Craig Salm, Chief Legal Officer, Grayscale discusses the SEC’s Concerns with Bitcoin ETFs

Presented by Syntax Advisors.

Margareta Hricova: Welcome to ETF TV – your insight into the role of exchange traded funds, issuers and investments. I am Margareta Hricova and joining me today is Craig Salm, Chief Legal Officer at Grayscale, and Deborah Fuhr.

Welcome to the show.

Craig Salm: Thank you for having me.

Deborah Fuhr: Thank you.

Margareta Hricova: So, Craig, there have been many filings since 2013 with the SEC to list a Bitcoin ETF. The ProShares Bitcoin Strategy ETF (BITO) was listed in the US on October 19, 2021. Were you surprised that the first ETF to list was only allowed to use futures?

Craig Salm: So I think the important thing to note about that date was that it was also the date that Grayscale refiled our application to convert Grayscale Bitcoin Trust (GBTC), our flagship bitcoin product, into an ETF as well. And the reason we chose to do it on that specific date is because, by the SEC allowing a futures based ETF to start trading, that signaled to us that the SEC must therefore now be ready for SPOT-based Bitcoin ETFs, like GBTC.

And the reason I say that is because if you go back to 2016 and in 2017, when Grayscale, along with several other issuers, had filings in to have Bitcoin ETFs approved, both SPOT and futures-based ETFs, the SEC ultimately denied those applications for reasons around; where there perceived to be fraud and manipulation in the underlying Bitcoin markets? So that’s the Coinbase’s, the Gemini’s and the McCracken’s of the world. And if that’s a concern, then it makes a lot of sense that you would denied both SPOT and futures-based ETFs, because both types of products are priced based on those underlying Bitcoin markets.

Back then, the markets were a certain level of maturity. They’ve only become more mature, more robust and more secure the way you would see in other traditional financial markets. And so I personally believe a lot of those concerns don’t really exist anymore. And the fact that we’ve seen the first futures based ETF start to trade to us signifies that the SEC must also believe that those concerns are not really concerns anymore, either.

Speaker 3: And the SEC must therefore now be ready for a SPOT-based ETF like GBTC.

Deborah Fuhr: Right. In addition, they’ve mentioned concern about liquidity and transparency. That’s slightly different than manipulation. How do you react to that comment?

Craig Salm: On transparency I would say that a lot of the US-based Bitcoin exchanges, as well as ones in other parts of the world, have the same sort of trade surveillance technology that you would see at regulated national securities exchanges like NYSE and NASDAQ, as well as regulated, national futures markets like the CME. And so I think a lot of those protections have been put in place voluntarily, and that’s why we again say that there’s been so much development in the Bitcoin markets over the years, such that we truly believe the US markets are ready for Bitcoin ETFs.

Deborah Fuhr: And I think the other one was suitability of Bitcoin as an underlying for a fund?

Craig Salm: Yeah. So there’s multiple ways to have an ETF. We have a futures-based ETF and also SPOT-based ETFs like GBTC that hold bitcoin. We believe that holding the physical asset is really the most efficient way to gain the exposure, because it doesn’t come with all the additional costs, transaction fees and things like that that you see with a futures-based product.

So, for example, with a SPOT-based ETF, you can just hold the asset in perpetuity without having to do any sort of trading or transacting in it. Whereas for futures-based products, you have something called roll costs, which is that you can only hold the bitcoin futures for one month. And then in the subsequent months, you just sell your position to rebuy a position to maintain that exposure. And what we’ve seen, historically speaking over the last couple of years, is that those forward looking contracts are trading at premiums to be existing month contracts.

What that effectively means when you’re rolling these forward is you’re selling low and then buying high, which add transaction fees to your exposure, resulting in what is not a perfect tracking amount. So we believe that having the physical SPOT-based exposure to Bitcoin that you would have with GBTC is really the more efficient way to gain that exposure.

Deborah Fuhr: GBTC, as you say, has been very successful. Why do you want to convert it into an ETF?

Craig Salm: GBTC was always designed to be an ETF once permitted by the regulatory environment. And so what we at Grayscale have designed is a four stage lifecycle process where our products all start off as a private placement. After a one year holding period, we seek to make products publicly traded. We then also seek to make them SEC reporting. We do that voluntarily, which I think is really important, because it goes to show that we’re doing what we need to do to make our products more robust, more transparent and more regulated, so that we can ultimately achieve the fourth and final stage, which is conversion into an ETF.

I think the other really important thing to note about what an ETF would do for GBTC is rather than these historical premiums and discounts, the product is traded at, it would allow that you a better tracked nav, which is just a more optimal way to invest in any asset class.

Deborah Fuhr: So the comment period is scheduled to end on February 18th, and then there could be an additional 14 days, so March 4th is when this should be finished. What’s likely to happen on or after March 4th?

Craig Salm: When we filed our 19b-4 back in October? That’s right, that started a statutory 240 day review period wherer the SEC has time to review the application. And then over the course of that time period, they can either approve, deny or delay it for further comment. In the case of Grayscale, that takes us out to July 6, 2022. And in the meantime, the SEC is inviting public comment because they want to hear the voices of investors and anybody else that has an interest in Bitcoin or the broader cryptocurrency industry.

Many letters have already been submitted on behalf of our Bitcoin ETF conversion. There’s many supportive letters, because our investors in the market really want this type of ETF to be approved. What differentiates it from the other Bitcoin ETF applications is the product is already trading.

It’s the largest on an AUM and trading volume basis for any publicly traded Bitcoin product in the world. And what that also means is that upon conversion, if you’re already a GBTC shareholder, you don’t have to do anything for your shares to become ETF shares.

Deborah Fuhr: And what is the mechanism that would allow it to convert? How would that actually happen?

Craig Salm: Because we haven’t had this regulatory approval for an ETF, the product has only been able to do certain types of creations and no redemptions in its existence. But with the ETF conversion, what that would do is register the shares so that creations don’t have to go through this private placement, public rotation process I described. That also means that if there’s premiums an arbitrager can come in and create more shares to bring the shares back in line with nav.

Conversely, it’ll also turn on the redemption mechanism, meaning that if there’s a discount, arbitrage is going to be the opposite and redeem shares so the shares trade in line with any of it. So it’s important for investors to know about that mechanic because this is a unique situation in that we have an existing product as being converted into an ETF.

Deborah Fuhr: Is there likely to be tax consequences for existing investors?

Craig Salm: I certainly cannot give tax advice, but I would say that there should not be a taxable event. The reason being because the shares of GBTC that exist today will be the same shares that would exist as an ETF. It’s just that new shares that are created will be registered, so they will not have to go through this holding period process of the private placement to the public quotation. And then the other feature is that they would enable redemptions.

Deborah Fuhr: Do you expect that you’ll receive approval?

Craig Salm: We continue to believe at Grayscale that a SPOT Bitcoin ETF is a matter of when, not a matter of if. So right now, we’re really focused on engaging with the Commission and also inviting anyone who’s supportive of our efforts to submit comment letters to the SEC, because they want to hear your voice. These are difficult questions and we definitely encourage folks to send their letters in.

Deborah Fuhr: That was a great set of rebuttals to the questions raised. Thank you for joining us.

Craig Salm: Thank you so much for having me, Debbie.

Margareta Hricova: Debbie, can you tell us about some of the other news in the ETF industry?

Deborah Fuhr: Last week, there were 34 new products that were listed and 33 new cross-listings. This was definitely a week when the majority of products were actually focused on crypto exposure and thematics.

Deborah Fuhr: The majority of the products were from the US and from Europe. The overall assets declined slightly 3.9% due to market moves, and so the assets now stand at 9.87 trillion dollars, down from 10.3 – that record, we said at the end of the year.

The net inflows have been 76.4 billion, which is down slightly from 85.38 billion last year.

We’ve had thirty two months of consecutive net inflows. The majority of money is going into equity exposure, which many find surprising. A lot of journalists have been talking to me saying, ‘how much money is going into inflation focused fixed income?’ Very little is the honest answer.

There’s a little bit going into gold, which is often seen as an inflation hedge, but the majority of the money is going into equities. So I think many investors are hopeful and optimistic that we are seeing recovery after COVID-19.

Margareta Hricova: Thank you for that update, Debbie. Thanks again to Craig for joining us today and to our sponsors Syntax Advisors, and of course, to all of you for watching. To watch prior episodes or see news from the ETF industry, visit us at ETFTV.NET. Thank you.

ETF TV News does not provide investment advice, nor recommend products.

Published on February 16, 2022