WBD664 Audio Transcription
GBTC & The SEC Lawsuit with James Seyffart
Release date: Monday 29th May
Note: the following is a transcription of my interview with James Seyffart. 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.
James Seyffart is an analyst for Bloomberg Intelligence covering ETFs. In this interview, we discuss the how and why of ETFs, Grayscale’s legal battle with the SEC over the approval of a Bitcoin ETF, and the complexities of Grayscale implementing a redemption program for GBTC. We also talk about the role of the SEC in regulating Bitcoin and Gary Gensler’s political ambitions.
“The judges might issue a ruling that says, “You violated the APA. You did not treat situations alike.” And then say, “Go back to the drawing board.” And then the SEC could then just deny for other reasons... So Grayscale might win the case and then still not be able to convert to an ETF.”
— James Seyffart
Interview Transcription
Peter McCormack: When I launched it, it was me, had this little Peli case, it was about this big; you'd get two mics in there, two mic stands, a Zoom H6, which we don't have, actually no, they were little handheld stands, wasn't it, it was those weighted ones. And I would fly, do the interview, go to the hotel, edit it, but I was so shit at editing, I knew I had to do half of it in GarageBand and half in Final Cut, so I had to go between the two.
James Seyffart: That's more than I know how to do.
Peter McCormack: Yeah, and then I would publish it all and then I'd get up the next day, go somewhere else, and it was like that. Then Danny wrote to me and said, "I'll take over the production for you", and then we got Ben onboard. Ben, he did the publishing, then the editing; then Emma came onboard to arrange, organise us all; then we got Neil, a researcher in; we got Austin on our partnerships; now Connor as a support and production. It's one of these things that's grows, but you're used to the bigger productions, man.
James Seyffart: No, this is bigger. We have setups similar to this in our offices in Bloomberg, but this full-fledged video and this, for the most part, it's reserved for certain special things, but obviously TV is a whole different animal, but this is a little different. But now you've got, what, three or four massive Peli cases?
Peter McCormack: Yeah, that's come down.
Danny Knowles: It has come down, yeah.
Peter McCormack: So, our last camera guy used to come, what, eight cases, nine cases?
Danny Knowles: Eight cases, yeah.
James Seyffart: Oh my God!
Danny Knowles: We've got much more efficient.
Peter McCormack: It used to take about half a day to set up and then Danny was like, "No, this is wrong", so Danny, we got all new equipment and he can set up, what, about an hour?
Danny Knowles: Yeah, well, that was a race, but I got it done in an hour the other day.
Peter McCormack: Yeah.
James Seyffart: Nice.
Peter McCormack: So, it's quicker, better. Anyway, good to see you again, James. I realised we'd met before.
James Seyffart: Yeah, we met briefly for like two minutes at Bitcoin, I introduced myself as one of the Bloomberg ETF guys you referenced on your podcast a couple of times; that's me.
Peter McCormack: So, what do you do over at Bloomberg?
James Seyffart: So, I'm an EFT research analyst, but really we cover the entire asset management industry, so anybody that manages money really, we write about that, primarily focused on ETFs. I used to cover commodities in crypto, so I helped bring our commodities crypto analyst, who's actually based in Miami now. So, I was working with him and I was personally involved in cryptos and he was like, "We're going to start covering it. What do you know?" and I just went from zero to 100 with him. So naturally, anything that goes over that overlap of asset management, crypto, is squarely in my wheelhouse of expertise, and GBTC obviously fits right there.
Peter McCormack: You know my audience, right?
James Seyffart: Oh yeah, I know your audience. I listen to a lot of your podcasts; you're one of my very few select podcasts, I listen to most episodes.
Peter McCormack: Thank you, man, I appreciate that. Well, you're swearing a lot at the moment to my audience; they're not going to like the word cryptos or crypto.
James Seyffart: Yeah, I know, but I have to say crypto because I obviously separate crypto and Bitcoin from my personal perspective, but in Bloomberg, it's crypto, it's all crypto for the most part, and I know for a fact that Bitcoin is not crypto as far as you're concerned.
Peter McCormack: Got to separate that shit.
James Seyffart: I'm good with that, yeah.
Peter McCormack: Well, listen it's good to see you again. You came highly recommended by a mutual friend as well; Steve McClurg is a very good friend of mine, actually we're seeing him tonight, aren't we?
Danny Knowles: Tonight, yeah.
Peter McCormack: Yeah, very good friend of mine, love that guy, and he was like, "You've got to get James on the show, you've got to get James on the show".
James Seyffart: Yeah, they just filed for an Ethereum futures ETF, Valkyrie, I don't know if you know that, they just filed yesterday or a few days ago.
Peter McCormack: God damn it, Steve, you shitcoiner! We'll have to have a chat with him about that tonight.
James Seyffart: Yeah.
Peter McCormack: No, I didn't know he'd filed that.
James Seyffart: Yeah, so basically, related to all this Grayscale, they filed for three ETFs, a privacy ETF, which is going to invest in Zcash BS, all this stuff; and then a Bitcoin Composite ETF, which I kind of think it's a middle finger to the SEC for them not allowing GBTC to convert because they're basically saying, "We're going to invest 40% in international spot Bitcoin ETFs and then 60% in Bitcoin miners". I think it gets under most of the SEC rules; they can still deny it and force them to withdraw it, but they're just saying, "Here's spot Bitcoin ETFs that exist everywhere else in the world. We're going to invest in those and then allow US investors to get access to them", that's what they're trying to do.
Peter McCormack: So they're trying to basically create a spot ETF by basketing international spot ETFs, Bitcoin ETFs, and lumping in some miners in for a little bit of leverage?
James Seyffart: Yeah, exactly, yeah.
Peter McCormack: Cool product.
James Seyffart: Yeah, and then they also filed for an Ethereum futures ETF, and then we've seen, like literally, five or six issuers in the last week file for an Ethereum futures ETF. It's all related to this big GBTC situation because it's all a fight with the SEC.
Peter McCormack: Yeah, well, there's a lot we can get into, man.
James Seyffart: We could sit here for three hours and probably not cover everything.
Peter McCormack: Well, we will do our best; let's see what we can get through. Okay, so to set it for you right now, me and Danny were talking about this beforehand. A couple of years ago, if you'd asked me about Bitcoin ETF, I'd be like, "Yeah, let's have it, let's bring it, yeah, definitely bring it". Now, it's not even that I'm ambivalent to it, I kind of think they are ultimately bad for Bitcoin, ultimately bad, and we'll come to that. But I think it's mainly because I've seen so many situations over the last year, two years where, if people had just bought and self-custodied Bitcoin they would have their Bitcoin; one of my sponsors, BlockFi, went to shit.
James Seyffart: I have money in BlockFi tied up in this. So I basically, just for reference, I put a little bit of money in a ton of different platforms so I know how everything's working, so I have money tied up in the Genesis and Gemini bankruptcy and in the BlockFi, not a lot but enough to know what's going on. So, I left it in there and I was like, "Okay, this is going to shit"; can I curse on here?
Peter McCormack: Yeah, you can say what the fuck you want.
James Seyffart: Yeah, so it's going to shit, so I was like, "I'm going to keep this in here so I get all the notices". So I actually have like Bloomberg news reporters who would be like, "Did you get any notices recently?" and I'd be like, "Yeah", and I forward them what I've got. But part of it is Bloomberg, initially when we first started covering this, cryptos, Bitcoin, it was not considered anything, it was like, "You can do whatever you want with them". So, I had regular recurring buys, like a lot of people do, and then, obviously, in 2020-ish, Bloomberg was like, "All right, now if you're going to cover it --" I can't buy or sell it, so I'm not allowed to do anything with it, so I kind of just have to let it sit where it is.
Peter McCormack: Yeah, well I've definitely got something in BlockFi because I get the notices as well, but I didn't realise I had something in BlockFi.
Danny Knowles: You might just get them because you're a customer though, or you were a customer.
Peter McCormack: No, I'm pretty sure the notices said I have something, but maybe you're right, but anyway, look, they went to shit, a lot of things have gone to shit; GBTC, it's kind of gone to shit though.
James Seyffart: I would take "kind of" out of there, it's gone to shit.
Peter McCormack: Yeah, but it's not gone to shit via like a rug pull.
James Seyffart: No, correct.
Peter McCormack: It's gone to shit out of a choice because there's a benefit to DCG. My view is there's a benefit to DCG because of the fees. I mean, I saw the Brad Sherman letter. They could do redemptions, they just don't want to do it because if they offer redemptions…
James Seyffart: So, there's a lot of nuance there, so this is a good point to start. So that Brad Sherman letter, there were two points in there that I thought were fantastic, which I hate saying because this guy is a quack, but we can get into that another time, but there were two points in there that he did a really good job questioning: the Reg M question, which I know David Bailey, on your podcast recently, kind of made it seem like it was unquestionable they can just offer redemptions while they're not offering subscriptions, and it's just easy to get it.
Me, I'm not a lawyer obviously, preface everything I've said there, but I talk to a lot of SEC lawyers, lawyers that launch ETFs, lawyers that work with the 1940 Act and 1933 Act, they're not Reg M experts per se, but not a single person said to me, "It's cut and dry, they can just offer redemptions".
Peter McCormack: Explain what Reg M is so people know.
James Seyffart: So, Regulation M, it's anti-manipulative practices. They don't want people basically offering redemptions and subscriptions at the same time on illiquid stuff, because then the people behind it could just mark it up or mark it down as they're doing redemptions and creations and manipulate the underlying market of different things. So it's basically to prevent any sort of manipulative practices. With Bitcoin, it's almost irrelevant to me because there's a spot market, you can see the prices that trades, but that's not basically how it's seen as the law. So, for this conversation, GBTC has to comply with Reg M. And they got a cease and desist letter in 2016 or 2014, basically because they were operating redemptions and subscriptions at the same time.
The one thing that I think is missing that I've talked to some lawyers and no one will give me a straight answer, I've asked multiple people at Grayscale, and basically all I've gotten on them is they've heard from their lawyers, they cannot operate a redemption programme. I found there's Rule 102 in Reg M, so I read through this rule, which I don't know if you've read through any regulatory documents or anything with the US Government and the lawyer speak, it's hard to read, but there's one area where I'm pretty sure is why GBTC cannot offer redemptions right now. It's because it trades on an interdealer quotation system, it's dumb speak for it trades OTC, it trades over the counter, and there are dealers that hold things and they trade it. Basically, the rule is you can't operate redemptions and subscription at the same time, and it can't be trading on an interdealer quotation system.
So basically, I think what would have to happen in order to operate redemptions, without just liquidating outright, which obviously I don't even think anyone really wants because if you just liquidate outright, assuming you could get the Bitcoin to everyone, that might better, but there's a potential they would have to sell a huge chunk of the Bitcoin just to give people their cash back, which you don't want that much selling pressure; but essentially, they would have to delist from the OTC, which I don't fully know that process, and then maybe they could offer redemptions as far I'm concerned, but again, I'm not a lawyer, that's just my understanding.
What I will say is getting Reg M relief, that's what it is, you're applying to the SEC to get relief from Regulation M so that you can operate a redemption programme. And if you've seen or read anything Gary Gensler and the SEC have said on crypto or Bitcoin, it's not as clear as, "Here, we're applying for Reg M, give us exemption"; I don't believe Gary Gensler's going to do that, maybe he will. And Sherman that sent that letter, today is Tuesday, he asked Gary to give him a response by today; I haven't seen anything that he's responded to yet, but I'm interested to see what he says.
So, there are a lot of people asking these questions. The one thing I get from every lawyer I talk to is it's not cut and dry, this is a new situation, no one really is certain. It's probably going to need to be figured out in the courts potentially.
Peter McCormack: Which is great for DCG because they can continue to take their 2%, really 4% fee for the time being.
James Seyffart: Correct, yeah.
Peter McCormack: But yeah, look, that shitshow, all of it has just made me realise the thing we should be promoting is buying and owning, self-custodying Bitcoin as much as possible. That said, we have a market, ETFs exist, I can't do anything about people applying for ETFs, and when they arrive, people will use these ETFs. So, we'll work our way through it, but I just wanted you to have the context that I've come to a position, like I think smoking is bad for people but I can't stop it, I think ETFs are bad for Bitcoin, I can't stop it. But anyone who doesn't fully understand what an ETF, just explain what it is.
James Seyffart: Let me first give you a counter to your point because I've talked with a lot of bitcoiners about this, and the one thing I would say is people are used to using the current system. I view the ETF as a bridge between the current system and the Bitcoin ecosystem, or crypto ecosystem, whatever you want to say.
The one way to think about it is, in the US, just the US alone, registered investment advisors, the people who advise on money, have $25 trillion-ish in assets. Those people would much prefer, now there are now systems being created where people can do direct custody, but for the most part, those RIAs, they're people much older than us, both of us, and they are just used to doing things the way they want to do things. Plenty of them out there want to give their clients exposure to crypto, to Bitcoin, what have you, some basket of maybe cryptocurrencies, whatever may have you. If just 1% of that money is able to go into something's that clean, cheap, efficient and we know is secured stably somewhere, that is a good thing. Also, a lot of people, if they want access to it, it's kind of like dipping your toe in the water. Once you go into an EFT, it's like the first step kind of thing, just like buying on an exchange and then you go to do a custody, self-custody in cold storage, what have you.
The other part of it is, RIAs want it into their wheelhouse. So, usually they charge on the AUM, so if you are an investment advisor and your client has $10 million and you want to put $100,000 into Bitcoin for them, or $50,000, whatever it may be, you'd much rather have that under your umbrella that you can charge those fees on. So, part of that is not great, at the end of the day, but it's also an incentive for RIAs to use it, and the ETF will help do that.
Peter McCormack: Yeah, I guess it comes down to personal opinion on what you see Bitcoin as; what do you think the role of Bitcoin is in the world; where do you think it's going? I think, if you come from a position that you want uncensorable money, you want to have something which is a check and balance on government, which allows people to send money anywhere in the world, censorship-resistant, peer to peer, trustless, if you've lost trust in the government and you've lost trust in the dollar, the pound, the yen, the euro, which I think a lot of people have, and you see this as the fight back, then I think an ETF isn't something that you see directly helping.
I think if you're somebody who sees it as an investment class and you want the price to moon, then I can see why an ETF is useful. The only way I think the two bridge in that argument is that if you do have an ETF, you've essentially legitimised it even more and you've put a product into the market which traditional people can use, and then I think you put the government in a more difficult position if it wants to continue with Operation Choke Point stuff. Then again, you are potentially creating big pools of Bitcoin that can be confiscated. So, there's a lot of nuance to it. I just, at the moment, I'm falling on the, what would you say; not care, or just -- but where are you are at?
Danny Knowles: I think it's great if you only care about Number Go Up, but if you want ground up, global adoption, it's probably not; it's going to price people out quicker, I don't know.
Peter McCormack: Nobody's every priced out.
James Seyffart: Yeah, you de minimis.
Danny Knowles: Yeah, but I mean, if you want bottom-up adoption, it makes it harder, or it makes people accumulate less.
Peter McCormack: Yeah, correct me if I'm wrong, but I think what Danny's trying to say is that Bitcoin is a great redistribution of income, brilliant for Michael Saylor and MicroStrategy if that's successful, but if he gets lots of other companies onboard, you're pushing the early gains to the richest people. We want to push the most gains to the people near the bottom.
James Seyffart: Yeah.
Peter McCormack: We want them to have the opportunity. And so we've kind of seen this bottom-up approach work well; if the US chokes Bitcoin in --
James Seyffart: They're trying to, they are, at least certain parts of the US Government are.
Peter McCormack: But if they do that within the US and smaller countries in South America continue to adopt it, or people in Africa continue to adopt it, or other countries in the world, like poorer, more developing nations continue to adopt it, what you do is that, if there's an inevitability to Bitcoin, you've closed the nation-to-nation wealth gap. Then, if we can get in the hands of normies, we've essentially closed the wealth gap there. Sorry, one second; lucky it's a glass table; we'll just carry on anyway. So, yeah, I've wrestled with it a lot, I've gone from, "Yeah, bring ETF, let's moon this shit", to, "Yeah, I'm not sure", but anyway.
James Seyffart: It's funny, goldbugs had a similar situation with ETFs. They don't like the fact that they're stored in vaults and you're not physically holding your own gold; it's kind of a similar situation to cold storage in Bitcoin.
Peter McCormack: Okay, so anyway, position set. Let's explain what an ETF is.
James Seyffart: Yeah, you've talked about ETFs a lot and most people have gotten pretty good, but I feel like there's a base understanding that wasn't fully set in most of your podcasts. So, if we start from square one, they were invented by a guy named Nate Most, and you've actually talked about this recently in one of your podcasts, somebody talked about receipts. You would give money to like a warehouse and then you could use those receipts to say, "I own X, Y or Z"; they were called commodities warehouses, but he used that logic.
So essentially, if you had, I don't know, ten bars of silver or a bunch of bushels of grain, whatever, you would give it to the warehouse and they would give you a piece of paper that says, "We confirm you have this, this is the receipt", and if you ever want, you can go to the warehouse and take that commodity out. That's the basis for how an ETF is supposed to work. That piece of paper is worth whatever that commodity is, but he did it to more than just commodities, the first one was the S&P 500 ETF. Well, the first ETF was actually in Canada but it was based off of what was being designed in the US. Anyway, what it really does is it takes those pieces of paper, and if you think of those pieces of paper of a commodity warehouse that I was just talking about, those are essentially the shares of the ETF and there are custodians that hold the underlying assets.
So, if it's equity, say that you would make an index of ten stocks, the way an ETF works is there's a mechanism where you can create and redeem shares of the ETF because those ten stocks are equivalent to some number of shares. So, for every ten stocks I hand, I can get, I don't know, we'll say ten shares of an ETF. So, at all times, those ten stocks, I can trade them in for ten shares of the ETF or I can trade in ten shares of the ETF for ten shares of the stock.
So, the way it actually works is it's like 100,000 shares of the ETF and 500 stocks in some proportion for the S&P 500, or whatever the ETF is, but the whole thing is really I can do an in-kind transaction, which the big benefit is that that's a taxless situation because you're just doing in-kind, you're giving shares for shares, and there's no taxable event that occurs. So, that's one of the big reasons why ETFs are so efficient.
So, if we have a spot Bitcoin ETF, the way it would work is you would hand in Bitcoin and you would get some number of shares in return, and it's not a taxable event right now, so that's a huge advantage versus the way usual funds work is I give you money, that fund goes to buy something and then I try to return, they have to sell something; those are both taxable events that have to occur. So, the way an ETF works, the reason why it works so well is because of that creation redemption process in the in-kind transaction.
The first type of fund was what's called a closed-end fund and that's more similar to what GBTC is right now. So, a closed-end fund is like, I'm going to start a company, and instead of doing something like Apple and making electronics, I'm going to invest in other companies. So, you have an IPO and then you invest in bonds or stocks or what have you. The problem with that is there's no mechanism to say the underlying has to be worth X or Y because we know what the underlying is worth, so the shares of this company have to be worth whatever that is because that's all that's involved, but there's no mechanism to arbitrage that out. It's the same way a company works; a company, its price will fluctuate wildly, but its actual value is indeterminable for the most part, like you can kind of figure out what it is. But for a closed-end fund, you know that, say it holds those ten stocks and we know what those ten stocks are trading at, but the closed-end fund doesn't have to be trading at that price.
With an ETF, it's a technology, it's a wrapper, it's an advanced technology to get efficient exposure to anything. No matter what happens with the ETF, when it goes into a market, it democratises everything, prices come down to hold it, prices come down to trade it, it's a very good technology in the asset management space. But the reason it works is because of that mechanism I spoke about. Those shares are always going to be equivalent to the underlying because you can always exchange them. If all of a sudden, those shares are worth $10 more than the underlying stocks, I'm going to give you the underlying stocks and take the shares back, or vice versa, because there's an arbitrage mechanism there, right.
So, at any point, if it gets too out of whack, somebody's going to come in and basically say, "All right, fine, if this is worth $10 more, I'm going to create more shares, give you the stocks and I'll take the ETF", or vice versa if it's worth $10 less, which is what GBTC is missing. You can't hand in the shares and get Bitcoin in return, because if you could, you could be sitting really nice right now, that's the whole problem. So, ETFs allow for what's called NAV, Net Asset Value, what the underlying value of the holdings are worth, and then the price is the share price. With an ETF, the NAV and the price are almost always going to be very close in line; there are instances where that doesn't happen and usually it's problems in the underlying market, which we don't need to get into, but for the most part, that creation redemption mechanism, like my boss likes to call it the flux capacitor, that's how everything actually works in the ETF world. It's a non-taxable event, and it makes sure that NAV and price are always in line.
Now normally, it's not people like, "Oh, this has deviated a little bit, I'm going to go hand in the shares and do this", mostly it's just part of day-to-day trading, there are people trading, there are authorised participants. There are people out there just making markets in ETF and it keeps things in line, but there are times where, if things get really out of whack, somebody will come in and be like, "There's an opportunity here to make, I don't know, 3 basis points", and if I can do that on $1 million, that's a decent amount of money in one trade.
Peter McCormack: Okay, so they're basically super-efficient markets?
James Seyffart: Yeah. So, the way to think about it is like a stock. You have a fixed supply of shares for the most part, obviously companies issue and buy back shares, whatever, but demand is what drives the price; as demand goes up, the price is going to go up because the supply is fixed. With an ETF, when demand goes up or does down, you can change the supply, so you are moving the supply, not you but the market itself and authorised participants, market makers, Wall Street if you will, are making sure that supply is always in line with demand.
So, if you just think about it as two bars, basically it's just the market constantly moving that supply bar up and down to keep in line so that NAV and price are the same, which again is what's missing from GBTC.
Peter McCormack: And you can also create some quite exotic products with them, like I say, I want to invest, say, in Bitcoin miners, public Bitcoin miners; to save me having to go out to every single miner and buy shares, you could just create a basket of all public Bitcoin miners and you can hedge yourself. If you think, "Right, I think certainly Bitcoin miners are going to be super-successful over the next five years, I don't want to have to pick a winner, I don't want to have time studying each of them but I know the market's definitely going to grow", someone can create an ETF for that.
James Seyffart: Yeah, there are, there's a bunch of ETFs out there that do that, and honestly, it's not even that they have to be super-successful, there are plenty of ETFs out there on things that people expect to fail and basically they'll use it so -- ETFs were initially invented to be trading vehicles, so people can short them, you can buy options on them, you can do anything you want on the underlying market, which we can get into.
Peter McCormack: Is there anything you can't put into an ETF?
James Seyffart: There are some nuances. Basically, there needs to be an underlying liquid market.
Peter McCormack: Okay.
James Seyffart: So, the way an ETF works is like, if you think about it when you're trying to see how much does it trade, so if you're an institution, you care how much it trades. For an ETF, it's not as critical how much it trades, because if the underlying trade's enough, like I said, you can always exchange those shares. So, a market maker is somebody who's making markets in these ETFs. If the underlying market, if it's an ETF that only trades 100 shares a day, but its underlying stocks that it holds are the S&P 500, a market maker can arb that all day; they can give you a million shares in a second without any issue because the underlying market is what makes the ETF liquid.
So, there are instances where the ETF becomes more liquid than the underlying, we call those pseudo future ETFs, they're like just super-high-powered trading vehicles, most of them have been around since 2000 or earlier. But for the most part, the real liquidity, we call it the primary liquidity, is like the secondary layer, what is held in that basket. And you can hold bonds, commodities, ETFs, futures, derivatives, and they've made rules over the past few years to make it easier to do these things.
Peter McCormack: And can you have ETFs which back up a basket of multiple ETFs?
James Seyffart: Yes, you can, yeah. So like iShares, for example, has a bunch of ETFs where they'll hold their underlying ETF and then do a currency hedge on it. So, say you want, I don't know, UK exposure but you want to hedge the British pound exposure, so they'll hold their UK ETF and then they'll offer a hedged UK version where it just literally holds the ETF. And then there's also a bunch of issuers where they're like, "All right, we're going to actively manage our ETFs and rotate through these different sectors", what have you; you can do a lot. It's a technology, it's a wrapper, that's the way to think about it.
Danny Knowles: Just quickly, going back one second, in the Michael Sonnenshein interview, we asked that if he allowed redemptions would it bring the discount back to par, and he said he didn't think it would necessarily; is that just wrong?
James Seyffart: So, the problem is, my big thing is if we just allow redemptions and we don't allow subscriptions, GBTC's broken in the opposite direction, which is basically what happened. Shall we just get into the history of GBTC?
Peter McCormack: Well, let me ask one more question before we get into that then.
James Seyffart: Okay.
Peter McCormack: Do you remember the Cullen Roche interview?
Danny Knowles: Yeah, but --
James Seyffart: Cullen's great.
Peter McCormack: Cullen is great. So remember he talked about -- his investment thesis is, he was like, "I'm a third equities, a third gold --"
James Seyffart: He has an ETF that does this, there's an EFT that does this.
Peter McCormack: I was going to say, you kind of want a hard assets ETF, which is a big gold, a bit Bitcoin and a bit property.
Danny Knowles: I assume they exist, do they, apart from with Bitcoin?
James Seyffart: They do.
Peter McCormack: You want one with Bitcoin in as well. So, you know that thing where I'm like, "I want a little bit of gold just in case", and I feel like if there was a hard assets ETF, I would be interested in that.
James Seyffart: Yeah. So, right now though, the only way to do that would be just with Bitcoin futures, which isn't really what most people really want.
Peter McCormack: And sorry, before we get into the history of the GBTC thing, can anyone invest in ETFs?
James Seyffart: Anyone; it's just like buying a stock. So, if it's an ETF, for the most part you can just go on to your whatever, brokerage trading platform and you can just type in the ticker and buy it.
Peter McCormack: Okay, interesting. Do you trade them; are you allowed to?
James Seyffart: I'm not allowed to; I hold them in my portfolio. So, I work in Bloomberg Intelligence, which is Bloomberg's research arm. So in my department, for the most part, people there are sell-side researchers, buy-side researchers, basically they write research on the street for the most part and they came to Bloomberg and now they do the same thing, but it's not buy- or sell-side research. If you have a Bloomberg Terminal, you have access to everyone in my department's work. Ironically, if you cover healthcare or automobiles or whatever it may be, for the most part, you just have to worry about the names in your sector to get requests to buy, but you can just buy any ETF you want because ETFs are exempt from everything for the most part, except for me because I cover ETFs; so no matter what I buy, I have to get approval or I can't buy it.
Peter McCormack: Okay, but you can buy things outside of ETFs?
James Seyffart: I have to get approval, but yes, yeah.
Peter McCormack: Annoying.
James Seyffart: Yeah.
Peter McCormack: All right, let's get into the history of GBTC then.
James Seyffart: Yeah, so GBTC was the first way you could get access on the traditional financial rails; I think 2015 is when it launched.
Peter McCormack: I think that's about right.
James Seyffart: So, it basically launched as a hedge fund, so the only way to get access still, even if people wanted to create shares back when it was open for creations, was a private placement, which basically it's like a PE fund, hedge fund, it's a private vehicle. You have to be an accredited investor or qualified purchaser to create shares to buy in, just like a hedge fund. We call them AIQP; AI, you have to like $1 million investable assets outside of your home, QP is $5 million; or make $200,000 for the past two years. But those have been the rules forever and they haven't changed with inflation, which is good in my opinion; I think some of the AIQP rules are dumb because they don't let people get access to certain things.
Peter McCormack: Yeah, they seem to be arbitrarily unfair.
James Seyffart: Yeah, it was like if you're rich, you can invest in these things. But to be fair, those funds that are in there, they're not subject to -- we'll get into the 1940 Act, 1933 Act -- they're not subject to all the stuff that Gary Gensler wants Bitcoin and crypto and these crypto exchanges to be subject to; there's a lot of disclosure and agreements. So, the hedge funds, they're not allowed to market, they're not allowed to do these things, but that's the way GBTC was initially launched.
So, first it launches that, it's just a private trust; I actually added it to the Bloomberg Terminal when it launched as a hedge fund. So basically, I say "hedge fund", it was always a grantor trust but I'm just referring to it as that because you had to have a private placement; the document for it's called a PPM, Private Placement Memorandum. So, you invest in that, that's how you go in; you have to be an AIQP. For the most part, people were hand delivering them Bitcoin and getting shares of GBTC in return.
Then they listed it on the OTC, the Over-the-Counter Markets, under Rule 144. So basically, that's when GBTC started trading, and it was trading at a 200% premium, 100%-somewhat premium. And the way it worked initially, which people on your podcasts have gotten into, say I give them 10 Bitcoin, I get the equivalent amount of GTBC back and I'm locked up for 12 months. So, I sit there for 12 months, I'm locked up, I can't do anything.
After 12 months, then I get my shares to my brokerage account and I can do what I want with them, I can hold them, I can sell them. But if you were handing in 10 Bitcoin and you waited 12 months and then Bitcoin has gone up and GBTC is trading at 120% premium, 100% premium, so if Bitcoin's $10,000, you're selling your GBTC at an equivalent of $20,000 back in 2017 or 2016, before anything really crazy happened, so that's what people were doing.
So, a lot of the demand came from people handing Bitcoin over, getting GBTC shares, and trying to take advantage of that premium, and so they were going in. And what I think David Bailey missed is, like I work at Bloomberg so most of our clients are high net worth or work in institutions or they deal with this stuff; the people I talked to that were doing this, there were a lot of PE funds, a lot of hedge funds, they saw that premium and they were like, "I'm going to arb it".
So, people went in there, they put in billions of dollars, like I know a lot of clients who were doing this, and they don't care about Bitcoin, they don't care about crypto, they saw this arb opportunity and they were pouring money in, and honestly, it was at the disadvantage of retail investors, because the only way a retail investor could get access to GBTC was buying it on the exchange at that 100% premium, 70% premium, whatever it was. You had to buy at a premium, so people who were accredited investors, institutions, were able to put their Bitcoin in. A lot of them then shorted Bitcoin in the futures market or whatever avenue they had, so they were basically only long that premium. So, all of a sudden, once their shares unlocked, they get out the short, they buy Bitcoin and then the sell GBTC.
Peter McCormack: Great trade.
James Seyffart: Yeah, so people made a ton of money until it unwound. And in ETHE, which I know isn't what we're here to talk about, but that was the perfect example -- the one step I did miss is these products become SEC reporting companies; Grayscale did this on purpose. And also, from the get-go, since I stated covering them, their stated goal was to launch crypto, Bitcoin ETFs, that's what they wanted to do, from the very get-go, this was the process.
The reason they launched it as a grantor trust is, I talk about those gold ETFs, all those gold ETFs, their underlying structure, the legal structure behind them, they're also grantor trusts. It's not just like a misconception that they launched these things as a grantor trusts, they launched them because it's a tried and true accepted measure to have an underlying structure of grantor trusts to launch an ETF that holds some "physical "assets in them.
Peter McCormack: Okay, fine. Do you think any of this is the reason why the Bitcoin price ended up becoming corelated so much with traditional markets?
James Seyffart: That's a complex question; part of it maybe. I'm in agreement with the mostly consensus that a lot of people that were buying Bitcoin were also huge tech investors or in the tech world, so a lot of the correlation was really to the tech area. If you look at the Dow, which holds a lot of industrial-type stuff, the correlation isn't as strong, and also the correlation has broken down. Also, in markets where there's tons of money printing, any assets, risk assets, which I know most people in the Bitcoin world don't consider Bitcoin a risk asset, but in the --
Peter McCormack: Of course it fucking is!
James Seyffart: Okay, it's a risk asset, so when it's risk-on, all risk-on assets tend to go up at the same time.
Peter McCormack: Yeah, look, the people who are saying it's not a risk asset are talking narrative because they say, "Well, the dollar's a risk", but come on, it's a risk asset.
Danny Knowles: Well, it's like 1 Bitcoin's always 1 Bitcoin, but yeah, it trades like a risk asset for sure.
James Seyffart: Yeah, exactly, but I did want to talk about ETHE for a good example.
Peter McCormack: Yeah, what is that?
James Seyffart: So, that's Grayscale's Ethereum one.
Peter McCormack: Interesting, yeah okay.
James Seyffart: Shitcoin if you want to call it that. So, I wrote about this. So when you become an SEC-reporting company, you can lower that 12-month lockup to 6-month lockup, and ETHE was a mess. So, in December 2020, I wrote about -- so basically what happened is everyone's creating shares and I can see the flows, I can see the shares increasing on a daily basis for these products, I know what's happening. What happened is, when ETHE became an SEC-reporting company, they filed, the SEC allowed it, and then there's this time period where everyone who had filed from 6 months ago to 12 months ago, all that became unlocked at the same time. So, if you look at ETHE and the Ethereum price, and I'm convinced of this, I wrote a note, I can pull up my Twitter thread basically saying this is a massive unlocking of ETH shares and it's going to send the premium, which was around 100% of ETHE, down cratering.
Any time, even back in 2017 when I was tweeting about GBTC, how the premium was going to collapse, FUD, don't know what you're talking about, sued, all these things, and I'm like, "Just know what you're investing in; this thing is trading at a massive premium". People would comment and they'd be like, "It's only going to go up, we're going to see a 300% premium here". But yeah, ETHE, back in December 2020, basically what happened is it changed from 12-month lockup to 6-month lockup.
So, anyone beyond who created shares before six months ago at that time got their shares on the same day, and what happened is all those people -- so I actually had clients who read my report and were like, "Oh God, I've got to get my shares out", and they got lucky because they were short Ethereum and long ETHE because it was a 100% premium because that was the arbitrator, it wasn't just the GBTC one, that was the biggest; what happened is everyone was unlocking their short ETH at the same time, so ETH went through the roof. If you look at the price of ETH end of 2020 into January 2021, I'm convinced that that was the main reason because people were getting out of their short positions, which means you have to buy ETH, and they were getting rid of their ETHE.
So, a lot of people who were on that arb trade got rocked. I had multiple clients who actually reached out to me and said they saved a ton of money by getting out after reading my piece because the trade went against you in two directions, which is the same thing that happened with GBTC when GBTC started going into a discount.
Peter McCormack: Right, so what do you make of the whole GBTC situation; how much can you actually talk about? Can you be completely open with your opinions; are you limited?
James Seyffart: Yeah, I can completely open with my opinions.
Peter McCormack: Okay, so you listened to my interview with Sonnenshein?
James Seyffart: Yeah.
Peter McCormack: What do you think?
James Seyffart: I thought you were a tad harsh but he also should have admitted that Genesis screwed up by putting all their money with Three Arrows. Obviously Genesis screwed up, but again, his opinion is like, "I don't deal with them", which obviously he does in some way, but it really wasn't in his purview.
Peter McCormack: You know he was the signatory on the loans?
James Seyffart: Yeah, so there's some culpability there, and he should have said he feels bad for everyone there, but that's as a far as I would say I guess I would go.
Peter McCormack: Where do you think I was harsh?
Danny Knowles: Be honest.
Peter McCormack: Yeah.
James Seyffart: I listened to it when it launched, which was a month ago.
Peter McCormack: I mean, I guess I called him a liar.
James Seyffart: Yeah. So, with ETFs, when I cover ETFs, everything's out in the open, it's fully transparent, I can see very document, I can see daily holdings, I can see shares. With this DCG, Genesis, Grayscale situation, I don't have any special information, like I don't know exactly what the relationship was, I can't see what money was moving; I have to wait for the quarterly filings, what have you, which we can get into about what happened, but I don't know.
Obviously Grayscale, everyone should be pissed. I bought GBTC in 2016 I think in my IRA because it was the only way, at the time, to get access to it. Now I'm not allowed to trade it, like I said, but I still hold it and I'm not happy with what's going on here, so I'm a little biased, maybe not as biased as David Bailey is or biased as Sonnenshein, but I said this before we started recording, I probably sit somewhere in the middle of the two of them when you've covered this topic.
Peter McCormack: So what do you think's going to happen with them, and do you believe they genuinely want an ETF?
James Seyffart: So, I do believe they genuinely want an ETF.
Peter McCormack: But do you think they want an ETF but hope it's maybe in two, three years?
James Seyffart: Maybe. So obviously, this is where they're getting most of their cash right now.
Danny Knowles: Yeah, I think you should explain that for people who didn't listen to the David Bailey one why they might not want to be…
Peter McCormack: So, look, what's in the Trust; how much is in there, how much Bitcoin?
James Seyffart: 600,000-some-odd, over 3% of the supply.
Peter McCormack: Okay, and they're making $400 million-ish based on the current cost, ish?
James Seyffart: Yeah, something like that, it doesn't matter, but somewhere around there; they're making a lot of money.
Peter McCormack: $400 million's a good revenue line for a company that probably employs not a lot of people, and so $400 million's great, what a great revenue line. We did an interview yesterday; do you know Rational Root, the carrot on Twitter?
James Seyffart: No, I don't.
Peter McCormack: Brilliant, he has these brilliant charts. So he has this one chart, I'm going to try and draw it for you, but basically you have the issuance, no, this is your liquid supply of Bitcoin, right, and then you have your issuance rate, okay. This is your illiquid supply, this is your Bitcoin that people got locked up and stuff, this is your trading supply, and what happens with each halving --
James Seyffart: Yeah, it goes down.
Peter McCormack: -- it goes down.
James Seyffart: Step function.
Peter McCormack: But the amount that's actually being held locked up is growing at a slower rate than the issuance. But we hit what was the inflection point which was the last halving, and so they've kind of grown about the same; but with the next halving, this essentially becomes your S-curve, so you get to this point here, over the next kind of two halvings, where the liquid tradable supply is a lot lower.
James Seyffart: Yeah.
Peter McCormack: So, over the next four, eight years, if there's a growing interest in Bitcoin and a growing adoption, an increasing illiquid supply and a shrinking liquid supply, there's only thing that can happen to the price of Bitcoin. So, if Bitcoin goes to $100,000, that $400 million a year becomes $1.2 billion, because at $200,000 it becomes $2.5 billion.
James Seyffart: Yeah.
Peter McCormack: So, you just have to rationally ask, if you look at the money they would make in the ETH versus what they make in the Trust, where are they going to make most of their money? So, sure, maybe they want an ETF, but at the moment there are billions of reasons why they don't want it to happen.
James Seyffart: So, there are a few things I would say. My biggest criticism for them is I thought they should have lowered the fee.
Peter McCormack: Of course.
James Seyffart: Once you get to economies of scale, I think they should have lowered the fee. That said, no court is going to make them lower the fee. If you look over in Europe, the first ETNs are still trading and they charge 2.5%, there are a bunch of ETFs that charge 2%; it's not like they're off out of left field. That said, there are Bitcoin futures ETFs in the US that are trading 79 basis points and lower; basis points is 0.01% basically, so less than 1% fee. But fees add up over time, they really eat into your return, but obviously they're saying they're using it. Their defence is they're going to use it to fight the SEC, and they really are fighting the SEC and I think they're going to win their lawsuit against the SEC for an APA violation.
Peter McCormack: Okay, let's get into that; what's an APA violation?
James Seyffart: So, Administrative Procedures Act, and basically it says any government entity, regulator, whatever, has to treat like situations alike. I'm dumbing it down, but like Bitcoin futures ETFs, spot Bitcoin ETFs. And basically Grayscale's argument is you're allowing Bitcoin futures ETFs but your reasoning makes no sense; you can't do one without the other, which I've been saying since they've been denying spot and approving futures. The futures market and the spot market are inextricably linked, they go hand-in-hand, you can't have one without the other. Anyone who knows anything about derivatives markets knows that's how it works. So, the idea that you can manipulate spot and it wouldn't affect futures, or vice versa, is just insane to me.
I listened to the hearing, we thought that they had one judge on their hands, Grayscale I'm saying. So, I have a crew of people I work with on this, so we have people who cover exchange companies that cover crypto, we have people who do whatever on that side; I have people covering cryptos as a commodity; I have a crypto analyst who covers a lot of the on-chain metrics who's based in Australia actually. And then also we have a litigation analyst, he used to be a lawyer, and he covers this stuff; so, he's covered the Ripple lawsuit, he's covering this lawsuit. Initially going in, we were like, "All right, they got this one judge who's Democrat-leaning and he's likely going to be on their side, there's this other judge that they could possibly get, and this third judge that there's probably no way they're going to get".
Listening to the hearing, which you can't base everything off of that, it's just their line of questioning, but his view was like, "Grayscale's a 40% chance", which everyone I was talking to was like, "This is a frivolous lawsuit; it's going to get thrown out". Grayscale has a powerhouse litigation team behind them filing this lawsuit. This is not like some nobody doing this, which I think he mentioned on his podcast.
Peter McCormack: How brave he was.
James Seyffart: Yeah, that was a little strong, but suing your regulator is a big step; they are an asset manager, they have to deal with the SEC no matter what they do going forwards, so going out and suing them in federal court is definitely like -- there's a give and take that usually happens with these regulators, so going out and suing them in federal court isn't the smartest business move but they're kind of out of moves, in my opinion. I forgot where I was going with that.
Peter McCormack: The judges.
James Seyffart: Oh, the judges. So, we listened to it, and then a second judge came in and was just hammering the SEC lawyer, and we were like, "Okay, well they've got two, they're probably going to win this now within the first 15 minutes"; I was live tweeting it actually, I was like, "This is crazy".
Danny Knowles: Are there three judges total?
James Seyffart: It's a three-judge panel. And then the third judge came in that we thought was no shot, started asking hard questions of the SEC that were in line with our thinking, so we were like, "Okay". So, he's flipped from 40% chance Grayscale win to 70% chance that Grayscale win after that, or the oral arguments as they're called, which we should get. It could happen before June, the end of June, but likely 2Q, 3Q, and we should get the Ripple case, which is irrelevant to you. I kind of view it as a security, but at this point, any wins against the SEC I'm all for.
Peter McCormack: Oh listen, I can hate Ripple and XRP and want them to beat the SEC at the same time.
James Seyffart: Yeah, exactly, yeah, that's where I sit right now for the most part.
Peter McCormack: Fuck the SEC, apart from Hester Peirce; we like Hester.
James Seyffart: Yeah, Hester's great.
Peter McCormack: Yeah.
James Seyffart: She is awesome. It's really Gary, it's mostly Gary Gensler, to be very clear.
Peter McCormack: Yeah, I want Hester to get Gary's job.
James Seyffart: Yeah, but so now it's like we think 70% chance. The problem here is that the judges might issue a ruling that says, "You violated the APA, you did not treat like situations alike", and then say, "Go back to the drawing board". And then the SEC could then just deny it for other reasons, which I think is my base case of what's likely going to happen. So, Grayscale might win the case and then still not be able to convert to an ETF.
Peter McCormack: Why do you think the SEC is doing this?
James Seyffart: Gary.
Peter McCormack: And why do you think Gary's doing this?
James Seyffart: Gary wants more power.
Peter McCormack: But what actual power is this; is this post-SEC job?
James Seyffart: So, I'll give you a little background on Gensler.
Peter McCormack: He's a shitcoiner himself; what was he promoting?
Danny Knowles: I don't know.
James Seyffart: So, when he was at the CFTC, I've talked to people, he was like a crypto evangelical person to the SEC back in the day.
Peter McCormack: Yeah.
Danny Knowles: Well, he was really excited when he came in because of the talks he had, was it at MIT?
James Seyffart: Including me, I listened to hours of his classes; I learned stuff from him about how blockchain works.
Peter McCormack: And the CFTC always seemed a bit more open to this; I mean, Brian Quintenz was great. Who was the other guy?
Peter McCormack: Yeah, Giancarlo.
James Seyffart: Yeah.
Peter McCormack: I've got this great photo of me; I went to the CFTC to interview Brian, I've got a great photo of me in front of the big plaque. It's me, Brian Quintenz, Giancarlo in a Motorhead shirt.
James Seyffart: That's awesome.
Peter McCormack: I'm going to show you it. But when I met both of them, they were brilliant, they're totally pro-Bitcoin.
James Seyffart: Yeah. This is going to get a little off topic, but I was shocked. So, anyone who's talked to the SEC, most of the, I don't want to say the underlings, but people you don't see giving press conferences, when you talk to them, they know what's going on. People on Twitter were like, "Oh, the SEC doesn't understand this", and then like -- I had calls with them, like we have calls about ETFs, and we were like, "Can we ask about what's going on with Bitcoin and obviously have a conversation?" and they know what's going on, they're not completely oblivious.
Right now, it's coming top-down from Gary, and Gary wants to be Secretary of Treasury, that's his ultimate goal, and he's basically tied himself in with the left wing of the Democratic Party, think Elizabeth Warren types. So, he needs them to be on his side if he ever wants to be Treasury Secretary, so he's tied in with them now.
Danny Knowles: Has he actually said he wants to be Treasury Secretary?
James Seyffart: It's an open secret, but I've heard from more than enough people that know him that that's his ultimate goal.
Peter McCormack: Then what happens when Trump wins the next election?
James Seyffart: Well, it's funny, I think he was a CFO of Hillary Clinton's campaign in 2016 and he was in line to become Treasury Secretary; if Clinton won, he was probably going to be Treasury Secretary and we wouldn't have him as Chairman of the SEC right now. So, he lost there and then he went to MIT and now he's back and he's Chairman of the SEC.
Peter McCormack: See, this is where it's absolute fucking bullshit because he's putting his entire career above what is best for the people of America.
James Seyffart: He would disagree with you, but yeah.
Peter McCormack: Of course he will, but you've seen the MIT classes.
James Seyffart: Yeah.
Peter McCormack: We have. Everyone used to talk about, "Gary Gensler's bags to the moon", and yet, right now, he doesn't seem to be doing much. It's almost like he's trying to just delay, delay; delaying as a tactic.
James Seyffart: What he's doing, he's regulating through enforcement, rather than regulating through dialogue with the market, which you'll hear from everyone, and what he wants to do is get more power at the SEC; that's what he did at the CFTC. When he was Chairman of the CFTC, so this is fun fact, they weren't unionised until he became the Chairman of the CFTC. So, the people who work at the CFTC unionised underneath him because of how hard he was working them. So, he's doing the same thing to people at the SEC; there are people leaving the SEC left and right because of him. He's hard to work for basically is the gist I've gotten from anyone I've spoken to.
Peter McCormack: What kind of checks and balances are in for somebody in that role?
James Seyffart: It's the courts, which he's going to the courts to do. So basically, one of his tactics is, you'll see this, he'll put out these applications or notes for comment on what he wants to do, rule changes, what have you, and he'll often put one or two things in there that are just absurd and has everyone up in arms. But really, there's a third or fourth thing in there that also is a little bit extraneous. But then he comes back later on, after dialogues and comments and it's like, "We're taking this out", and then everyone kind of forgets about this other thing that he slipped in there in some different way, so he's a textbook politician.
Peter McCormack: Snake.
James Seyffart: He's a politician through and through, that is what this guy is. So, he does a lot of different things like that.
Peter McCormack: He's a fucking snake, man.
James Seyffart: Yeah.
Peter McCormack: Okay, and just so people understand the US political structure here, so he is a part of the Biden Administration in that role. If Trump was to win the next election, all those roles, the heads of all those institutions change, right?
James Seyffart: Theoretically, yeah, he could ask for them to -- so I'm not an expert on this, I don't know 100%, but I believe that's correct, and he could keep them on or he could ask them to resign essentially and then put somebody else in their place.
Peter McCormack: Yeah. I'm pretty sure, when I was at the SEC, I actually saw the Hester Peirce thing in her office where it was her being appointed by Donald Trump, I'm pretty sure, I think that's what it is; that goes back to that Michael Lewis, Fifth Risk thing where they bring in their own team.
James Seyffart: Yeah, exactly.
Peter McCormack: Okay, so Gensler's basically playing power games and stopping all this. Okay, so just say they lose the lawsuit and if the judges are tough enough, they might be forced to allow it?
James Seyffart: Theoretically, or what could happen, which is a fringe case which has been discussed on Twitter and a few other different people, the main thing that this hinges on is you allowed futures ETF, because the one thing that the SEC continually says they want, so I think the last denial of the GBTC, there was like 88 references to the term "surveillance sharing agreements".
Basically, they want NYSE to have surveillance sharing agreements with New York Stock Exchange, or Nasdaq, wherever it lists, with an underlying couple of exchanges, a market of significant size, so think Binance, Gemini, Coinbase, surveillance sharing agreements, every single microsecond of trade that they can see to look for manipulation. That's what the SEC wants so then they can go to NYSE, who's regulated with them, and see it; or they want those underlying exchanges to come onboard and become exchanges themselves so that they're also regulated. So, it's either surveillance sharing agreements, "Give us all your data", or, "Come in and become fully regulated with the SEC".
So basically, they approved futures ETFs because the CME, where the Bitcoin futures trade, is a regulated market. So the SEC was like, "All right, this is regulated". I'm going to toot my own horn a little bit here, we got shit on when we said that these were going to get approved. We stuck our necks out in August because basically, in late July, Gary gave a speech and a couple of lines in this speech he was like, "We look forward to 1940 Act applications of Bitcoin futures products".
Basically, all you have to do right now is listen to what Gary Gensler says, because what he says is what he does; everything else kind of matters, but it's moved down in the totem pole. And that's why we got it right that Bitcoin futures ETFs were going to be approved when they were approved, and most other people were incorrect even though they told us we were going to be wrong. So, that's when I got all my followings because I was aggressive in saying we thought it was going to get approved and that's when most people followed me, but all of this hinges on the fact that Bitcoin futures ETFs were approved.
There's a non-0% chance that Gensler could go back and say, "All right, then we're just going to delist Bitcoin futures ETFs", which then would open another APA violation and lawsuit and go in the courts because the issuers are like, "You can't just approve and then disapprove", but there's some talk of that happening. I don't think it's going to happen but that's another outcome there, but like I said, I think the most common outcome is the judges say, "You violated the APA, go back to the drawing board", either approve or deny for a different reason, and then they're going deny them. They've done all this stuff with custodians, regulated custodians; I think they might lean on that a little bit, I'm not really sure.
Peter McCormack: Okay. Just say they do allow it, through the judges, they are forced to allow this, how quickly can the GBTC Trust become an ETF; and also, what position does this put all the other applications in, the Valkyrie, the Winklevoss one, because there are lots of applications, but really first to market is what you want?
James Seyffart: Yeah, so that's a good question; we kind of have to get into the 1933 Act versus the 1940 Act to answer that question. So, there's this new rule called the ETF Rule, filed in 2019, and basically if you're a 1940 Act ETF, you file, and then after 75 days you can launch; it basically makes launching an ETF easier. 1940 Act has additional protections. Basically it was created afterwards with more protections; you need a board, you need X,Y, Z.
1933 Act ETFs, which what the gold ETFs are, what spot Bitcoin ETFs can only be, they don't have all the same stuff but they're very minute differences, like for the most part, 99.9% of the time it doesn't really make that much of a difference. But for futures ETFs, they can be either 1940 Act of 1933 Act; 1933 you can use a little more leverage, be a little bit more efficient, but it's basically because Treasuries can either be cash or security as far as the SEC and regulation is worked, because you can basically file it as other cash or as security, and if you file it as a security then it's a diversified investment. So basically if you use Treasuries as your security, you can file as a 1940 Act. That means 75 days after you file, unless the SEC comes in and says, "Withdraw, you can't do this, we won't allow it", you just launch.
The other option, which is the only way to launch a spot Bitcoin ETF, which is the way that all the gold ETFs, a lot of other ETFs are launched, is under the 1933 Act, and they have to go through this process called the 19b-4, which is where you see all those, "Has been disapproved, has been disapproved", which is, whatever. So, they go through this process, and it's like a 240-ish-day process from filing, and they extend, they extend, whatever. So, they either accept right away after, I don't know exactly what the days are, but it's 240 total and there are like 5 steps in between, or 4 steps in between, and they either extend or approve. And then, at the end of 240 days, they either approve or deny, and then they deny.
The only active application right now for a spot Bitcoin ETF is ARK, Cathie Wood's ARK and 21Sshares, which launched a bunch of ETFs in Europe. So they have a ton of crypto ETFs across Europe, primarily in Switzerland; they just filed not that long ago. So that's the only active spot Bitcoin application. There is a 1933 Act ETF which was critical in the lawsuit that Grayscale brought against the SEC. I don't want to get too in the weeds here, but essentially the first spot Bitcoin ETFs were approved and basically they leaned on the fact it was 1940 Act product instead of a 1933. By then, there were already filings for a 1933 Act Bitcoin futures ETF that became due in March 2022. So the SEC, basically, was forced to approve that because what they were going to say, "Oh, one's a 1940 Act, one's a 1933 Act"? So they approved the futures ETFs under the 1933 Act. Basically, it's all these issuers whittling away at all these different reasons for them denying.
So, Teucrium was the one that filed that and they ended up selling it to a company called Hashdex, who are in the US but primarily in Brazil, and the bought that ETF, so now there's a 1933 Act Bitcoin futures ETF, DeFi. Theoretically they could alter things, and if they allow for spot Bitcoin ETFs, that might be the first spot Bitcoin ETF because it's already a 1933 Act and so theoretically, they could alter things in their perspectives. I'm not 100% certain of that but I think they could alter it to buy spot Bitcoin, but I don't know how long it would take. It could take months, it could take weeks, I would guess months if they get approved and they can convert it to an ETF.
Honestly, the best thing for everyone involved, in my opinion, would be for ETF approval. You don't want them in forced liquidation because then they're going to have sell a ton of Bitcoin.
Peter McCormack: Nobody wants that.
James Seyffart: You don't want them to stay where they are. ETF approval's best for everyone, just Bitcoin holders directly, GBTC holders, it's just a more efficient vehicle for anyone who wants to trade these things. Right now, everyone's trading the Bitcoin futures ETFs, so if you want to trade on traditional financial markets. So, yeah, the best situation would be for them to convert to an ETF, but I don't see it happening any time soon.
Peter McCormack: Back to my point though, you want to be the first ETF, right, because that becomes the most liquid market?
James Seyffart: For the most part. So, we saw in Canada one ETF launched one day before the others, so this ETF launched, it's the Purpose BTCC, launched in Canada, it launched literally one day before all the other ones, it's spot Bitcoin EFT up there, and it dwarfs everything else for the most part in trading volume. It dwarfs in assets but there are a lot of assets in some other ones, but they don't trade anywhere near as much, so a one-day advantage is critical. We were of the opinion that you should just allow a bunch of these to line up at the starting line and go at the same time, but that's not how the SEC works; I don't think they're going to do that.
Peter McCormack: How many spot EFTs do we know of for Bitcoin there are globally?
James Seyffart: Spot?
Peter McCormack: I mean, just an estimate, are we talking about 5, 50?
James Seyffart: No, more than that, 15, maybe more.
Peter McCormack: Okay.
James Seyffart: There are like 180-something crypto ETFs, or ETPs I'll call them, there are ETNs, ETCs, we don't have to get into the nuances.
Peter McCormack: Fundamentally the same?
James Seyffart: For the most part, they're technically a dead instrument but a lot of them are spot backed, so they actually hold the assets. The difference is, like some of the really cheap ones in Europe, the reason they're super-cheap is because they lend them out. So some of the reasons some of these are more expensive is because they're not lending out the underlying Bitcoin. So, if you're buying a super-cheap ETF, they're probably lending out the underlying assets in some way and earning return on it.
Now, that's very common in the ETF world, so I'm going to talk traditional finance a bit, but you can basically get virtually free access to the US financial markets, or any market, using like a Vanguard ETF or iShares ETF, because what they do is they charge 3 basis points, 0.03%, and then they'll also lend out the underlying, so they earn a little bit of return. So, basically, your net net expense, they're taking this money but they're also earning on lending out shares, and you end up paying virtually nothing, even less than what the expense ratio is many times because you're lending out. But obviously we know the issues with lending out underlying crypto, Bitcoin, what have you, so some of these ETFs aren't doing that, but I'm going to hope and assume they're doing it in a more efficient manner than some of these other guys we've seen.
Peter McCormack: But basically, US investors are being disadvantaged against other international investors.
James Seyffart: 100%, yes, not even close.
Peter McCormack: Yeah.
James Seyffart: Not up for an argument.
Peter McCormack: Yeah, bad. Okay, interesting. Okay, so when's the lawsuit being heard? You said there are oral arguments; when do we expect a decision by?
James Seyffart: So now we'll expect a decision, the rough estimate is towards the end of 2Q and into 3Q, which is before the end of June is possible. It's likely going to be a 3Q decision, so July, August, September, somewhere in that time range. So there's no, like, this many days until the judges issue a statement, there's no guarantee, but my guess would be some time in the third quarter, so summer.
Peter McCormack: These markets are very heavily regulated; are they overregulated?
James Seyffart: Which markets?
Peter McCormack: Everything, the CFTC, the SEC.
James Seyffart: That's a real nuanced question, so this is a good thing to ask. The SEC, which people have probably said -- some regulators are merit regulators; is there merit behind this investment? The SEC is not a merit regulator, which to be honest, that's what they're doing with Bitcoin; they're saying, "There is no merit to this investment, in my opinion", a lot of the decisions why they didn't deny it. What the SEC is, is a disclosure regulator; they're supposed to say, "Disclose everything to us", which is what all these companies do, and when you don't disclose everything, it's securities fraud.
So, I'm blanking his name but there's a columnist in Bloomberg and he says, "Everything is securities fraud", like if you do one thing and it's said differently in your documents, you've committed securities fraud. So basically that's what the SEC does, they can go over anyone basically if you lie and do something different with however you're operating. So, their whole goal is, "Disclose all the risk, disclose everything you're doing and we'll be good", which is what they should be doing.
Everyone knows the risk at this point of what Bitcoin is, this isn't 2015 anymore, people understand what it is. A little side note, the Winklevoss tried to launch an ETF back in 2013 when Bitcoin was $100; this list is every EFT that has been filed in the US.
Peter McCormack: Holy shit, what is there, like 50-odd here?
James Seyffart: No, 79, and I'm probably missing some, and one of those was filed today. But you asked about the first-to-market thing, if you look at the bottom, see all the dates on the filing for all those Ethereum futures ETFs?
Peter McCormack: Yeah.
James Seyffart: Grayscale filed for those three ETFs I mentioned, and the next day three issuers filed and then your buddy, Steve at Valkyrie, filed also a couple of days later because they don't want to be late. Even if it's likely or potentially likely that the SEC's going to not allow them to launch these, but in the off chance that they do allow it, you can't be 75 days behind, you have to just file and go for it; you can't let somebody else launch and beat you to market by 70-plus days.
Peter McCormack: BlockFi applied.
Danny Knowles: Did they?
Peter McCormack: I didn't even know about that.
James Seyffart: Yeah, they did.
Peter McCormack: All right, anything I've not asked you with regard to these EFTs that we should have covered?
James Seyffart: Not really.
Peter McCormack: There are two other things I want to ask you about then; do you know anything about the Coinbase action with the SEC?
James Seyffart: I'm not an expert in that, so I don't actually know.
Peter McCormack: All right, we won't cover that then. So, the last thing I wanted to talk to you about is, of all the companies out there reporting on Bitcoin, I know you say crypto, Bloomberg's all right, Bloomberg's pretty fair.
James Seyffart: Yeah, so this is a little background -- actually, I'm going to give you my first foray into crypto, into Bitcoin specifically, Bitcoin mining. I was a freshman at the College of New Jersey and I had a roommate and then I had four suitemates, so they each had their own roommate. One of my suitemates, Mike H, I won't say his last name, came over in the spring of my freshman semester, he was like, "You've got to check this out", and he showed me Silk Road, and he was like, "I'm mining this coin and we can use it to buy things".
Sure enough, he downloads the software onto my computer, and so I was mining Bitcoin technically; I didn't even understand what it was. Until 2016, when I read Cathie Wood's white paper, she wrote a white paper on Bitcoin explaining the whatever, that's when I really started digging in. I was like, "Oh my God, I used to mine this stuff", but it blew up my computer! So, I literally had a 12-page paper that I had written and my computer blew up. I don't know for certain that it was the Bitcoin mining that was on my shitty laptop in 2011, but I'm pretty sure that that's what did it.
But Mike, I reached out to him in 2017 on LinkedIn and I was like, "Dude, do you still hold the Bitcoin you were mining?" and he never responded, and then deleted; I can't find any trace of him anywhere on the internet, so he's either completely changed his name or is like a Bitcoin millionaire somewhere, I don't know. Mike H, if you're listening to this, I would love to talk to you still.
Peter McCormack: Mike H, get in touch.
James Seyffart: Yeah.
Peter McCormack: That's wild. I guess you didn't save any of your Bitcoin.
James Seyffart: My computer blew up.
Peter McCormack: Dude, you were getting 50 Bitcoin a block back then.
James Seyffart: Yeah, I have no idea. He just downloaded it, I was like, "Yeah, you can use my computer", just like whatever. I didn't even want it, I was like, "You can use it and keep it for yourself".
Peter McCormack: Damn it!
James Seyffart: And then in 2016, I got involved, really deep diving in and that's when I first got into Bitcoin. It was actually like a traditional financial investment process and Cathie Wood was up there talking about the benefits of Bitcoin back then, and I was like, "Okay, this is actually pretty interesting".
Peter McCormack: But Bloomberg's pretty good. We get so fed up of all these different --
James Seyffart: But this is what I was saying, we weren't good, we didn't use to be good. So when we were covering it, we were dealing with news people from the TradFi, traditional finance world, that like, "All this is magic internet money, it's BS". I heard you saying you talked to people and were like, inflation, and then you say, "You should buy this magic internet money"; people just thought we were insane even writing any research on it, they were like, "Why are you doing this?" But they hired a ton of people from different industries and different areas that were covering crypto, so we vastly expanded our crypto coverage in 2020 during the pandemic, during the heart of the pandemic. So, they hired people who had traditional understanding of crypto and Bitcoin, and that's why we got really good.
But back in 2017, when we were trying to get information on the Terminal, we had a lot of clients that were interested in this. We wanted more data so we could write research better and we just got stonewalled, we were hitting the ceiling, no one was like, "Yeah, no researchers, we're not doing this, we'll do the bare minimum". So they got pricing, there was some good stuff on there, and then everything kind of changed in 2020. I think they saw how much value it is in covering this market because how many people care about it; it's irrespective of whether they think there's merit to it, they just know that people care about it and they want to understand what's going on, so they're investing money.
Peter McCormack: So they're pro accurate information?
James Seyffart: Correct.
Peter McCormack: Yeah, I like Bloomberg; I've got to say, I can't remember you being shit at it, but all I know is recently, anything I've read on Bloomberg, I'm usually like, "Yeah, well this is fair".
James Seyffart: Yeah.
Peter McCormack: Yeah, good work, man.
James Seyffart: I'm happy to hear that.
Peter McCormack: Well, James, look, great to meet you. Have you got anything you wanted to ask, Danny?
Danny Knowles: No, I think we covered it.
Peter McCormack: That was brilliant, man, that was genuinely brilliant, well done, that was amazing. I hope we can do this again sometime.
James Seyffart: Yeah, I would love to, maybe when we get an ETF!
Peter McCormack: Yeah, let me know, man. Are you in Miami all week?
James Seyffart: I'm here through Friday morning, yeah.
Peter McCormack: Nice one, man.
James Seyffart: I'll be at the conference on Thursday.
Peter McCormack: Well, listen, stay in touch, and you're usually in New York?
James Seyffart: I'm based in New Jersey; I'm in New York once a week, every other week.
Peter McCormack: It's just over a bridge, right?
James Seyffart: Yeah. So we actually have an office in Princetown, New Jersey, so I'm based there; it's much easier to go down there than to go all the way into New York, but yeah.
Peter McCormack: Right. I'm sure we'll do this again, but thank you for coming on.
James Seyffart: Yeah, thanks for having me. This was awesome. Long-time listener, first-time caller!
Peter McCormack: Thank you, man. Well, I appreciate that, thank you.
