peter McCormack: Is there any historical precedent of similar lawsuits?
Michael Sonnenshein: I mean, there's certainly APA violations that the SEC has been sued under, and countless other APA violations in general of companies or other folks suing federal agencies, sure.
Peter McCormack: And, I just wrote it down, you said your millions of investors, you want to do the right thing by them. But in fairness, it's also a right thing by Grayscale, especially with the first ETF, it's going to open up a massive new market of investors for you?
Michael Sonnenshein: We absolutely are not going to be shy by saying that we certainly of course have a commercial interest. This is not just for investors. So, there's a couple of things that I want to hit on here. Number one, because GBTC is trading at a discount to its NAV today, if it were to convert to an ETF, there would no longer be a discount, there would no longer be a premium, there would be that arbitrage mechanism embedded.
Peter McCormack: Hence why me and Danny should buy some?
Michael Sonnenshein: Well, I'm not giving investment advice on this podcast, but you do as you wish.
Peter McCormack: Yeah, of course.
Michael Sonnenshein: But what does that mean? That means there's actually a couple of billion dollars of capital that would immediately go right back into investors' pockets on an overnight basis because the fund, instead of trading at a discount, would bleed back up to its net asset value. And in this environment where investors are facing inflation and all the other kinds of things, I can't imagine why the SEC wouldn't want to protect investors, return that value to them.
Peter McCormack: Well, that's why I asked you about the account management side of things as well because my assumption is, it's great, you've got some great customers who've bought tens, hundreds of millions of GBTC, but they're now sitting with a discount and nobody wants to sell the bottom, they believe in this long term, and I guess there's some account management in them understanding that you are working for them as well to try and bring an ETF.
Michael Sonnenshein: 100%. And I honestly believe that most of the investors in GBTC have really been those that have that medium- to longer-term time horizon for their investment. They're not in Bitcoin for the next 10% or 20% move in Bitcoin; they believe that it's early days and they're going to be in this investment for a while. So, when we're successful in converting GBTC to an ETF, that value will go back into investors' pockets, we're going to see the opportunity of investing in Bitcoin open up to a larger audience of investors, we very recently, even just this week, started to see some proposed new guidance from the SEC that actually may restrict certain types of investors, whether they're investing through RIAs or other channels, may actually have a harder time holding Bitcoin directly, and that may force them into using a qualified custodian, or even a product like GBTC for their Bitcoin exposure.
So, it's more important than ever that this conversion ultimately goes through. And one of the things that I really wanted to make sure that we talked about today, because this is a podcast about Bitcoin, that we don't get to talk about enough is that, sure we have a commercial interest, sure this value would return back to investors, but people aren't talking enough about the implications of this lawsuit for Bitcoin itself.
Peter McCormack: Okay.
Michael Sonnenshein: You don't need to be a GBTC holder past, present or future to care about this lawsuit; you need to also be potentially a Bitcoin holder or a digital asset investor. Given where we are in terms of not having enough regulatory clarity around this asset class and Bitcoin in particular, given it's the largest of the assets within the crypto space, the outcome of this lawsuit actually stands to inform potentially some of the posturing that regulators may take towards Bitcoin over the short to medium term, and that's not just here in the US. A lot of regulators all around the world are looking to see how US regulators treat Bitcoin and treat Ethereum and treat all kinds of things within the crypto asset class.
So, the outcome of this lawsuit is going to have a direct impact on GBTC, no question about it, but the implications are much further reaching than that. So, I would say that anybody who is broadly involved in the crypto space, you want to see Grayscale win this lawsuit, you want to see GBTC convert to an ETF, you want to see this be a milestone that signals increasing regulatory clarity around this space, and I can't underscore that enough.
Peter McCormack: No, I agree and I think we all want to see that.
Danny Knowles: Can I just ask a question on that?
Michael Sonnenshein: Yeah.
Danny Knowles: Would allowing redemptions today not do the same thing in terms of getting rid of the discount premiums now?
Michael Sonnenshein: Not necessarily because one of the things that we've talked about is that if we are ultimately unsuccessful in challenging all legal options available to us around the lawsuit and around converting GBTC, we would be able to entertain getting approval for a tender offer. And the tender offer could help to eliminate some of the discount, but it would be something that we would need to work out on a bespoke basis with the SEC to retain relief from the tender offer rules.
Peter McCormack: What's a tender offer?
Michael Sonnenshein: A tender offer is when shares of a fund like this would be bought back and essentially destroyed or redeemed.
Peter McCormack: Okay, it's like burning a token, right?
Michael Sonnenshein: Sure, for this audience, sure. But that would not be an optimal outcome. If we ultimately were at the point where we were doing that with the SEC, that would mean that the implications of us actually being in those conversations would mean that the courts weren't persuaded by our arguments of how the SEC acted; it would mean that we had exhausted all of our other legal challenges to fixing this issue; it would mean that regulators were still shutting the door in our face in terms of continuing to bring crypto into the regulatory perimeter; and it would be mean that we were at a last-resort option that was not the optimal outcome for investors.
Danny Knowles: So, why could they not be two separate things; why could you not still pursue the lawsuit but also allow redemptions?
Michael Sonnenshein: It's another great question. So, to get relief from the tender offer rules, which are not really written for products like GBTC, there's all kinds of stipulations. The price needs to be held consistent for a certain period of time, we'd need to work something out bespoke with the SEC. It would be very difficult to continue to be actively litigating against the SEC for their position on this while also getting them to give us the necessary relief to be able to do something that's bespoke and has never really been done before.
Peter McCormack: Is there also a risk that there's a reputational risk on the Trust itself, like the AUM could drop significantly, less people would be interested in it?
Michael Sonnenshein: No, and to be clear keep in mind when GBTC is an ETF, because it will then have the flexibility to both create more of the ETF and redeem more of the ETF, the AUM is going to fluctuate, not just based on the price of the Bitcoin it holds, but depending on if more shares get created or more shares get redeemed. So, just as much as we're excited about the opportunity it opens to more investors, there's also the potential for AUM to shrink as a result of being an ETF.
Peter McCormack: How important is the size of the AUM, because you mentioned it a couple of times at the start; there's a difference between $60 million and $21 billion?
Michael Sonnenshein: It's huge.
Peter McCormack: What does it mean to you?
Michael Sonnenshein: I couldn't be prouder of the team, I couldn't be prouder of the work that we've done to build the Grayscale business and to build the AUM of these products and open up the opportunity of crypto to as many investors as possible. But certainly, as you think about the makings of a good ETF, it has to do with size and it has to do with liquidity. So, the fact that GBTC is as large as it is today, and hopefully remains as large, if not larger based on price appreciation when it converts, having that captive share base to start gives it a massive, massive advantage that most ETFs don't have when they come to market, where they start with no assets, the ETF launches and then the assets start to build from there.
Peter McCormack: Right. I can't have you here and not ask some stuff about Genesis, but I mean my main question about Genesis really is, that situation must be making your job harder.
Michael Sonnenshein: You know I'm the CEO of Grayscale, right?!
Peter McCormack: I know you're the CEO of Grayscale, I do know! But you know I'm going to ask you about this.
Michael Sonnenshein: Ask away. Yeah, listen, I think it's important that folks listening understand the relationships between the various DCG entities.
Peter McCormack: Explain, so somebody understands, the structure.
Michael Sonnenshein: Yeah. So, Digital Currency Group's a holding company and that holding company has several operating subsidiaries, not an unusual structure. You have Berkshire Hathaway owns Geico and NetJets, LVMH owns tons of different companies beneath it, and Digital Currency Group owns CoinDesk and it owns Grayscale and it owns Genesis and it owns Luno. So, each of these are independently operating subsidiaries. So, Grayscale and each of the other businesses has its own leadership team, its own governance, its own policies and procedures, its own budget, etc.
Do we of course work with one another, the way that we also work with other service providers? Absolutely. And so, when it comes to Genesis, it is certainly sad to see how things played out with Genesis that they ultimately filed for Chapter 11. Importantly for Grayscale investors and for the Grayscale business, we didn't have operational reliance on Genesis, so we're not affected, our products are not affected, our investors aren't affected. But of course, there are going to be people around the crypto ecosystem who did have deposits with Genesis and who were caught up in the Chapter 11 in the bankruptcy proceedings that they're now going through.
Peter McCormack: Yeah, look, I mean obviously the companies work together, there is a unifying factor which is Barry Silbert, there is the fact that Genesis is within Chapter 11 and people think that Barry should be selling Grayscale to try and fund -- these things all happen, but you do get wrapped up in it. And I'm just wondering, does that make your job harder?
Michael Sonnenshein: I think what we're trying our best to do is not get distracted by honestly the headlines and a lot of the conspiracies that have been thrown out there as a result of recent events. I'll tell you the full resources of my team and my firm are squarely focused on this lawsuit. So, we're here talking in mid-February, the oral arguments for our SEC litigation are 7 March, so that's very rapidly approaching. And so again, from a fiduciary standpoint, we have too many people counting on us, depending on us, to really get distracted by other things going on with other businesses.
Peter McCormack: So, you mentioned some of these conspiracies; what are the conspiracies?
Michael Sonnenshein: Oh, Lord, am I really going to give airtime to some of the conspiracies?
Peter McCormack: Well, you get a chance to put them to bed.
Michael Sonnenshein: You know, that we had anything to do with FTX, or any of these other -- I mean, none of these things are truths. We didn't have direct dealings with Sam or have anything to do with that.
Peter McCormack: I've not even heard that one!
Michael Sonnenshein: Oh, really? Oh, of course, that's of course the kind of thing that we're of course responsible for! Certain things like our lawsuit against the SEC is all for show, and things of that nature.
Peter McCormack: But your, I say relationship with the SEC, this has been going on for quite some time.
Michael Sonnenshein: Well, let's actually talk about that, because I told you earlier in the show, I've been at Grayscale since January 2014. I've been going to DC actively and persistently, I don't know, at least since mid-2015, okay. So, we've been developing this "ask for permission, not for forgiveness" kind of relationship with them, we've been the good guys, we've been the educators. And so, when it actually came time to sitting down as a team and saying, "If they deny us, are we going to file a lawsuit; are we actually going to sue the regulator that oversees our business every day?" That wasn't a decision we took lightly.
Peter McCormack: I'm sure it was, and tell me if I'm wrong, I'm sure you announced the lawsuit a couple of years ago?
Michael Sonnenshein: We said that one possibility would be that if we ultimately were denied by the SEC, an option available to us would be to sue.
Peter McCormack: How long ago was that? I feel like it predates all this bullshit of the last year.
Michael Sonnenshein: Oh, it certainly is something that we wanted to ensure investors knew was something we were thinking about. But to actually take the decision to sue the regulator that oversees our business was a pretty heavy decision to have to make, and probably is one of the most difficult decisions I've had to make as CEO, because it's a big undertaking and it's me asking for the entire resources of the firm to focus on this one really, really important, almost existential issue. And we're confident with where we are with the lawsuit and our arguments and the legal counsel we've chosen to represent us.
But this is not for show. We mean business, we have a lot of investors counting on us, we want to continue to open up access to Bitcoin, we believe now is probably the most important time to be having that conversation and we're just going to continue to fight for investors, that's all we can do.
Peter McCormack: When you have a group that there are certain benefits, my tiny, little media group, of which there's a podcast, some films, and a football team, Danny and Jeremy here, they work on the podcast and Tom and Emma work on the football team, I'm the unifying factor of them all. But sometimes when I sell the sponsorship, I end up doing a deal, there's a discount if you do the football club, and --
Michael Sonnenshein: Are you selling me right now?
Peter McCormack: Well, maybe. I mean, we're top of the league, we're a good team. But there are benefits, like we've just done a deal and one of them is, if you take everything, there's a discount and then I work out which gets each; but that's one of the those benefits of being in a group. Barry's a smart guy, I'd say a smart guy, I mean he's got some difficulties at the moment, but some people may say not. I've always liked Barry historically, but you know, he owns these businesses, these businesses can grow bigger and better if they have working relationships.
One of the big questions that's come out is whether Genesis was offering uncollateralised loans to large investors on the understanding that they would then buy GBTC; are you aware of this?
Michael Sonnenshein: I am not privy to the loans that are going on, or that were going on, at Genesis. What I certainly can confirm is that when investors were making investments into Grayscale Bitcoin Trust, they were doing it either by investing cash, in which case that cash would go out and buy the right amount of Bitcoin; sometimes they were investing with Bitcoin, and that was adding up to a certain number of shares; or in other instances, they might have been borrowing Bitcoin to be able to add some leverage into the trade that they were doing and sometimes those loans could have come from Genesis, but they also could have come from loans that they obtained elsewhere. The actual collateral requirements that an investor had to make a borrow is not something that we would know.
Peter McCormack: But you are aware that Genesis customers were buying GBTC?
Michael Sonnenshein: Certainly. I mean, if you think about the Genesis business, it was and largely still is, you know, the Genesis trading side of things, spot trading, derivatives, they were an industry stalwart that almost every institutional and high-net-worth partner was using for some kind of crypto-related service as they built out their prime broker offering.
Peter McCormack: Because these loans businesses, typically they don't tend to do uncollateralised loans because it's such high risk.
Michael Sonnenshein: Sure.
Peter McCormack: And so I'm wondering, what is the incentive for Genesis to be taking such high risk offering uncollateralised loans if it's done on the condition that they have to use that to buy GBTC, which kind of becomes a money printer for them to then go out and take other loans; there has to be incentive in there somewhere? So, I don't believe the incentive's with Genesis; there's certainly great incentive for Grayscale, because you sell more of the shares. So, I'm trying to understand who is structuring those deals; is it Barry and he's instructing people to do this, because it has to be some kind of interrelationship group benefit and therefore, intercompany discussion to make that happen?
Michael Sonnenshein: So, the Genesis business has, and was, an authorised participant for the Grayscale products. Today Grayscale, with its own broker dealer, is the authorised participant for its products, that's one of the things we worked on over the last couple of years. And so, like any authorised participant, they're of course going to make a fee when they create shares of a product; it's true of an ETF and it's certainly true here. But there was no, and never has been, any kind of arrangement that if someone was borrowing, that there would be some kind of other way to incentivise of compensate somebody for making that loan if it was for GBTC or a Grayscale product.
Peter McCormack: So, you're saying Genesis weren't offering uncollateralised loans as long as they bought GBTC?
Michael Sonnenshein: I have no idea of the collateral requirements that Genesis was asking of somebody if they were borrowing coins for GBTC, is what I'm saying.
Peter McCormack: But I mean you're aware of this now though?
Michael Sonnenshein: I've heard about it and we're talking about it today, that certain people were saying that the collateral requirements were either off market or were atypical if they knew the proceeds were that. But I am not aware of what the collateral requirements were that somebody was dealing with. If they were taking a borrow from Genesis, they were dealing with someone at Genesis, not someone at Grayscale. We don't have a loan book, we don't loan.
Peter McCormack: No, I get all that, but you know who these customers are, you know who 3AC are, you know who these people are, and they would have been significant customers of Grayscale. So, what kind of due diligence do you perform on these companies when they're making such significant purchases?
Michael Sonnenshein: The absolute largest and most extensive due diligence we can do: AML, KYC, source of funds, government-issued IDs, everything possible. I mean, we're selling a security, these are regulated investment instruments. But the things that you're touching on, which is around collateral requirements and things like that, that is in the scope of an arrangement made between borrower and lender, not between the issuer and the investor.
Peter McCormack: But you were aware -- so, if 3AC are buying a significant amount of GBTC from you guys, you have to perform due diligence on them. They passed all due diligence checks?
Michael Sonnenshein: Due diligence, absolutely. I mean, in terms of AML, KYC, source of funds, coins that are run through Chainalysis or whatever the appropriate blockchain forensic tools that are available now, that's the kind of work that's done when investors make an investment in Grayscale product.
Peter McCormack: And so, source of funds could have been Genesis?
Michael Sonnenshein: Could have been Genesis, yes.
Peter McCormack: So, is there not really a conflict of interest of the source of funds?
Michael Sonnenshein: Why would there be a conflict of interest?
Peter McCormack: Because… Because if the fund isn't dirty, it isn't. No, I see what you're saying.
Michael Sonnenshein: Well, no, I think here's what you're getting at, which is that if you're hedge fund XYZ and you want to borrow some Bitcoin to invest in a Grayscale product, well you can go to lending desk 1 or lending desk 2 and if lending desk 2 happens to be Genesis and they happen to be giving you a better borrow rate than lending desk 1, well then you may want to make that borrow from lending desk 2, from Genesis. And so, there's no conflict of interest there, it's up to the investor.
Peter McCormack: I'll tell you what it is, I'll tell you what I find hard to believe and I don't expect you to give me an answer that I'm wanting here; but I find it very hard to believe that there's billions of loans being issued by Genesis, which is then being immediately used to purchase GBTC, and that you wouldn't be aware that this is a relationship and an offer that was made specific; I just find that really hard to believe.
Michael Sonnenshein: Totally separate companies, totally separate businesses.
Peter McCormack: But the unifying factor is Barry, and I would find it very hard to believe that he doesn't talk to both CEOs to discuss this arrangement. I just find it very hard to believe. I mean, you've worked with Barry since whenever in the market. I would find that very hard to believe.
Michael Sonnenshein: Barry is a visionary, Barry is an incredible investor, Barry is not an operator, Barry is not someone that is telling myself and the rest of the Grayscale management team what to do day-to-day, or really any of the operating subsidiaries. That's how and why Barry has amassed for DCG the largest and arguably most impressive venture capital portfolio in the crypto space, broadly speaking.
Peter McCormack: At what cost to investors?
Michael Sonnenshein: What do you mean?
Peter McCormack: Well, you said he's amassed the most impressive, but at what cost? There are lots of people now, whether they're Gemini Earn customers or Genesis customers, who have no access to their funds.
Michael Sonnenshein: DCG made investments in venture-backed companies, private companies, blockchain companies, crypto companies in every continent in I think it's over 200 companies over 40 countries around the world, not using Gemini Earn deposits, using proceeds that Barry, the businesses made, being profitably-run businesses and/or from the very limited amount of capital that DCG raised when DCG formed as a company.
Peter McCormack: That's only part of the story. Do you think it's ethical what's happened to Gemini Earn depositors and Genesis depositors that they're now facing the fact they have no access to their funds? This is a range of people that could be massive, high-net investors down to the little guy. Bear in mind, I've got Gemini as a sponsor, I've read the emails of people who've lost their funds, can't access their funds.
Michael Sonnenshein: No, it's exceedingly disheartening.
Peter McCormack: No, that's not the question I asked. I asked --
Michael Sonnenshein: Is it unethical? What part of it is unethical?
Peter McCormack: That Genesis were offering uncollateralised, high-risk loans, which have now propped up the AUM of Grayscale.
Michael Sonnenshein: I mean, Genesis extending loans that made their way into Grayscale products is one of numerous ways that the Genesis loan book was used.
Peter McCormack: You're avoiding the question though.
Michael Sonnenshein: I'm not at all.
Peter McCormack: I'm saying, was it ethical?
Michael Sonnenshein: I'm trying to ask, what is unethical?
Peter McCormack: I think it's unethical to offer loans -- and it's a separate business, but I'm just asking you --
Michael Sonnenshein: That's what I'm saying, you're asking the wrong person. I didn't make the loans, Grayscale didn't make the loans, I'm not guilty by association as a part of it.
Peter McCormack: Well, you're part of DCG, you're part of the group that allowed this to happen, so you are part of this. You may be part of Grayscale, but Grayscale's AUM is propped up by what I would say unethical behaviour, potentially fraud, okay; we can argue about whether it's unethical or fraud, but it's certainly unethical what happened because people now do not have access to their funds. The loans that were issued that were uncollateralised to high-risk firms who didn't have the collateral, and were therefore told that they could have these highly valuable loans as long as they buy GBTC, I would say that's unethical behaviour. Would you say that's ethical?
Michael Sonnenshein: I am not aware of someone who said, "You can have said loan if you do X or if you do Y".
Peter McCormack: Well, I'm aware so I'm telling you. Do you think it's ethical?
Michael Sonnenshein: Were you one of the people who took the loans?
Peter McCormack: No.
Michael Sonnenshein: So then how are you aware?
Peter McCormack: I'm aware. Okay, look, hypothetically speaking --
Michael Sonnenshein: You have to take a giant step back, then you have to look at the Gemini Earn programme. So, Gemini Earn had X number of investors who were depositing to Gemini click the Earn button to earn yield on their crypto. I flip the question back to you; was it prudent of Gemini to then, as a counterparty in the early stages of where crypto lending was and still arguably is today, was it prudent of them to put all of their customers' deposits for earning interest to a single counterparty?
Peter McCormack: Well, I mean I would ask Tyler and Cameron themselves if I was with them, but they're not part of DCG.
Michael Sonnenshein: But nonetheless, they're still the ones who extended that all into one place, and were they doing the proper due diligence on the way that Genesis was or wasn't making loans?
Peter McCormack: But that's a question for Tyler and Cameron and Gemini, it's not a question for DCG. The question is, you're part of DCG --
Michael Sonnenshein: I'm really responsible for running the Grayscale business --
Peter McCormack: Of course, but you're part of DCG.
Michael Sonnenshein: -- so I can share in the frustration, I can share in the anger, I can share in the saddened state that we're in, because people have been disadvantaged, had millions of dollars of capital that's been tied up in these types of arrangements because the Genesis loan book shut down, because Genesis went into Chapter 11; but I also can't claim or take responsibility for it, running the Grayscale business.
Peter McCormack: I've not asked you to take responsibility.
Michael Sonnenshein: And I also can't opine in a sincere way whether things were ethical, unethical, untoward or toward, because --
Peter McCormack: I actually think you have a duty to, because you talked earlier on about the size of the AUM; we know the high fees that you guys charge, the 2%, leads to a massive amount of revenue a year for the company. Now, if the AUM has been propped up by unethical behaviour by another company in the same group with specific arrangements that have pushed people towards buying more of this, that have essentially taken the funds of retail and other institutional investors, from Gemini Earn and Genesis, and that has pushed up the AUM, the revenue that your company has earned and the wages that pay you has come from unethical behaviour, potentially fraud. The money you earn has come from that because the commissions on the AUM you earn comes from the money of Gemini customers and Genesis customers.
Michael Sonnenshein: That's a mischaracterisation.
Peter McCormack: I mean, it just isn't, I mean it's factually true.
Michael Sonnenshein: It absolutely is a mischaracterisation. You cannot extrapolate an arrangement that was made between Gemini and Genesis, to deal between the two of them, and the resulting losses that have come from that arrangement being something that we at Grayscale are somehow responsible for. It's just a bridge too far.
Peter McCormack: I didn't say you were responsible for.
Michael Sonnenshein: Or that, what did you say, our wages are earned unethically?
Peter McCormack: I said, how do you feel about the ethics of this? You're part of the same group, you are part of DCG. DCG is run by Barry who runs most of these companies. There are intercompany relationships. Part of your AUM has come from the misappropriation of Gemini Earn customers' funds and the misappropriation of Genesis customers' funds. That money has gone into Grayscale and bought Grayscale shares.
Therefore, the money you make on top from your commission has come from that. So, these people who do not have access to their funds, they've lost money because of the unethical, potentially fraudulent behaviour of Genesis. How that can't affect you is beyond me.
Michael Sonnenshein: Of course it affects me.
Peter McCormack: But is it ethical what happened?
Michael Sonnenshein: It's not a question of ethics though.
Peter McCormack: Okay then, was it fraud?
Michael Sonnenshein: It's not a question of fraud. I can't be responsible and I am not responsible for what has taken place at Genesis. Any of the customers who became Grayscale clients as a result of taking a loan from Genesis, if those clients are no longer actively in business or have shut down their fund, or whatever it may be, as a result of their misappropriation of their risk management of their counterparties of the investments they made, and I'm sure that investing in a Grayscale product or taking a Genesis loan, or whatever counterparty exposure they may have had, may be one of a multitude of factors that ultimately led to their demise.
So, to take it as far as everything that's now transpiring between Genesis and Gemini is not something that --
Peter McCormack: And Grayscale.
Michael Sonnenshein: We're not party to this.
Peter McCormack: Okay, let me put it a different way. What you know and what you're willing to say you know are probably two very different things.
Michael Sonnenshein: They're not.
Peter McCormack: You have a PR person with you, this is a PR tour, you've got rehearsed lines. Look, I get it.
Michael Sonnenshein: I don't, we're having a conversation.
Peter McCormack: I reckon there is a difference between what you know and what you're willing to say you know. But what I would say is, any PR you have will not save your soul from what's happened to all these people. I receive the emails, they're heart-breaking.
Michael Sonnenshein: I can imagine how heart-breaking they are.
Peter McCormack: And some of their money is now in the Grayscale Trust.
Michael Sonnenshein: Their money was, as I understand the way that Gemini Earn and Genesis worked, was that when you clicked an Earn button on Gemini --
Peter McCormack: I'm talking about Genesis loans that were uncollateralised as well. We can't always flip this back to Gemini.
Michael Sonnenshein: I'm not. So, you're trying to tell me that you think that somebody lent money from Gemini to Genesis and Genesis lent it into a Grayscale product?
Peter McCormack: I'm telling you that large loans that were offered uncollateralised went towards buying Grayscale shares, and then those Grayscale shares were then used to post as collateral elsewhere.
Michael Sonnenshein: But how are you trying to say that somebody's Gemini Earn deposit made its way into a Grayscale product?
Peter McCormack: Because those funds were stored with Genesis, then Genesis used those as part of their assets under management, and they used those to loan out.
Michael Sonnenshein: So, Genesis had an active loan book. Some deposits they took from Gemini, some deposits they took from other people, some credit they extended back to other people, but somehow because they had an arrangement with Gemini and, I don't know, hundreds of other counterparties to loan and borrow from --
Peter McCormack: It's very complicated, I'm sure.
Michael Sonnenshein: Well, they did, they were the largest loan book in the crypto space.
Peter McCormack: Of course, and all these things, they're very complicated, the tentacles go everywhere. But Genesis is intrinsically linked to Grayscale, intrinsically linked through being in the group, through Barry, through the arrangements that were offered to people who were offered large, uncollateralised loans. Those large uncollateralised loans ended up in the Grayscale Trust, therefore the AUM you have and the interest being earned has come from that unethical behaviour.
Michael Sonnenshein: Okay, well I'll tell you again what I said earlier, which is that I am and we are, at Grayscale, not aware of special arrangements that were given to customers that borrowed from Genesis that were using those borrows to invest in Grayscale products. The terms that Genesis offered to their counterparties were terms that were offered between Genesis and that counterparty. Grayscale is not in the lending business, we didn't give them special compensation for making those loans, or anything of the sort.
Peter McCormack: I don't believe you. I just have to be honest, I don't believe you.
Michael Sonnenshein: Are you looking at the whites of my eyes?
Peter McCormack: I don't believe you at all and I know there's no chance you're going to come here and admit it, I just wanted to see you say it, but I don't believe you.
Michael Sonnenshein: You know, we're sitting here on a lovely Friday afternoon having a beer. You've asked me a ton of questions, I've given you an honest and wholesome answer to every single thing you've asked of me, so I'm disappointed to hear that you don't believe me.
Peter McCormack: Yeah, I'm sorry, I don't. You've been at the company longer than anyone else, you are essentially the number one employee, you've been the Managing Director, you've been the CEO, you've worked with Barry for over a decade, you know this business better than anyone else, you said you know the customers, you understand the sales, you understand the account management, even the largest customers will still have a relationship with you. You've also said that you have intercompany relationships, you know the CEOs of the other companies, but you didn't know this.
So, if you didn't know this, I would say either you're lying, or you're incompetent, but you should have known.
Michael Sonnenshein: Wow.
Peter McCormack: I just feel like you should. If you're the CEO of this company and you have interrelationships with companies like Genesis, you should know this. And because of this, there's been very severe consequences for a range of people. People's lives have been destroyed.
Michael Sonnenshein: So, you sound like you're on a little bit of a fishing expedition. I again reiterate to you, everything I've shared with you is wholesome and truthful and again, I'm disappointed that my answers are unsatisfactory to you.
Peter McCormack: We're not here to be used for a PR tour.
Michael Sonnenshein: This isn't a PR tour, we're just two guys having a conversation about Bitcoin on a Friday afternoon.
Peter McCormack: I mean, look, I hope your SEC lawsuit is successful, I really do, but I've always been truthful with people when I do this podcast, and somebody knew what was up. And this will come out in the courts itself. I mean you may yourself face questions yourself, face litigation yourself; Barry almost certainly will and this will come out eventually, I'm sure of it. But I just don't believe you and I'm really sorry. I don't mean to be a dick. I think it's better to tell you I don't believe you, because if you did know and you can do something about this, that's what I hope you do. I hope from this, you would go and do something about it.
Michael Sonnenshein: I have been working tirelessly to do what's right by investors. We operate with the --
Peter McCormack: Which investors?
Michael Sonnenshein: Grayscale investors. And we have built an organisation that prides itself on doing what is right by investors, acting ethically, acting compliantly, and we will again continue to fight for our investors. That's what we're doing by suing our regulator that oversees every aspect of our business.
Peter McCormack: Well, I'll finish on one final point. You had a rallying cry for bitcoiners, why bitcoiners should care about this, why they should care about this lawsuit.
Michael Sonnenshein: Did that resonate with you?
Peter McCormack: It did, but I would put it back to you that what's happened to Genesis customers and Gemini customers should be equally important to you. And you're part of DCG and you work with Barry. Whatever happened, however it happened, it was unethical and it's destroyed some people's lives and I think you are somebody who can make a difference here. I don't know what you do, you're never going to admit it, but I think you have a duty to become part of something that fixes that for those people who've lost their money. Otherwise, why should anyone give a fuck about your lawsuit? Because, the lawsuit isn't about your investors, it's about your company, it's about access to wider liquidity, of course it is.
Michael Sonnenshein: Okay, you know what, I would ask you to do this. For your next 10, 20, 100 podcasts, find another person in crypto who reputationally, who professionally, is bold enough to sue the harshest and most hard-hitting regulator in the world and --
Peter McCormack: Dude, you live in New York City.
Michael Sonnenshein: No, find someone else in crypto that is bold enough, that wants to do the right thing enough, that they are going to devote all of their energies, all of their time, all of everything their business is doing, to suing the regulator that oversees every element of their business. You're not going to find one.
Peter McCormack: But that's not bravery, that's business. You're spending funds on litigation. I've been involved in litigation, personal litigation. Bravery is what I've seen when I've been to the border of --
Michael Sonnenshein: Peter, every other person who approaches this regulator ends up being the recipient of enforcement actions, fines, penalties, you name it.
Peter McCormack: It's not bravery.
Michael Sonnenshein: I didn't say bravery.
Peter McCormack: Bold, brave, whatever the term is.
Michael Sonnenshein: But Peter, we run a regulated business, we've always run a regulated business from day one. They oversee every element of the business, we file 10-Ks, we file 10-Qs, we file 8-Ks. Every element of our business ends up getting disclosed to the investing public. We worked proactively with these people to develop full and fair disclosures for investors.
Peter McCormack: Because it's good for your business. Let's not --
Michael Sonnenshein: Because it's good for our business and it's good for investors --
Peter McCormack: As a by-product.
Michael Sonnenshein: -- and it's good for the asset class. And, yes, we are going to succeed in this lawsuit and, yes, to the point I made earlier, succeeding in this lawsuit is a good thing for Bitcoin, and that is what folks should know.
Peter McCormack: I think an ETF would be good for Bitcoin. I agree with that and I wish you the best on the lawsuit, I really do. I think we can leave it there.
Michael Sonnenshein: Awesome, good to chat.
Peter McCormack: Good to chat.
