Expert's Take: Is a Bitcoin ETF Really Possible? with James Seyffart

Today we're joined by James Seyffart, a research analyst at Bloomberg who's the perfect person to answer our questions regarding the convergence of crypto and ETFs. We dive into: - The probabilities of a Blackrock Bitcoin ETF and why - Important dates in which the SEC will need to give us answers - Neutrality, or lack thereof around the ETF approval process ------ 🚀 Join Ryan & David at Permissionless in September. Bankless Citizens get 30% off. 🚀 https://bankless.cc/GoToPermissionless ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🦊METAMASK PORTFOLIO | TRACK & MANAGE YOUR WEB3 EVERYTHING https://bankless.cc/MetaMask http://bankless.cc/MetaMask ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap ------ TIMESTAMPS 0:00 Intro 7:44 What is an ETF? 13:00 ETF History Lesson 17:40 ETF Market Size and Holders 22:46 Types of ETFs 27:02 Where Are These Assets Stores 34:04 Who Approves ETFs? 40:08 Neutrality Of Regulators 44:16 Types of Bitcoin ETFs 49:17 Reasons For Rejection 55:12 Does Gary Just Hate Crypto? 58:13 Does Blackrock Change Things? 1:04:46 Will Blackrock Get Approved? 1:15:20 Possible Approval Dates 1:19:09 Lack of ETFs to Blame For Crypto Fallout? 1:28:38 Why Should we Care? 1:34:14 Risks and Disclaimers ------ RESOURCES James on Twitter: https://twitter.com/JSeyff Trillions Podcast: https://www.bloomberg.com/podcasts/series/trillions ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: ⁠https://www.bankless.com/disclosures⁠ https://%E2%81%A0https//www.bankless.com/disclosures%E2%81%A0

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Yeah, I'll be very blunt. If you look at all the things that they have said and written over the last three years, this will be denied.

• 0:07Ryan Sean Adams?

  Really?

• 0:07Speaker 00

  But there's a lot of circumstantial evidence that suggests that it will be approved. It goes back to what I said. They can back into whatever decision they want to.

• 0:17Ryan Sean Adams?

  Okay, you said two things there, James. I want to be clear.

• 0:25Ryan Sean Adams?

  When Bitcoin ETF? That is the question on our mind today. Is the Bitcoin ETF actually happening or not? Will it happen this year or not? BlackRock, Fidelity, some of the largest ETF issuers in the world have now submitted filings for ETFs with the SEC. Is Gary Gensler going to let them through? And at this point, can he even say no? That's the question we raise with James Safer. He's a Bloomberg analyst who's tracking this thing closer than anyone I've ever met. He's on the episode today, and he gives us a date by which we should have a clean answer from the SEC on the Bitcoin ETF. So is he over

• 1:07Ryan Sean Adams?

  or under on the probability of the SEC approving a Bitcoin ETF this year? You have to listen to the entire conversation to find out. I'm psyched about this episode. And before we begin, I want to address a question that some of you might have, which is, why is bankless even covering the Bitcoin ETF? That's not very bankless of you, you might say. I disagree with that. And here's why. I think when people buy crypto assets, they buy into crypto values. Not all the way, not all at once, but a little bit at a time. This is just another step forward. Crypto ETFs, in my mind, are a gateway drug, a type of gateway drug. I don't think people will stop with just the Bitcoin ETF in their retirement account. I think that's the gateway to them setting up an exchange account, for instance,

• 1:51Ryan Sean Adams?

  and buying spot Bitcoin or spot Ether that way, which is the gateway to going full bankless and taking custody of their own keys. In order for people to care about crypto, they actually have to own crypto. And this is an easy way for people to own crypto in their retirement accounts. When we get more crypto ownership... We get more economic security and we get more people who care about crypto issues in their respective jurisdictions. We need a lot more people to care about crypto in the United States in order to turn the regulatory tide. There's one other thing I think we get from this episode, which is learning more about traditional finance. How is crypto supposed to eat traditional finance and disrupt it if we don't even understand how it works? Like, do you understand how ETFs work today? What backs them?

• 2:37Ryan Sean Adams?

  Why people love them? Why they're popular? I didn't. And that's where we start this episode with James. This is a college level course on ETFs from their birth in the early 90s to the Bitcoin spot ETF and the possibility of that today. I'm doing this episode solo today. David is off climbing mountains, but he'll be back soon and he'll certainly be back in time for an event that you should pay attention to. It's called Permissionless. This is the crypto conference to go to in 2023. If you only pick one, and I think you should pick one, the bear market conferences are the best conferences. You gotta come with David, myself, the rest of the bankless nation to Permissionless. It's happening in Austin, Texas, September 11th through the 13th.

• 3:21Ryan Sean Adams?

  So that's Texas, Austin, September 11th through the 13th. And we have an absolutely stacked agenda. We've got Eric Voorhees, who's talking. We've got Hester Pierce from the SEC Commission. We've got Stani from Ave. Go click the link in the show notes, get a ticket and come with us to Permissionless this year. All right, guys, it's time to go find out about this Bitcoin ETF. We'll be right back with James, but before we do, I want to thank the sponsors that made this episode possible, including Kraken, the number one crypto exchange I recommend to all of my friends and family. This is the way to get on boarded to crypto. Go create an account.

• 3:57David Hoffman?

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• 4:40David Hoffman?

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• 5:24David Hoffman?

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• 6:06David Hoffman?

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• 6:49Ryan Sean Adams?

  Bankless Nation, the question on our mind today is a Bitcoin ETF happening? We have an expert who can weigh in on this. James Saferd is a research analyst at Bloomberg. He's got one foot in crypto and the other foot in ETFs. He's currently a Bloomberg Intelligence ETF analyst, and he's here to drop some insight on the question I just opened with. When are we going to get that Bitcoin ETF? James, welcome to Bankless.

• 7:15Speaker 00

  Thanks for having me, Ryan. Happy to be here.

• 7:17Ryan Sean Adams?

  You know, we talk a lot about crypto on Bankless, of course. And so I think it's in some people, some listeners, they got their first exposure to finance by way of crypto. Actually, my co-host David Hoffman is very much like this. So I don't know if David's ever purchased an ETF in his life. And I think there's probably some Bankless listeners that fall into that camp, too. So could we start by going through some of the basics? What is an ETF? I think I know the acronym. Does that stand for Exchange Traded Fund? Is that correct? And what is this thing that we're talking about today?

• 7:52Speaker 00

  That is 100% correct. So it's Exchange Traded Fund. It's basically people, a lot of people have 401Ks, 403Bs, these types of plans, at least in the US. And usually what you're investing in is a mutual fund. And those have much longer tickers with an X at the end typically. But essentially, what that means is those funds are not traded. So you give money and at the end of the day, they put that money to work the next day for when your money comes in. And for mutual funds, for 401Ks and plans like that, it makes complete sense. It's easy. You're not usually super time commitment because you're just contributing on a regular basis. But an ETF is a traded vehicle. And basically, the real story here is that the ETFs were invented after the SEC wrote a report in 1987. There was this big crash.

• 8:37Speaker 00

  A lot of it had to do with futures and derivatives. And the SEC said, basically, they wish they had something that was more physically backed rather than derivatives or derivative of different assets. And basically, this guy Nate Most came up with the idea for what is now an ETF. And it comes off the idea of these things called commodity warehouse receipts. Those have been around forever. And the idea of commodity warehouse receipts, if you think about it this way, is like, say you had a bunch of gold or a bunch of barrels of oil or whatever, wheat, corn, you name it, right? And one thing that you used to be able to do is you would store that somewhere. And then the warehouse would... Charge some sort of fee and in return they give you pieces of paper that say you have this much exposure or it was a vault or gold. You would say you have this much gold and rather than moving that physical gold, those

• 9:21Speaker 00

  physical commodities around, you trade those pieces of paper. So those pieces of paper were a right to those things held in that warehouse. And that's where the idea of an ETF came about. And basically, the first one in the US was the S and P 500 and then basically those, instead of commodities being held in that warehouse, it's stocks or the S and P 500, the stocks that make up the S and P 500, held in by a custodian. So those stocks are held by somebody. And what that means is at all times, the key thing that makes an ETF work and why it's super efficient is because you can always access those underlying stocks. Or in the example, the commodities, you can always access those underlying commodities. So basically, those shares are a right to your ownership of the underlying asset.

• 10:05Speaker 00

  So in the S and P 500 ETF, you can always trade in shares of the ETF and get back the underlying stocks. In a potential Bitcoin ETF, it would be the same way. You could always trade in the shares of the ETF and get back Bitcoin or vice versa. You can always trade in Bitcoin and get back shares. And what that means is, we can get into this more, but like, one thing that I'm sure a lot of your viewers have heard about is GBTC, the Grayscale Bitcoin Trust. That operates more like what we, what in our world, we would call a closed-end fund. It's technically not one, but it means ETFs have that mechanism where you can create shares and redeem shares because always the underlying can be exchanged for the shares of the product, right? So in Grayscale's case, there's no way to access that underlying Bitcoin. I can't hand over GBTC shares and get back Bitcoin, which is what Grayscale is suing

• 10:48Speaker 00

  to do to try and get access to that mechanism so that you don't have a situation where the price of those shares is very different from the value of the underlying assets they hold. So when you have an ETF, that problem doesn't happen because you can always, at some point, if somebody thinks the price of the ETF is not in line with the underlying asset, you can buy those shares of the ETF or buy up the underlying asset and exchange them. It's called arbitrage. They're always the same thing. So basically, there's some trading costs, so there's minute differences there, but for the most part, you can always exchange shares for assets. And that's what's causing... A lot of the problems in different parts of the market. So the way to think about an ETF is if you're used to looking at stocks or even cryptos really, right? You know the supply. So for the most part Bitcoin's Bitcoin's a bad example since its supply is ever increasing.

• 11:33Speaker 00

  But if you look at a stock, typically the the supply of shares is relatively stable, right? You know what it is and what drives the price is that change in demand. So if you think about like two bars in a graph, basically what drives the price of most assets is the change in demand. Right? Obviously, supply impacts it as well. The benefit of ETFs is as demand changes, you can change supplies. You can add more shares to meet demand. And if demand drops, you can destroy shares to meet demand. So that way, the price and the value of the underlying assets, so the price of the fund, the price, the value of the underlying assets are always going to be very close. So that's the background of an ETF and why so many people view this as like the the key to the holy grail for crypto and bridge to TradFi.

• 12:18Ryan Sean Adams?

  You just opened up probably a thousand questions in my mind and you want to get to them. That last point that you mentioned, I want to draw an analogy for bankless listeners. So as the demand changes, you can increase the supply. USDC, you know, a stablecoin kind of works like that as well. Think of that, right? So how much USDC can be minted? Well, kind of pretty much as long as the US continues to give access to Coinbase and Circle to US bank accounts. It's kind of an unlimited supply. It's as much as as the market will demand and it sounds like ETFs work that way too. So a few things, just to recap. So this is a newish product, I guess, in the in the full scope of financial products. You said it sounds like it was invented maybe in the late 1980s, so it kind of took off.

• 13:03Speaker 00

  Ninety-three was the first one. So technically, I told you about that guy Nate Most.

• 13:08Ryan Sean Adams?

  Yeah.

• 13:08Speaker 00

  He actually went, the first ETF ever launched was technically in Canada a few years because the SEC took like three years to get comfortable with the idea.

• 13:15Ryan Sean Adams?

  No way, they've done this before?

• 13:17Speaker 00

  Yeah, so Canada did it first in like 91 after talking with Nate Most and these guys. So they got it done in like a year. And then we came along afterwards in the US and finally figured it out.

• 13:27Ryan Sean Adams?

  Okay.

• 13:27Speaker 00

  But yeah, so 93 was the first time and they're along the whole way. There's been people questioning the the structure, saying it was going to cause issues. And they've done nothing but prove themselves as an efficient. It's the way to think about it is it's a wrapper and it's a technology in a way. It's a democratizing technology in the way it's been used in the traditional finance space.

• 13:45Ryan Sean Adams?

  It's interesting that people would say that this would cause issues because it actually seems much simpler than the other kind of like price exposure mechanisms based on derivatives and that sort of thing. It's like because it's pretty simple. It's just a wrapper for underlying assets, right? So like, what can go wrong?

• 14:00Speaker 00

  Yeah, so we don't need to get too far into the weeds here, but essentially a lot of the people say like, if you're looking at bonds, so they all there's bond ETFs. They hold other assets that are less liquid than typical stocks. But so people like think you're adding liquidity. There's a lot of nuance here, but essentially what it comes down to is in the good times, an ETF can be way more liquid than the underlying because people don't have to go and access the underlying market to trade it, right? They can just use the ETF shares and sometimes it just trades back and forth. There's a lot of market makers that can handle that. But in times of stress, that like excess liquidity ETF offers is not going to be there. It's not magic. So basically, if the underlying market freezes up like happened in in March of 2020 during COVID, those they basically the ETFs don't aren't they're not magic.

• 14:45Speaker 00

  So if the underlying market is locked up, there's going to be issues with ETF. But with an ETF, you can always trade. So basically, like, yes, in the good times, there's more liquidity because the ETF is there, it's operating on exchange, there's market makers, there's always bids and asks. So if you think about a bond market, it's mostly over the counter traded, like literally some of it's like phone calls still like that's the way things are traded still. But like, basically what happens is like that the ETF will look like it's dislocated, but what really ends up happening is just the underlying market is out of whack. There's not enough liquidity, nobody's willing to buy or sell, or there's just mismatch of what's going on. So there's plenty of examples of things like that that happened in March of 2020. But all the ETFs in the US and around the world have held up extremely well and were Perfect beacons of efficiency during that time.

• 15:30Speaker 00

  They really like proved their metal, even some of their most ardent critics even had to come step back and admit like they did extremely well in handling the issues.

• 15:37Ryan Sean Adams?

  You sound like an ETF bull, my friend. Are you like, do you like this asset?

• 15:42Speaker 00

  Yeah, yeah, yeah. I mean, one of the things we've always said is like, we could, we're going to get into a lot of this, but like if the SEC had approved this thing, honestly, all the people in these markets, these market makers that operate in this market, like they're not going to let some of the fishy stuff that has been going on in crypto, like they're going to go to the exchanges that are operating cleanly. They're not going to get involved in a lot of the other things that plenty of people have been involved in in this space. So if we do get one, it's going to clean things up, it's going to drive down trading costs. ETFs trade like penny wide, very, very tight, so there's no transaction fees on most brokerage platforms. The, and then if you look at most brokerage platforms, they don't really tell you what the bid ask spread is. You can kind of back into it by looking at like what the trading looks like on Coinbase or Binance or any of those things, right?

• 16:26Speaker 00

  But you, there is a spread, so you know you're paying a fee typically to do the trade. And then there's also a spread between what the bid and the ask is. And like usually market makers are making that money. So there's a lot of money to be made in offering markets in the crypto markets. And when an ETF comes about, it's going to get way tighter. So you'll see a lot of people who trade Bitcoin specifically in crypto markets to learn to start to use the ETF. And vice versa, people from the ETF world will probably go to the underlying crypto markets and make things more efficient and more liquid. Because you have the behemoths of the US trading and financial system come in.

• 17:00Ryan Sean Adams?

  I think I was first exposed to kind of the ETF concept just, just, you know, earlier in my sort of, you know, adulthood and early investing career through like Vanguard Group and John Bogle, like the, the idea that, hey, you know what, you don't have to like outperform the market, you just buy, buy an index fund, buy a low cost index fund of some sort. And you'll outperform, you know, like 80% of active traders out there. And so it's always been a good concept. And of course you want to keep your management fees low. And my understanding is a lot of ETFs can, can somewhat provide that. So that's what, is that? Reason, I mean, I want to ask you, who are the holders of these ETFs? Is it, is it like kind of large pension funds?

• 17:44Ryan Sean Adams?

  Is it sort of big money capital pools? Or is it mainly like individual Americans? Like retail investors with a fidelity account or Schwab account with their 401k money? As, as you alluded to earlier, who are the net buyers of these things?

• 17:59Speaker 00

  So really, it's, that's the beauty of the ETF. It's everyone. So in the old mutual fund world, what you're used to looking at in your 401k or whatever it might be, if you're a US listener.

• 18:09Speaker 00

  There are multiple share classes. So like you need to invest a certain amount of money to get access to this lower fee. Because you get these other things, right? Economies of scale, whatever. So they have all these different share classes, A, B, C, I for institutional. There's different things, right? But what the ETF did is it democratized it all. So everyone's playing in the same pool. So if your grandma wants to buy an ETF, she's buying the same ETF as Citadel, if they're looking to trade that, or some other big hedge fund or pension or PE fund. So really, everyone is involved in this. And that's the beauty of the ETF ecosystem, because it incorporates everyone. So you have all the liquidity from the big TradFi players who are looking to make short-term trades alongside the mom and pops you were talking about, who some of them might be looking to do short-term trades.

• 18:53Speaker 00

  A lot of them are just looking to buy and hold, like you were talking about, low-cost ETFs and hold them for a very long time. They can get exposure. And part of the reason they can be so cheap is because so many people are using them, so many different types of people are using them.

• 19:04Ryan Sean Adams?

  How big is the ETF market, James? In terms of, you know, assets inside of ETFs? Are we talking hundreds of billions? Are we getting into the trillions here?

• 19:13Speaker 00

  Yeah, no, we're definitely a trillion. So like, we're right around 10 trillion globally, but most of that is in the US. I believe we have, I'm looking it up right now. I think we have seven. I think we're right around seven trillion in the US alone. I'll tell you the exact number, 7.25 trillion.

• 19:29Ryan Sean Adams?

  Where do you find that info? Is that like a Bloomberg terminal?

• 19:32Speaker 00

  Yeah, that's a Bloomberg function. But I don't, I probably vetify ETF.com, things like that will probably have that type of information. But the global market's like over 10 as well. But that you got to remember that includes like it holds stocks, there's going to hold bonds, it'll hold treasuries, commodities, everything you can think of has basically been thrown into an ETF wrapper. Even even cryptos, just not in the US.

• 19:55Ryan Sean Adams?

  What? Right, right. We'll get, we'll get there to crypto. You know, we're building here, building our understanding here. Okay, so $10 trillion worldwide. How much of that would you guess is kind of like retail mom and pops versus like the big guys?

• 20:11Speaker 00

  It's hard. So a lot of the, so if you look at the way the US market works, like for the most part, a lot of the money is via advisors and platforms. So we can't see exactly how much is retail, but a lot of people will use advisors. So roughly, we estimate right now that US advisors, the people that are helping, like if you went to somebody to help you manage your, your money, right? They, they control about 30 trillion in assets and they love ETFs, specifically independent advisors. So the way the old mutual funds I keep talking about used to be sold is there was basically a kickback. So if you put your client into this fund, you've got some money out of it and possibly into perpetuity and different things like that. So basically mutual funds were sold by people that were wholesalers and trying to get advisors to put their clients in those funds because they get more money.

• 20:55Speaker 00

  Everyone, basically the money gets, is kicked back all over the place. ETFs, it's not, some of that kind of happens, but it's not directly the case. It's more that ETFs are bought. So advisors are huge owners of this. Hedge funds like to use these things. Institutions are using these things to park money for the most part because they're super low cost. So retail, we, we don't have a like clear breakdown on that front, but it's a decent chunk. I would say at least 30%, probably more, just because a lot of it is buy and hold. But there's also plenty of ETFs that are not built to be bought and held. Some of them are built to be traded. And like I said, the SEC came about this because they wanted an alternative to futures and different things that were happening. So they wanted people to be able to use these and trade.

• 21:39Speaker 00

  And there are some ETFs out there like the S and P 500 from SPY and plenty of others that we refer to as like pseudo futures. Where institutions are using them for liquidity. So like they had, they got a certain amount of money. They can't put it to work fully in exactly what they want to. Um. So they're going to throw it into an ETF. Or like you even have mutual funds, some of those guys are talking about that are picking bonds, picking stocks. And what they'll do is they'll pick, they'll hold an ETF in like 3% of their portfolio, 4% of their portfolio. If they're a large cap manager, they'll hold a large cap equity ETF. If they're a high yield bond manager, they'll hold a high yield corporate bond ETF. And basically they just use that like sleeve, almost if you think about it as a moat around their portfolio. They're picking the bonds they think are going to outperform the most, give them the best, whatever characteristics they're looking for.

• 22:22Speaker 00

  And then rather than holding cash, which is what they did historically, which doesn't give them exposure to the market. It's called cash drag. Um. Actually, in the last couple of years, it might not have been that bad with the way rates have gone. But um. Essentially what they do is they want to have exposure to the market, but they know that ETFs are super liquid. So I keep going back, like everyone uses this, people across the traditional financial ecosystem are using ETFs in many different ways.

• 22:45Ryan Sean Adams?

  Yeah, and I'm, I'm looking at kind of a list of different ETFs and you probably have a better list in your head. But you know, you basically buy any collection, any set of assets in an ETF. So we mentioned, you know, the SPY, it's a S and P 500 index, if you want general stock index in the US. Uh, you know, there's a NASDAQ, we've got equity, uh, uh, precious metals. So you can buy a gold ETF. Um. Sure you could buy silver. I'm sure there's all sorts of other commodities you can buy.

• 23:11Speaker 00

  Platinum, palladium, you name it.

• 23:12Ryan Sean Adams?

  Yeah, I know. I've seen, uh, I've seen, um, you know, certainly, yeah, oil ETFs as well. If you're kind of want to go down the commodity stack, real estate ETFs of, of various types. I don't know if it gets as specific as like, let's say I want to bet on the real estate market in California. Maybe that's a bit too specific, but you know, maybe they have something like that.

• 23:32Speaker 00

  Actually, they do have some stuff. They have muni bonds that focus on, they have muni bonds that hold focus on that. So you could bet on the California muni market. Um. But also like the, the, basically there are those real estate ones. They don't hold physical real estate. They own REITs with the real estate investment trusts, which have been all of the news lately because public REITs are trading very differently. From private REITs, but ETFs will wrap those things as well and hold them. So give you exposure. So like maybe one REIT specializes in like the southwest United States. So they'll have California, Arizona, whatever. And so if that's what you're after, you could just buy the REIT that's kind of similar to like buying a stock and these will give you like, here's the US market or here's, here's a REIT for like multifamily homes or stuff like that. There's, it's becoming sliced and diced in different ways. There are REITs out there that focus specifically on like retail

• 24:16Speaker 00

  warehouses or data warehouses that hold all these servers. So like they own the real estate and people rent those warehouses to put all their servers in them. And that, that has been one of the best performing areas of the REIT market. So like there's ETFs that specifically target that. So yeah, there's ETFs that basically target.

• 24:31Ryan Sean Adams?

  Money markets? Can you just buy like dollars in an ETF or something?

• 24:35Speaker 00

  Yeah, there's actually, yeah. So there's some dollar ETFs that like basically they, the way those work though, isn't like they're just holding dollars. There are money market fund ETFs elsewhere. There's money market funds, obviously that are ETFs. For the most part, people just use like treasury ETFs if they're looking for that type of exposure. Because it just holds treasuries, the treasury bills specifically, you can look at T bill ETFs. But yeah, there are some money market ETFs in Canada, just not in the US yet. But again, you get those T bill type ETFs and they're, they give you a very similar exposure. Otherwise, there's ones that basically you can bet on the direction of the US dollar. So it'll go like long US dollar futures and then shorts a basket of other currency futures. So it'll short the grapefruit pound, the Japanese yen,

• 25:19Speaker 00

  the euro, Brazilian real, like you name it. So it'll tell you what it's going long and what's going short. And that's how you could bet like tactically on where the dollar is going.

• 25:30Ryan Sean Adams?

  All right. For CryptoNad, it's Chris, crypto listeners, TradFi, you thought of this idea of tokenization before crypto did. This looks a lot like tokenization of different assets, doesn't it? Okay. So this other point that you raised, which is like the thing that's different about ETFs is you can always access the underlying assets. I think that will come into play when we talk a little bit about crypto. Again, we're still building to the crypto conversation, James, but this idea of you can always access the underlying assets. I want to get into the details of that. Right? So for something like stocks, it's weird. It's interesting because like when we say the underlying assets, what are we talking about actually? Like a piece of paper, like legal documents somewhere?

• 26:11Ryan Sean Adams?

  I want to contrast that from a commodity like gold or like oil, for example, where the underlying asset at the root of it is much more clear. The underlying asset is like a barrel of oil somewhere in a warehouse, you know, you hope.

• 26:25Speaker 00

  So actually, so for oil, it's you mentioned, I mean, I was debating saying this before, but like oil, one of the we like to call some ETFs are like wolves in sheep's clothing because they look like they're simple. There are no ETFs that hold physical oil because you can't really store it. It costs too much money. There's a multitude of reasons. There are some people like I know some people who are thinking they want to give it a try. But really all the

• 26:45Ryan Sean Adams?

  Warehouse oil?

• 26:46Speaker 00

  Yeah.

• 26:46Ryan Sean Adams?

  Actual warehouse oil?

• 26:47Speaker 00

  Yeah, they want, but the only way to really get the oil ETFs work is they they roll, they they invest in futures. They invest in derivatives, which is how a lot of commodity ETFs also work, except for those precious metal ones you were talking about. And there are some others, but

• 27:00Ryan Sean Adams?

  All right. Well, so let's talk about those. So first, let's talk about maybe the precious metal ones. So if I buy a gold ETF of some sort, where is the actual gold bar, you know, stored? And can I actually like, can I actually redeem that for gold? And you said, you said it's always able to access the underlying assets. I want to convert my my gold ETF into like, you know, a physical bar of gold. Am I actually able to do that? Or there's some intermediaries in between here?

• 27:28Speaker 00

  Yeah. So this is going to get in the weeds of like market mechanics of ETFs a little bit. So I'll do, I'll do my best to keep it simple. But essentially, the way to think about it is there are, there's a few people involved in a creation redemption process. So usually it's what we refer to as a market maker. Think of those as the big trading firms, the citadels, if the people out there have heard of, obviously, people have heard of Jane Street. If you're listening to your show, Virtu, those are, they are big ETF market makers. They're they're pairing trades and they will access the underlying if they have to make a trade happen. Or it's more efficient to do it that way than just sourcing the the actual shares on the exchange. So I keep saying at any point, you can access the underlying market to create or redeem shares. These market makers know that and They know what's more efficient. Is it more efficient to just source the actual ETF shares?

• 28:13Speaker 00

  Or is it more efficient to go to the underlying market and make this happen? Sometimes the buy is so big that there's not enough shares to be demanded. So they have to go to the underlying market to make it. That might be a little more costly, or it could be more efficient than buying those that many shares in the market. Like it's the same thing as like a big whale comes to a crypto market and buys a ton of Bitcoin. You're going to blow through the price, but if you could theoretically figure out a way to buy Bitcoin more efficiently, that's how you would do it. So, but the way this works is those are the market makers. There's also something called an authorized participant, which has been in the grayscale situation as well. And the APs are the people that facilitate that creation. These are the huge banks with massive balance sheets. Think Bank of America, Goldman, there's a whole bunch of APs out there, Merrill Lynch.

• 28:55Speaker 00

  They'll basically like, they are the people that facilitate that creation of shares and redemption of shares that work with the issuers that own these ETFs. Now, for the most part, it's these market makers and these APs that are making sure that the market is efficient in the underlying. If you need to tap the underlying market, whether it's to create ETF shares or destroy ETF shares, they're the ones doing it. So the market makers are constantly trading every day. They're dealing with the APs, the APs are dealing with the issuers. In some instances, not to get too wonky, the market makers can be an AP as well. But like essentially, it's these people, these institutions that have specific licenses to operate in whatever markets that can operate in those markets and make the creations and redemptions. That said, that's the way most things work because for the most part, you need like 100,000 shares of the ETF to do a creation and redemption, right?

• 29:40Speaker 00

  So these are big, so like if you, that was what make like you or I, or actually, I don't know, maybe you're a whale. But like if you wanted to buy an ETF, it's these people on the backend that are batching the entire market together to make sure it's operating efficiently. There's very low cost to trade. All of those things, they're making sure that the ETFs are created or destroyed for demand to meet supply. Now that said, there are ETFs out there like O, U, and Z. For gold ETFs, this is a gold ETF and basically. The creation and redemptions are way lower, the minimums. So like, there is going to be a cost. If you owned enough, you could get gold delivered to your house. But that's like a special exemption that they went through to get to happen. But also, like, most ETFs

• 30:22Speaker 00

  hold their gold in vaults in London. There is one that holds it in Switzerland. There is an ETF that used to hold it at the Perth Mint in Australia. So, there's like, all these different ways you can do it. Everyone has different custodians, but gold is like a unique subset. So some people, like, the true gold bugs are like, I don't trust anyone to hold my gold. There's a lot of issues where people are worried about paper, paper gold with futures. But for the most part, the gold has to be stored in the vault. And every share of the ETF should be backed by physical gold. Now, sometimes the trading is literally like, some guy in London goes into the vault for the Spyder GLD, and takes gold out and moves it to the vault down the street for like, some other trading firm,

• 31:02Speaker 00

  or gold trading firm, or whatever, what may have you. But like, onto our view, like, that's gold leaving the trust that we were interested in, or the one we were looking at, and going into a different one, right? That's a creation and redemption. So.

• 31:17Ryan Sean Adams?

  Hopefully, they're using a Brink's truck, or some, you know, security apparatus for that transfer.

• 31:22Speaker 00

  No, and literally, sometimes it's the same building. Like, it's just literally a different, like, it's moving it from one vault to another.

• 31:29Ryan Sean Adams?

  And if they didn't, if they didn't move it, would we really know?

• 31:32Speaker 00

  Yeah, who knows?

• 31:33Ryan Sean Adams?

  That's an interesting question.

• 31:34Speaker 00

  Okay, so, there is like auditing and stuff. And in more than the, I'd like to think it's better than the auditing we've seen in the.

• 31:40Ryan Sean Adams?

  Well, it couldn't, it couldn't get worse with, with respect to FTX and the custody. But what's interesting is, like, we have, you know, as with crypto, we have, like, with the gold example, we have an actual bearer asset, which is like, when you have it, like, it's kind of valuable. Like, that's the thing. Possession is the asset itself. It's not like equity, it's not a legal agreement, or something like that, that's enforced by some sort of, you know, legal code. It is actual, physical possession. But there's a clean separation of responsibilities in kind of ETFs. You mentioned the APs, you mentioned the, kind of the market makers. And then, a third group, you said, is kind of. The custody providers, whether that's a, you know, somewhere in Perth in Australia,

• 32:24Ryan Sean Adams?

  or that's somewhere, some vault in, in London, these are not the same entities, right? Like, the vault is not, the AP is not the market maker. Generally, these are, there's some clear division of responsibilities. Is that approximately right?

• 32:39Speaker 00

  That is correct, which is one of the things that the SEC is going after Coinbase for in this lawsuit. They want them to break up their brokerage, their custody, all those things into separate legal entities.

• 32:47Ryan Sean Adams?

  Cool. You know, I, you know, I appreciate Coinbase, or sorry, the SEC is like, asking for these things, but it's also not providing a clear way to actually do it, which is this weird scenario we're in. Okay, but so if I own a gold ETF, it's pretty much like, it's pretty rare to own an ETF where I could actually get the gold bar delivered to my house. Maybe there's kind of one of those.

• 33:11Speaker 00

  Well, well, so for the average person, if you had millions of dollars in there, you could absolutely get the gold, right? Like, you could, like, it would not be a problem. But like, for the average person who's not going to have millions of dollars in this ETF.

• 33:23Ryan Sean Adams?

  I don't even know, with gold, it's so weird, though. It's like, let's say I had millions of dollars of gold, like, what, do I just show up with my, like, minivan or something, like, load up the bag?

• 33:30Speaker 00

  Yes, so like, Canada specifically does, they have ETFs that do this as well. The, the Canadian Royal Mint has, had, they're actually, I don't even think they're technically ETFs, but they operate like ETFs.

• 33:40Ryan Sean Adams?

  Yeah.

• 33:42Speaker 00

  You can do the same thing, right? You, you can get it delivered to your house, essentially. Like, I, I don't know exactly what it looks like, but I imagine, like, basically, a Brink truck would show up. But I'm sure if you're moving enough money, it's not, you're not going to have it delivered to your, your house.

• 33:57Ryan Sean Adams?

  Okay.

• 33:57Speaker 00

  But yeah, you could, but Bitcoin, obviously, is different because of the way it's transmitted and stored, and we can get into that.

• 34:03Ryan Sean Adams?

  And to be clear, who is responsible for approving ETFs? Who is kind of the gatekeeper? Is this somebody in government? Is this always the SEC? You have to go not?

• 34:11Speaker 00

  It's always the SEC.

• 34:11Ryan Sean Adams?

  You have to register?

• 34:12Speaker 00

  There are different divisions in the SEC that make these decisions on different ETFs, but it's always the SEC. The one that we're specifically, these issuers are dealing with right now, and the one that has been the traditional holdup is a place called the Division of Markets and Trading. But it's really the SEC, and it comes down to Gary Gensler. He's the overarching head, if, basically, they do what he says, for the most part.

• 34:34Ryan Sean Adams?

  So Gary, Gary Gensler, or the, the current, whatever, whoever the current chair of the SEC is, basically emperor king of, like, you know, giving the, this final sign-off for an ETF. Is that?

• 34:46Speaker 00

  Yeah, pretty much. But the thing is here, like, the way that you might have seen, like, notice about like, some of these Republican senators who are pro crypto, trying to change the way the SEC is set up. But basically, there's, there's four commissioners, and then also a chairman. And usually, it's two Republicans, two Democrats. That's the way it works. So then the chairman is the one that has like, the overriding power, because typically, it's two versus two. So theoretically, if you were, if somebody was able to swing, which I wrote about in one of my notes, one of these commissioners, basically, that that could change things as well, because like, Gary would be outvoted. But the Hester Purse, which I'm sure anyone listening knows who that is, Crypto Mom, she has dissented on multiple ETF denials in the past. Her most recent, the most recent dissent came

• 35:30Speaker 00

  this year. And for the first time, the new commissioner joined her in her dissent of the SEC's decision to deny Van Eck. And I don't, I think it was Van Eck, this most recent one. But whoever it was, they, they, they wrote a dissent letter, kind of like you would see from like, the, the Supreme Court dissent from judges that disagree. So if they get one of those other commissioners to agree with them, one of those two Dems against Gary, then all of a sudden, this thing is likely to get approved. So it's not as cut and dry as like, Gensler is fully in charge, but like, 95% chance that Gensler is the one making decisions here. Because, and you got to remember, he reports to the Democratic Party, right? Think Elizabeth Warren, that there's a lot of jokes about her, like, getting orders from Elizabeth Warren. But there really is a lot of ties

• 36:12Speaker 00

  to that side of the Democratic Party. And what's going on here?

• 36:17Ryan Sean Adams?

  But let's draw that out, because shouldn't the ETF process, or maybe I'm asking a question of historically, how has it been? So who are the issuers of ETFs? Who are filing and asking for the SEC's, you know, permission to do this? Is this a small collection of very large companies? Or is it pretty, you know, distributed and diverse? And what's the process? I would assume that we've had a process in place for regulators to be somewhat neutral, and to have kind of guidelines and rules. But they can't, I would assume, they can't necessarily pick winners or losers, right? Like, I have friends at BlackRock versus like, you know, I hate Goldman, or whatever, and I'm going to choose one issuer

• 37:00Ryan Sean Adams?

  over the other. What's this approval process been like historically for traditional finance?

• 37:05Speaker 00

  So let's just say that they can do that and they do do that and I'll go into why they do that, but they basically can make their decision and back into it legally. But wait, they can be biased however they want? Technically, they shouldn't be, but you would have to prove it and Grayscale is trying to prove that in court right now, right? But for the most part, they have been biased in some of the things that they're doing. And it's definitely coming down from what the Democratic side of the ticket wants to have happen. So it's already been politicized prior to crypto, you would say? Is this like kind of like a secret on the inside? Yeah, so I would say like the Winklevoss twins tried to do this first in 2013, right? They were small, they got denied, they tried again, they ended up getting denied again

• 37:50Speaker 00

  in 2018. That was the first time that Hester Purce dissented on the decision. I would argue that the denial then actually kind of made sense because the way that the Winklevoss application was constructed. We don't need to get into the weeds on that, but it's a lot of different issuers. So I'm looking now, I have 40 different filings for spot ETFs and 37 different filings for futures ETFs. What do you mean you have them? You're just seeing them in some queue in a database? I just looked at a list. Yeah, I have a list of like, it's literally an Excel spreadsheet of where I track them and I can look at the links and see what the SEC is saying about them and all the above. I try to track everything that's going on. It's basically, so when I first came to BI, I was covering commodities and we added crypto and I had already owned

• 38:33Speaker 00

  crypto personally and was interested in it personally and I reported to Mike McGowan, who's a commodities analyst who covers crypto heavily as a strategist. And then I reported to Eric Balchunas, who is my boss, who covers ETFs. And eventually I got moved up and I'm specifically in the ETF side. But that experience of my personal experience covering crypto from a strategy side of point of view and having all my ETF knowledge made this like ETF potential fund crypto stuff was like my squarely in my wheelhouse. So that's why like I was tracking this stuff already on my own and it was made a complete no brainer to start writing about it. So how many on those lists are crypto related in your queue? Do you say it was like 40 or so a total? So a lot of them have been denied. There's only eight that are currently active for

• 39:15Speaker 00

  on the spot side. But if you look at all the filings, you're at, let me see. Yeah, you're at 40 plus 37. You're at 77 total filings and like 30 issuers.

• 39:28Ryan Sean Adams?

  How many filings so far, if you include the ones that have been denied and are active? And these are Bitcoin ETF filings, to be clear, right?

• 39:36Speaker 00

  Not just Bitcoin, they're crypto. Some of them is ETH futures ETF. A couple of them are ETH spot, which had no shot of ever getting approved. But I guess people figured they'd try. But yes, 77 different filings. And there's some others that you could argue that are kind of like crypto ETFs, but they're a little, they might hold a little bit of futures, but they also hold some other stuff. So, but yes, 77 different ETFs have either been approved, denied, or are kind of like in limbo right now, waiting to see if they get approved.

• 40:07Ryan Sean Adams?

  Well, jumping back to that question about the neutrality of kind of a regulator, like, how are they supposed to go through the process of approving an issuer? But, and then also contrast that with how it happens practically for, like, for requests outside of crypto?

• 40:25Speaker 00

  Yeah, so the SEC is supposed to be a disclosure regulator. They are not just a merit regulator. So there are some countries that have merit regulators that decide whether an investment has any merit and should be allowed. The SEC's job is to do, basically, have they disclosed all the risks? They're not saying whether or not something is a good or bad investment.

• 40:43Ryan Sean Adams?

  And that's stated in the law that is around the formation of the SEC.

• 40:48Speaker 00

  Yeah, yeah, exactly. So Hester has written dissent saying we're getting dangerously close to being a merit regulator, which is a key term that like, I think a lot of people don't realize how strong that statement is. But they're really doing a really good job of toeing that line. And I would argue they've kind of crossed it, but it's more of a gray zone than like a black and white. They're saying this is a bad investment, which is not something they should do.

• 41:10Ryan Sean Adams?

  Okay, so they're supposed to be basically a neutral regulator. They're not supposed to make merit-based decisions. And what that means effectively is, you know, they may personally think that gold is just a, you know, a shitcoin asset or whatever. It's like completely useless. They might hate it. But they cannot, you know, have that determination in their rulings, right? They have to be neutral with respect to what they decide to allow retail ETF investors, not all ETF investors exposure to or not. And that's different than some other regulatory apparatuses outside of the United States. Is that approximately correct?

• 41:49Speaker 00

  Yeah, so the way to think about it is their job is to prevent fraud, manipulation, anybody getting taken advantage of. That's what they're there to do. They want to make sure that's not happening. And honestly, some of the stuff that they've done that has been questionable has probably saved some people from getting rugged that's happened in crypto space. But I would also make the argument that they should have been going after these actors before anything ever happened. But that's a whole different discussion. But the way that the process works, so there's two ways that this works. So basically, this all goes back to the 1933 Act and the 1940 Act, which are just laws about the US financial markets, securities markets. We don't need to get too in the weeds there.

• 42:26Ryan Sean Adams?

  This is where the SEC was formed. There wasn't an SEC previous to this, right?

• 42:30Speaker 00

  Yeah, I, yes. So essentially, the way that it initially worked was like everyone had to go through this 19B4 process, which is essentially where what we're doing right now with these spot applications. And what that means is there, it's exchanges that apply to the SEC for a proposal for a rule change. And at the end of the day, the rule change is to be able to list a spot Bitcoin ETF, right? And those are specifically for ETFs that are under the 1933 Act. In 2019, they made this rule called an ETF rule for anything that's under the 1940 Act. 1940 Act, think things that hold securities that are diversified. There's more requirements on those types of products.

• 43:13Speaker 00

  They made the rule because before this, everyone had to file a 19B4 to launch an ETF, right? If it was remotely new. Now, under the 40 Act, it's just a more simple process. You apply and you have, after 75 days, the prospectus or the application to launch a fund goes live and you can start trading it. If in those 75 days, the SEC can say, no, no good, you can't launch, and then it's bounced. But it's not the same process of the 19B4 process. Futures ETFs, the first one that came out, were launched under that process because the SEC didn't have to, trading markets didn't have to OK anything that happens with those applications because they're 1940 Act's products. Because the futures ETFs, they hold treasuries, and you can argue that holding treasuries in futures is diversified portfolio, and therefore they can fit under the 40 Act, which

• 43:57Speaker 00

  is the same reason that all these futures ETFs, they actually all got denied in June because they applied and the SEC within a week was like, no, take them back. The 19B4 process is the process that we're going to spend most of the time talking about, which is what spot Bitcoin ETFs have to go through. And that process, like I said, is for the proposal of a rule change.

• 44:14Ryan Sean Adams?

  Can you define that term, spot Bitcoin ETF? Spot Bitcoin, what's the significance of saying spot Bitcoin versus just Bitcoin ETF?

• 44:24Speaker 00

  Yeah, so we have Bitcoin futures ETFs, which like a futures ETF typically, the way it works is most of them hold like the front month futures contracts. So a futures contract basically means you entered agreement to either buy or sell Bitcoin at the end of a month on a given date. And you can trade that right to do that, or the the ability to do that via futures contracts. But the problem with that is that, like I said, it's every month. So right now, if you're holding a front month futures contract for Bitcoin, you're going to have to sell it towards the end of July and then buy the August contract, right? And typically, the way these markets work, they work in like where they're in contango. So the July contract is maybe priced here, and then the August contract might be priced just a little bit above. Sometimes it can get steeper or not, but that means you're selling low and buying high, and it eats away at your return.

• 45:09Speaker 00

  So this is constant churning of holding things, of holding these futures can be bad detrimental long-term returns. That said, these Bitcoin futures ETFs that have been in the market have done very well. Historically, they, if they had launched a few years ago, they would have vastly underperformed the spot market or physical market, as you can also call it. But it's really just the futures market versus the spot market. And the holy grail here would be to have a physically backed spot Bitcoin ETF, meaning the Bitcoin is stored in cold storage somewhere, and you have the shares of the ETF are a right to the underlying asset, in this case, spot Bitcoin, whereas in the futures ETFs that the SEC has approved, you have a right to those futures contracts.

• 45:49Ryan Sean Adams?

  So we want spot Bitcoin because it's just a much better user experience, right? I can't imagine if I was purchasing sort of a Bitcoin ETF in my Fidelity account as a retail user, and I'm trying to deal with like selling at the end of the month to buy the kind of the next month, and just what terrible user experience compare.

• 46:06Speaker 00

  Yeah, so for the ETF, you don't have, the ETF does that for you. So it does that for you, so you can just hold it. So the, but that rolling is the problem, right? And it's not actually holding spot Bitcoin, it's it's paper exposure, it's derivative exposure.

• 46:17Ryan Sean Adams?

  Okay.

• 46:18Speaker 00

  So a lot of people prefer not to handle that. So we talked about oil ETFs before. Sometimes those things can go into massive contango where like the next contract is super expensive, or backwardation, which is where the current contract is more expensive than the next one. So I don't know, some of you guys probably remember when oil went negative in 2020. That caused a lot of problem for these oil ETFs. But because, like I said, they all hold futures to get their exposure.

• 46:43Ryan Sean Adams?

  So if I'm recalling correctly, and you might remember the full history, so correct me if I'm wrong here, James, but I think when Gensler took over, that was when maybe the Bitcoin Futures ETF was approved somewhere around there, or am I wrong with that?

• 46:57Speaker 00

  Yeah, so he was already in charge. He took over after the Ripple lawsuit had been filed, but so that's what most people associate with him, and after Coinbase went, was like approved to go public. But he is the reason that we have futures ETFs. He gave a speech in late July

• 47:14Ryan Sean Adams?

  Gensler was?

• 47:16Speaker 00

  2021, and this is not verbatim, but he essentially said, "They had denied all futures ETFs up to this point." And at the end of the speech, he was talking about a little bit of crypto, and he said, "We look forward to applications for Bitcoin Futures ETFs filed under the 1940 Act." That one line in like a relatively longish speech, and then like everyone filed for a futures Bitcoin ETF, and sure enough, we got one approved in November.

• 47:39Ryan Sean Adams?

  We also have an ETH one too, right? An Ether one?

• 47:41Speaker 00

  No, we don't have any.

• 47:42Ryan Sean Adams?

  We don't, okay.

• 47:43Speaker 00

  Yeah, so they've applied, but they haven't been approved. So the SEC will not approve Ethereum Futures ETFs. Largely, Gensler, the one thing he will admit is a security, is not a security, is their coin, and he won't say the same now for Ethereum, which has been covered extensively. So I don't think he's going to allow those things anytime soon.

• 48:00Ryan Sean Adams?

  Okay.

• 48:01Speaker 00

  But because of that statement, and because of us talking with the people, is why in September or October of 2021, why we were so bullish on the fact that we were going to get a launch. And we actually were very different from a lot of our counterparts in the TradFi space, saying that this launch was going to happen, and most people were just banking on history and what the SEC has typically done, and saying no shot that this thing gets approved. And that's where we made a name for ourselves, I guess, honestly, on that front.

• 48:32Ryan Sean Adams?

  So why is Gensler in favor of kind of the Futures Bitcoin ETF style and not the Spot Bitcoin ETF? Like, what's the big deal, man?

• 48:41Speaker 00

  So I could tell you his argument.

• 48:41Ryan Sean Adams?

  What's the difference?

• 48:42Speaker 00

  Yeah, his argument is that they're CME futures, so they are covered by the CFTC. It's a regulated market. There is not going to be any manipulation of those futures contracts. That's what they would say, but the real fact of the matter is the pricing of the futures markets are dictated by something called the Bitcoin reference rate. And the Bitcoin reference rate is based off of a bunch of spot markets, including Coinbase, Kraken, and a few other Gemini, some others. So it's literally the price of those futures contracts is determined by an aggregate of the spot market value of Bitcoin.

• 49:15Ryan Sean Adams?

  Okay, well, Gary's a smart guy. I mean, he surely knows what you just said, right? So that's what he said. What do you think the real reason is? Do you care to speculate?

• 49:24Speaker 00

  I don't know why he, I think, I think the problem is they couldn't deny, they realized they were going to run into issues with the fact that the CFTC had approved these things and let them list. They are not making an argument that Bitcoin is security and basically saying that you can't launch these ETFs. First of all, the, like I said, it goes under a different process. It didn't go through a division of trading in markets. So these things kind of got a little bit of a green light because they didn't have to go through the same process than 19 before. So yeah, Gensler kind of gave that to the crypto community and it's what's biting him now. So ironically, there were other ETFs that were filed before Gensler made that speech. And this 19 before process takes 240 days. Basically, you file, the SEC can bounce it back to you for changes and then you can

• 50:09Speaker 00

  refile. But essentially, it starts a clock and the clock goes 45 days and you have to approve, delay, deny, 45 days, 90 days. And then at the end of 60 days after that, you either have to approve or deny. There is no more delaying. And there was an application from a company that is a commodities ETF provider, Tukram, that had filed before Gensler gave that speech for a 33 act one that goes through this 19 before process. And I wrote about this six months before it happened, but I said, this is putting the SEC in an absurd place to be. Like they approved these futures ETFs under the 40 act. And now we have 33 act applications that are fundamentally very, there's very little difference between the two of them. And the SEC is going to have to decide how hard they're going to

• 50:51Speaker 00

  stay on this 19 before process in approving them versus not approving them. And what they did is they approved this ETF and the argument they made. So one of the reasons why all ETFs have been denied is because there is No surveillance of an underlying market and they specifically say they want surveillance of surveillance sharing agreements, or they want a regulated spot market of significant size. And the two keywords there are regulated market and significant size. And the way that they got around those, this is where I said they can kind of back into what they want. The way they got around those requirements for the CME futures market. Cause if you talk to somebody in crypto, they would tell you there's billions of dollars trading in futures markets in Europe and on these exchanges and what have you. But specifically regulated crypto, regulated futures markets.

• 51:34Speaker 00

  The SEC basically said that it was a regulated market of significant size with respect to itself. So the CME futures market is a regulated market of significant size because it's a market of significant size. Cause the entire market they were looking at was nothing but the CME futures market. So like they can kind of like make, they can kind of back into whatever reasoning. That's what I kind of hinted at before. So that's a good example of like what the SEC will do just to make sure they can do things the way that they want to. And that, and then application, they spent pages upon pages explaining why they were going to prove that futures ETF and still not allow spot ETFs. And then a couple of months later, we got the grayscale denial, which we also fully expected and grayscale has sued. And now that's where we are.

• 52:17Ryan Sean Adams?

  Guys, I think we're going to get to the crypto part of this conversation all in on whether we're going to get a Bitcoin ETF anytime soon. I've got a lot more questions for James, but before we do, I want to thank the sponsors that made this episode possible, including Metamask and their portfolio application. If you haven't looked at your Metamask portfolio, go check out your crypto wallet right now. Download Metamask and load it up. Here they are.

• 52:42David Hoffman?

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• 55:10Ryan Sean Adams?

  Okay, you mentioned that the SEC can basically back into whatever they want, and it seems like they're having trouble maybe keeping their story straight with all the different things they've said and actions they've taken. Is there like a real reason that the SEC and Gensler is not just approving a Bitcoin ETF? Okay, surveillance, all of this type of thing, is it? I mean, crypto will just... Tell you, I mean, there's definitely a lot of conspiracy theories here, of course, but the simple explanation seems to be Gary Gensler and some political body within the government does not want to propagate crypto any further.

• 55:52Ryan Sean Adams?

  And so they're just trying to hold the line for as long as possible and delay things for as long as possible because they don't like crypto. Is it as simple as that, James? Or have you seen anything in your journey here to to bring up kind of an alternative alternative explanation for all of this?

• 56:13Speaker 00

  That I would say that's a huge part of it. But you also like a part of it. The other side of that is one that sounds very wrong. But at the same time, like, look what's happened with FTX. Look what's happened with Celsius. I mean, those are the ones that seem to be ones that committed really bad acts. Then you have Prime Trust also. And then you have the companies that went down with them, whether or not they committed bad acts in BlockFi and Voyager. I mean, we can name all of them, right? And this kind of gives credence to the SEC's argument as far as I'm concerned. Right, there is some

• 56:41Ryan Sean Adams?

  Well, does it? Let me ask you this, though. But like, if they, to your point earlier, I think you made this point that if we do get an ETF, it'll clean things up. Right? I mean, like, the reason that people had to trust an FTX or felt like they did, wanted to trust a Celsius or something else, is because our regulator, our gatekeeper, wouldn't go through the process of approving a regular spot Bitcoin ETF. Do you think that argument has any merits? Like, I mean, people in crypto don't want to get ripped off either. So so how about the regulators create some alternatives rather than just setting up blockers all the time? Do you lend any credibility to that argument?

• 57:24Speaker 00

  I lend a lot of credibility to that argument. So like, I find that when I'm on TradFi type, we'll say podcast, but it's really anything. Or if it's a client call, I find that I talk about that side a lot more than the side I spoke about earlier because they focus on that side. So basically, the whole thing is like, there's two sides of the coin here. But I agree with everything you said. The problem is that also, I would say, some of the, some of it wasn't people had never bought the ETF because they were chasing Celsius and those other actors because they were promising like whatever unimaginable returns and people didn't do their research, didn't understand how it was actually working.

• 57:59Ryan Sean Adams?

  It feels like the Spider-Man meme of all the Spider-Men like just pointing at each other and blaming each other here. Alright, so something new it feels like has happened this year, but I want you to tell us if there really is anything new here. Of course, you said there were 77 different applications for Bitcoin ETFs, or crypto ETFs over the years. But this year, some new participants have thrown their hat in the ring, one of which is BlackRock. It was very interesting, earlier this week as well, we had Larry Fink doing kind of the, that's the BlackRock CEO, doing kind of a mainstream media tour and talking good things about Bitcoin and about crypto in general, which is very interesting

• 58:41Ryan Sean Adams?

  because, you know, six years earlier, he had called it, I think, the direct quote as an index, Bitcoin is an index for money laundering. So definitely a change, maybe some education that happened, maybe he changed his mind, maybe he has a product to sell, I don't know. Believe what you want to about that. But BlackRock entering a $9 trillion asset manager, the largest in the world, is that different? There's also a stat here where they've done like over 500 different ETF applications, and they only missed once. It's like, so they don't often miss once they file applications, so that feels new. Is there something new here, or is this more of the same?

• 59:22Speaker 00

  So, one, when we, basically CoinDesk broke the news that they were going to file, and we saw it, and we, me and Eric and other people on the team were like, whoa, and in the industry, we're like, is, can this be true? Sure enough, a few hours later, we got, the filing hit, and we were like, I've, my eyes were wide open.

• 59:38Ryan Sean Adams?

  You were not expecting this.

• 59:40Speaker 00

  So, let me explain what we were expecting. So like, one, BlackRock is the only new entrant. Everybody else has already tried this, this year. So the only new entrance to this space to try and launch one of these is BlackRock.

• 59:50Ryan Sean Adams?

  Like even Fidelity, they had tried previously.

• 59:52Speaker 00

  Yes, yes, multiple times, actually. So, there's been multiple people that, everyone else who's doing this has already done it in the past, aside from BlackRock. That said, we always expected BlackRock, no matter, at one point, they were going to launch a Bitcoin ETF, particularly after they partnered with Coinbase last year for, for different Things they they use Coinbase for their institutional their institutional clients. They use them for pricing into their Aladdin, some technology that BlackRock sells, which we don't get into, but they they've had a partnership with Coinbase. They we knew they weren't shying away. But BlackRock is so big, they have so much distribution, they have so much marketing power. We didn't think they were going to waste time just fighting with the SEC to get this thing launched. We figured it would get approved and then BlackRock would file and they were they would be ready to go.

• 1:00:35Speaker 00

  So this caught us by surprise, not that BlackRock filed at all, but that they were filing to fight with the SEC to get this thing out the door first.

• 1:00:41Ryan Sean Adams?

  You just thought they'd be a fast follow after somebody else gets it approved. Then, of course, BlackRock is going to throw their hat in the ring, but like, why be, you know, macheting your way through the jungle and be kind of a lead here?

• 1:00:53Speaker 00

  Yeah, exactly. And honestly, you mentioned that that Fink interview, that was like way stronger than I expected him to like we always. So one thing we also knew, once they filed this, we knew Larry signed off on this, right?

• 1:01:06Speaker 00

  Larry is one of the biggest figures in in traditional finance and we knew that if BlackRock filed this, they knew they were going to start a race, right? They knew they were gonna if they filed that everyone else was going to file after them because it's just the way the the way things have worked historically. The key difference here with what BlackRock offered in their filing is they said they were entering into a surveillance sharing agreement with a spot Bitcoin E T trading provider. We guessed at the time that it was Coinbase. Subsequently, we learned it was definitively Coinbase after the SEC made them name it before they could fully file. So that's the big difference. So they entered into a surveillance sharing agreement. And I mentioned those earlier. That's what the SEC has said when they denied all of these. They want a surveillance sharing agreement with a regulated market of significant size.

• 1:01:49Speaker 00

  I a lot of people initially said, no way Coinbase is not a market of significant size. I've written notes that debate the opposite because it is the largest Bitcoin trading pair with US dollars. They are the largest US exchange. They are the largest exchange that accepts US dollars as an on-ramp. So in our mind, it is a market of significant size. The biggest market is obviously Binance. But Binance, all that is done on stable coins like Tether and True USD and things that the government really doesn't like as it is anyway. So I think it is a market of significant size. And then everyone else jumped on board to try and get this. Now, one thing I said that I want to correct is I said BlackRock filed. Technically, these 19 before filings are filings from.

• 1:02:32Speaker 00

  The exchanges that they're partnered with. So in this case, it was NASDAQ that filed this in partnership with BlackRock, but it's a NASDAQ application. And then we have other kind of NYSE, New York Stock Exchange and CBOE has partnered with other issuers to also file them.

• 1:02:45Ryan Sean Adams?

  Well, that seems to let we lend a bit more credibility to. I don't know how this works, but when you say NASDAQ plus BlackRock is filing rather than just, you know, BlackRock, that's very interesting, or NASDAQ on their behalf. But is this also with kind of the comments this week from Larry Fink? Is this also a signal from BlackRock? Or like, are they trying to broadcast something? Are they trying to say, hold on, US regulators, you've gone a little bit too far. We actually want to lean into this asset class. And if you're not going to let us do it in the US, then we're going to fall behind all of the other jurisdictions. Is this a kind of a coordinated pushback? Is there a signal? Or should we,

• 1:03:28Ryan Sean Adams?

  should I not read that into what the messages that are going on here?

• 1:03:32Speaker 00

  So I would say that that's putting your tinfoil hat on a little bit. That might be the case, honestly. We also thought that it's because of BlackRock. Let's be clear, BlackRock is the gorilla in the room, right? BlackRock is 31, 33% of US ETF assets. Vanguard is 28%, and then everybody else is nowhere close, right? So it's BlackRock and Vanguard. Vanguard is never, will never file for a Bitcoin ETF. If I had to guess, maybe very far down the line, but.

• 1:03:55Ryan Sean Adams?

  Why? They're more conservative?

• 1:03:57Speaker 00

  It's not, they don't even have a gold ETF. It's not something they believe in. It's not something they do. They're low cost index equity and bonds. That's what they do, right? Like, that's what they specialize in. They don't even have a gold ETF. Jack Bogle didn't believe, John Bogle didn't believe in investing in gold to be, and he hated crypto or Bitcoin, but he's not there anymore. They've changed a lot of things that he didn't like. He also didn't like ETFs.

• 1:04:20Ryan Sean Adams?

  Oh, really?

• 1:04:21Speaker 00

  He promoted to, he thought they promoted too much trading. He much preferred the old mutual fund index fund, cheap.

• 1:04:28Ryan Sean Adams?

  The hodl OG for stocks.

• 1:04:30Speaker 00

  Yeah, he was, yeah, exactly. Eric Balchunas, my boss, has written a note, basically says, like, DeFi people can learn a thing from, like, from Jack Bogle.

• 1:04:38Ryan Sean Adams?

  It's called patience, crypto natives. You learn that.

• 1:04:42Speaker 00

  Yeah, I forgot where I was going with that.

• 1:04:44Ryan Sean Adams?

  Well, let me just ask you. So BlackRock filing, is that just slam dunk? Like, it's going to happen now? Or is that not the case? Because I was giving you that track record, which you know. I think maybe I probably read it from a tweet that you put out, which is like, they've only missed once out of 500.

• 1:05:02Speaker 00

  Yeah, it's 500. We've said 575. I think the technical number is 546 upon like, super close inspection that we could find. But we could be missing something. Either way, it's over 500. They've only lost one. And that one that they lost, it was for something called a non-transparent active ETF. Or we call them ANT, Active Non-Transparent. And it's just a structure that doesn't have the same like, most ETFs are fully transparent. So you can see what's in the ETF every single day. When it's trading, you know exactly how much of each stock or bond or whatever. And this is like where it's kind of hidden a little bit, so people can't front run you. And that was in 2014. And they approved these things in 2018, I think, 2019? Something like that. But it ultimately did get approved. They were just early. So that's a good sign.

• 1:05:44Speaker 00

  The other point is like, if you look at Bito, which is the first futures Bitcoin ETF in the US, that thing got $1.5 billion in two days. That has 96% of the Bitcoin futures ETF assets and 99. I don't know what the numbers are, but it's like, it's in the 90s percentile for assets in trading.

• 1:06:03Ryan Sean Adams?

  1 billion in two days, is that good?

• 1:06:05Speaker 00

  That was the best launch ever. So the previous record was GLD, the Gold ETF in 2004, which hit over $1 billion in three days. Which, let's be clear, $1 billion in 2004 is worth a lot more than $1 billion in 2021. But that's the way we kind of have to look at it.

• 1:06:21Ryan Sean Adams?

  Okay.

• 1:06:22Speaker 00

  Yeah. But even still, Bito would have beat it because they went to 1.5 after two days. So it wasn't like they just cracked the $1 billion mark. So, but the problem is like, they're a first mover advantage, right? So if BlackRock thinks they could possibly be first and get that type of exposure and charge relatively high fees compared to what they're used to charging, the odds don't have to be very high for them to take that swing, right? Like, if the benefit was not that high, maybe they wouldn't have taken this risk. But I think that, this is me playing devil's advocate a bit. Like, they don't have to, like, even if they think the odds are 10% or 20%, they could be out first. Like, the benefit of getting what they think maybe $2 billion in a week or $10 billion in a year and charging 50, 60, 70 basis points on that is...

• 1:07:09Speaker 00

  Very strong even for BlackRock despite the amount of assets they have. That's a lot of margin that they can get. So like the benefit of being first and doing that is pretty strong. So and the downsides are, yeah, so what? They have another loss on their record and they piss off some people at the SEC. Like there's very little downside in my eyes. But that said, BlackRock is not in the game of filing things willy nilly, just throwing spaghetti at the wall. Right? This is not a company that's going to do that. This is not a company that's just going to jump into this without doing their due diligence. And they also have very close ties with the government. They've done some of the, they've helped the government do like different exchanges, the Fed do different things with buying programs. So there's a lot of, I don't want to say it's not a revolving door, but it kind of is. There's

• 1:07:52Speaker 00

  a lot of people that are at BlackRock or at the SEC and vice versa. So.

• 1:07:58Ryan Sean Adams?

  I mean, this is what we've surmised. There has to be some political pressure building on the SEC to kind of do something. And this is why I'm just like totally speculating, but feels like it's, it's never been closer, even though the SEC is, you know, in 2023 especially, been very anti crypto. I mean, this feels pretty big, but you do think still, James, there is, there is a possibility, there's always a possibility, but like it's not a remote possibility that Gary and SEC could still deny BlackRock. That's still on the menu, right?

• 1:08:31Speaker 00

  Yeah, let's be, I'll be very blunt. If you look at all the things that they have said and written over the last three years, this will be denied. But there's a lot, there's a lot of circumstantial evidence that suggests that it will be approved. It goes back to what I said, they can back into whatever decision they want to.

• 1:08:48Ryan Sean Adams?

  Okay. Well, you said two things there, James. I want to be clear. So you think that if you look at the history of the last three years and what they've kind of, you know, said, then it looks like it's a denial. Yet, when you look at the circumstantial evidence, you think that it's maybe pointing to an approval?

• 1:09:07Speaker 00

  Yep. Exactly. So like BlackRock jumping in, we think Grayscale is going to win their lawsuits. So Grayscale's lawsuit is hinging. It's called the Administrative Procedures Act. If you were in the US and you heard about like some overturning of the EPA saying they overreached their bounds and stuff that the Supreme Court has done, the Administrative Procedures Act basically says like you overstepped your power or you didn't treat like situations alike. And that's what this one is. And Grayscale's whole basis is like you can't approve futures ETFs and then not approve spot ETFs because the futures market and the spot market are completely intertwined, which is an argument that everyone has been making since the futures ETFs were approved. But the SEC has basically said there's still no way to detect fraud and manipulation in the underlying spot market, which again is a kind of an overreach from anything they've done for other commodity ETFs. Like if that was the case, then we

• 1:09:52Speaker 00

  shouldn't have oil ETFs because OPEC is completely manipulating that market, right? Like so, so you can push arguments and push buttons in any different way that you want. But yeah, so there's a lot of circumstantial things, but we think the SEC is going to lose that lawsuit to Grayscale. And what that means is the judges will almost certainly say, look, you can't deny for the reasons you gave, go back to the drawing board. And either the SEC is going to have to approve Grayscale's application that they're suing over, which is to convert GBTC to an ETF, or they're going to have to deny for other or those same reasons and additional reasons on top of it that make it so that the situations are not like for like.

• 1:10:31Ryan Sean Adams?

  So there's pressure building from multiple angles here. Not only do you have like, you know, Larry Fink and you BlackRock in kind of the 77 previous application for crypto ETFs, you also have this Grayscale lawsuit. And what's the timeline around the Grayscale lawsuit? Like, is there any, like, when would the court have to make a decision by?

• 1:10:51Speaker 00

  Yeah, so the decision need to be done and it doesn't have to be done. So that's not that the courts kind of like roll through things, right? But our litigation analyst, Elliot Stein, who I work with, expected it by the end of, before the end of the third quarter. So that's before the end of September. So in the next couple of months here, we're expecting a decision.

• 1:11:11Ryan Sean Adams?

  Wow, really?

• 1:11:12Speaker 00

  The one, but the one thing I would say to caveat everything we just said, the circumstantial evidence is there's hard evidence that the SEC is suing Coinbase and they're the people that are going to be the custodian for this BlackRock ETF. They are going to be the surveillance sharing agreement partner and.

• 1:11:29Ryan Sean Adams?

  But they're suing Coinbase over other things, not Bitcoin.

• 1:11:32Speaker 00

  Exactly. That's the key point here, right? The SEC is, Bitcoin is one thing that Gary will admit is a commodity. It's not a security. He's suing Coinbase and Binance. Binance for every different things. They're accusing Binance of fraud, manipulative practices, wash trading, spoof trading, spoofing, all the things you can, you name it. They're accusing Binance of it. They're not accusing Coinbase of that. They're saying they're basically an unregistered securities broker because they're trading securities on their platform.

• 1:11:57Ryan Sean Adams?

  So does all of this-

• 1:11:58Speaker 00

  But their focus on different securities. So that in my mind, if Gary and the SEC are going to back down anywhere and give like, bend a little bit on this front, it'll be on the Bitcoins, other things, nowhere else.

• 1:12:09Ryan Sean Adams?

  That's what it's felt like to me, but of course you know better. But so are you over/under on a spot Bitcoin ETF by the end of 2023?

• 1:12:19Speaker 00

  So this goes back, so now we get to get into the detail that's something we didn't talk about.

• 1:12:23Ryan Sean Adams?

  Okay.

• 1:12:24Speaker 00

  When BlackRock filed, there was, so I talked about 19 before process, right? So you submit the application, the exchange sends it to the SEC and the SEC has some time period before they have to accept it and acknowledge it, or they send it back and they basically say, you didn't do this. With BlackRock, that's what they did with all the CBOE filings, VanEck, Bitwise, AdNisy, you name it, Invesco and Galaxy, WisdomTree. They sent them all back and said, you can't submit this with the surveillance sharing agreement without telling us who it is and giving us more information.

• 1:12:52Ryan Sean Adams?

  This happened recently, wasn't this, this happened last week?

• 1:12:55Speaker 00

  Yeah, this was a Wall Street Journal article.

• 1:12:56Ryan Sean Adams?

  Okay.

• 1:12:56Speaker 00

  And which was not surprising. The SEC was never going to approve these things because these filings said they were going to enter into an SSA, right? So it wasn't surprising that they shot them back. But the key difference here is that 21Shares, which is an ETF issuer in Europe, they own, they have the most crypto ETFs launched in Europe, based in Switzerland. But they partnered with ARC, which is a big ETF issuer here in the US to launch an ETF. They were denied recently in, I think, February.

• 1:13:23Ryan Sean Adams?

  This is Arc, this is Kathy Wood's Arc?

• 1:13:24Speaker 00

  Kathy Wood, she's partnered with Kathy Wood. So Kathy Wood has been on the board for 21Shares. We actually just did a podcast yesterday, two days ago, with the president of 21Shares, if anyone's interested. So she gave us some insight into what they're seeing on their end. But that's on the Trillions podcast, sorry to promote something.

• 1:13:42Ryan Sean Adams?

  No, no, no, we'll include that as a link in the, in the show notes. So Trillions podcast, okay.

• 1:13:48Speaker 00

  Yeah, that's, that's Belchunis's podcast.

• 1:13:52Speaker 00

  So they filed, so they were denied, them and Van Eck were denied, and then the SEC, I told you, issued those dissent letters. But after they were denied, ARC and 21 shares got right back on the horse and applied again. I'm pretty sure it was, so they basically applied not too long after we heard the oral arguments in the Grayscale case. And that's when we got, we were like, after hearing the judge's conversation with the Grayscale lawyers and the SEC lawyers, we were confident that Grayscale had a legitimate shot to win the case. Not guaranteed, obviously. My litigation analyst put it at like a 70% odds of Grayscale winning. And we talked about what that means, really. But they filed. So I think they filed because of that, right? And they wanted to have an application outstanding with the SEC.

• 1:14:32Speaker 00

  So they submitted that on April 25. And then the SEC acknowledged it on May 9. So the only application that's active in that 19B4 process, where I talk about that 45-day, 45-day, 90, 60-day process, the only ETF that was active, or the application that was active, was ARC 21 shares in partnership with CBOE. So then BlackRock dropped this application on June 15. CBOE and a bunch of issuers, and NICE and Bitwise filed suit, and they were bounced back by the SEC. And then the first one we saw was ARC 21 shares submitted an amendment. So basically, their clock has already started. So we have a date, we have dates on when we know the SEC needs to issue a response, delay, deny, approve, for ARC 21 shares. All the other ones were sent back and bounced back to the issuers and the exchanges, and they

• 1:15:17Speaker 00

  had to refile. The SEC hasn't acknowledged those. And basically, acknowledged means they post it to the federal register, but like, it's essentially, the SEC says we got these, and they post them to their website, and then we get dates of when these things are going to happen. But the only ETF that we know exactly what those dates are right now is ARC 21 shares. And the next, the fun, the interesting thing is, the SEC on June 15 came out and issued ARC and 21 shares a delay. But the deadline wasn't until June 29. So they were, the SEC was required to respond with a delay, deny, approve by June 29, and they delayed on June 15, the day that BlackRock and NASDAQ filed their application. The next date is August 13. Now, again, the SEC, that's a deadline, they can go before

• 1:15:57Speaker 00

  that. But at the end of that 240-day time period is January 10 of 2024. So we will have an answer by January 10, 2024, at the very least.

• 1:16:07Ryan Sean Adams?

  No way. And, and, okay, so this, this would be basically like the 21 shares, the ARC one that you mentioned, that's kind of the leader, right? That's the first one. And like, the way, it would be very difficult for the SEC to deny this one and then like approve some of the others in queue, right?

• 1:16:23Speaker 00

  Correct.

• 1:16:24Ryan Sean Adams?

  So is that why you're thinking that this January 10th, 2024 date is kind of the, the last and final, cannot be delayed any longer date on which this entire crop of ETFs in this season, in this cycle, given this political climate, will either be approved or denied?

• 1:16:40Speaker 00

  Yeah, so let's be very clear, Valkyrie has also filed with NASDAQ. So they also, NASDAQ is the one, they're, they're further along in their agreement with Coinbase. We don't know exactly where it is, but there's different language. So in the first filings, we saw expecting to enter into a surveillance sharing agreement, right? Expecting. So the CBOE still said that in their amendments and they named Coinbase. But the BlackRock ones said they executed a term sheet to enter in a surveillance. So there's like, they, I don't know exactly what all these mean from a legal perspective. CBOE says their time, term sheet is already, ready to go too. But essentially, BlackRock and NASDAQ, well specifically NASDAQ is further along than CBOE and IC. Right? So they have gotten further along in the process. So if for some reason, which I can't, I don't think this is going to happen, that like CBOE can't

• 1:17:24Speaker 00

  enter into an SSA with, with Coinbase, that's the one thing that differentiates BlackRock and NASDAQ's application. Then maybe they could deny ARC 21 shares and approve BlackRock, but that would be shocked. That would be absolutely shocking to me. But also what the SEC could do is they could approve, like I said, there's all those deadlines, but the SEC can make a decision whenever they want, right? They just have to have a decision before those deadlines. For example, they went 14 days on ARC and delayed it. Initially, I thought that the first deadline, so August 13th, with the surveillance sharing agreement information, if they delay there, then it's probably just going to get denied. The more I look at it, the more I talk to people, this is going to require a long conversation. This is, this whole process is going to be a back and forth between these issuers, the exchanges, and the SEC.

• 1:18:06Speaker 00

  So I would say now that if they do delay at the first instance of the BlackRock and all these other applications and ARC 21 shares in August, I expect BlackRock's deadline to be, I'll tell you right now, I'm estimating, because it depends when, like I said, the SEC doesn't always acknowledge them on the same timeframe, but it'd be like the, the first week of, of September, that we would get a delay, deny, approve on the BlackRock and other ones.

• 1:18:31Ryan Sean Adams?

  Got it. So this is all kind of coming to a head over the next few months. And this also matches the January 10th might be a date, at least for the 21 shares, ARC 1, 2024. But this also is interesting timing with the grayscale case, which you said a decision could be made. Don't know when, but September is a possibility here. So all of these dates are kind of narrowing in. By the way, just a quick aside quest on the grayscale thing, GBTC. That was a, I think, a cause or folks in crypto have said that not having an ETF and being reliant on GBTC

• 1:19:12Ryan Sean Adams?

  caused a whole cascade of shitty things to happen in 2024, right? We had 3H Capital insolvency, which let this.

• 1:19:22Speaker 00

  Yeah, I have strong views here.

• 1:19:23Ryan Sean Adams?

  Give me your strong views, okay? Because there's a crypto narrative around something that, you know, like, people want to blame the GBTC and the SEC not approving an ETF. And others will say, well, that had nothing to do with it. What's your take, James?

• 1:19:40Speaker 00

  It did have something to do with it. A lot of these applications have said, including grayscale in their applications to approve. It's like, this product is broken, retail. The SEC's goal is to protect investors, right? And this product is broken. A lot of retail investors got hurt or have been hurt by the huge discount. And one of the arguments has historically been, look at what we have in the market now. There's already things out there. People are using micro strategy to get exposure, like an ETF is a proven wrapper that we know will work.

• 1:20:05Ryan Sean Adams?

  That's so crazy to me, by the way, that we have to use micro strategy and Michael Saylor as a proxy to getting Bitcoin exposure in a public, that's crazy.

• 1:20:15Speaker 00

  Yes, but the SEC has come back and said they don't take that into consideration and their trading as a market's way that they're looking at things, right? They just basically said they don't care about that. That's not something they're worried about. They acknowledged the situation. The flip side of this, which I do agree with all this thing said, is we might not have found out the shit that 3AC and FTX were doing without this entire blow up.

• 1:20:36Ryan Sean Adams?

  Could have gone on longer.

• 1:20:38Speaker 00

  Exactly. If the SEC had approved these things, we might. Not have caught all this this fraud blatant fraud that happened or I guess I shouldn't say blatant because it hasn't been proven yet, but it's likely to be proven.

• 1:20:48Ryan Sean Adams?

  Seemed pretty blatant in the FTX's case.

• 1:20:51Speaker 00

  FTX's case, but I mean, you look at 3AC, which arguably triggered like what's like they were also triggered by the Luna stuff. So it was all kind of related. Genesis is having issues because of this. BlockFi was heavily invested in the GBTC stuff. It doesn't look like BlockFi necessarily committed fraud.

• 1:21:09Ryan Sean Adams?

  You're saying you're like, well, the ETF, not approving ETF is to blame here, but like, consider yourself blessed crypto market. This needed to happen. This is a cancer that needed to be caught up, cut out at this point in time. It would have just consumed the entire body if we had another like three to five years for this malignant tumor to kind of grow. And it would have been far worse.

• 1:21:33Speaker 00

  Continue issuing leverage and doing things that they shouldn't be doing. Yeah. So I tweeted this the other day. I made the argument that like, you know, like this might have been like one of the best things the SEC could have done for the long-term health of the crypto and Bitcoin market specifically. Because they didn't allow people to get out of it. Basically, it comes down to the fact that people couldn't access the underlying value of the Bitcoin in GBTC, which you can do in ETF. So because they couldn't access the underlying value of Bitcoin, they couldn't like cover up all the other shit they were doing.

• 1:22:03Ryan Sean Adams?

  I didn't expect to come near to the end of this episode and say, thanks, Gary. But maybe that's part of the conclusion here. Just a couple of other points before we before we depart on this on this issue. So one is that Bitcoin ETF, spot Bitcoin ETFs are already outside of the US. This is already happening in other jurisdictions. Is that correct?

• 1:22:25Speaker 00

  Yes, there are Canadian spot Bitcoin ETFs as of 2021, 2022, early 20, I don't even remember, 2021, 2022. I don't remember the exact date. Even long before, long before that, they were available in Europe. They're not technically ETFs in Europe. They're what's called ETCs. But functionally, they're ETFs. They're spot backed, physically backed Bitcoin ETFs, and they have plenty of other crypto ETFs. They have some stuff. I mean, they had an. FTX ETF in Europe. So B and B ETF in Europe. They have a lot of like things that the US is very far away from ever getting to. So do with that information what you will. But yeah. And the other thing is, I want to say is like, they've been around. They were around for all this crazy stuff that happened and they handled everything perfectly.

• 1:23:11Speaker 00

  There was no issues, no, no issues with accessing the underlying asset. There was no issues with Bitcoin just not being in the, in the, on the wallets that you expected it to be. And it traded very smoothly. It traded very tight. It was about as efficient or as good as you could hope that it would be. And it should be used as an example of what we can do here in the US. And I know for a fact what the SEC will say, because they've said in the past is, we're the oldest, most trusted financial market.

• 1:23:39Ryan Sean Adams?

  They love saying that.

• 1:23:40Speaker 00

  More requirements and blah, blah. But if you look to other markets, these things have handled, even Brazil, Brazil has spot Bitcoin ETFs from HashDex, which I mentioned 2Krim before, but HashDex is a crypto ETF provider that basically partnered with 2Krim to take over their application because 2Krim was like, we're not first, like it doesn't matter to us anymore. But HashDex is a provider that wanted access to the US market and they partnered with them to launch it. So HashDex, which is ticker DeFi, we haven't, something we haven't touched on yet, is the only 33 act Bitcoin futures ETF. 33 act futures, 33 act ETFs are the only ones that can hold spot Bitcoin. So theoretically, if we do get an approval here, that could be the first ETF on US exchange that holds spot Bitcoin.

• 1:24:20Speaker 00

  They would just have to change the prospectus and file an amendment with the SEC and get accepted. But theoretically, they could be one of the first ones holding spot Bitcoin.

• 1:24:27Ryan Sean Adams?

  That's interesting. Okay. So Ethereum as an ETF, is that happening anytime soon?

• 1:24:34Speaker 00

  No, unfortunately not.

• 1:24:36Ryan Sean Adams?

  Why not?

• 1:24:37Speaker 00

  Because there is Ethereum futures ETFs and I thought they were going to come quickly after the Bitcoin futures ETFs, but Gensler and his SEC bounced that back immediately, right after in 20, early 2022. I said, oh, I gave it a year and I said we'd have futures ETFs within a year of the Bitcoin futures ETFs and I got that blatantly wrong. And basically it's because the, the SEC is like arguing now that ETH is security. They won't say.

• 1:25:04Ryan Sean Adams?

  You probably based that on the Hinman speech, right? Like kind of the SEC.

• 1:25:08Speaker 00

  Yeah, yeah, exactly. It's based on the Hinman speech. I thought for sure it was going to the fact that we had futures, the volume on the futures and the CME were strong. And the fact that it follows the same, it would follow the same path that Bitcoin did.

• 1:25:19Ryan Sean Adams?

  But Gary has held the line and almost regressed on the SEC's posture towards.

• 1:25:23Speaker 00

  100% has regressed.

• 1:25:25Ryan Sean Adams?

  Yeah, I totally agree with that. So not happening anytime in the US, but is.

• 1:25:29Speaker 00

  Well, actually, let me give you one caveat there. It's not happening unless Congress steps in. I'll give you multiple caveats. Unless Congress steps in, gives some regulatory oversight and clarity.

• 1:25:38Ryan Sean Adams?

  Please, Congress.

• 1:25:40Speaker 00

  Yeah, but I won't hold my breath for that to happen. The other thing is, it's not going to happen with Gary at the helm. So if a Republican wins in the presidential election, Gary will likely not be at the helm of the SEC. And then you'll have somebody in the Republican. So theoretically, Republicans have been more pro ETH, crypto, Bitcoin on that side of things. So you could get one that way, but it still seems very unlikely because you would have to undo some precedent that the SEC has already sent and set in different ways. But like I said, Ethereum futures, we had Ethereum futures. Like, give me one second. I'll tell you exactly when. We had Ethereum futures ETFs apply in June.

• 1:26:18Speaker 00

  No, in May. We had three. Yeah, we had. So basically what happened there was Grayscale applied on May 9th for a few, three ETFs. And they would go under that 75 ticking clock time period. And one of them was a futures ETF. And then four issuers followed suit immediately the next day and applied for an Ethereum futures ETF, and those were denied. One of the ETFs that's likely going to launch on, it'll be approved, I'll tell you the exact date, July 23rd. This is, this is also kind of comical because it looks like the SEC is going to have to let it go through because it satisfies all the rules they have. But what it'll do, it's, it's going to hold a slew of international Bitcoin ETFs, the likes of Canada and Europe.

• 1:27:01Speaker 00

  And for like 40% of the fund and the other 60% is going to hold Bitcoin miners.

• 1:27:06Ryan Sean Adams?

  Such a silly.

• 1:27:07Speaker 00

  So basically, so basically.

• 1:27:08Ryan Sean Adams?

  That's a silly product, I feel like, but okay.

• 1:27:11Speaker 00

  I don't know if the, I don't know if, so with one thing is that the Grace, it's called the Grayscale Global Bitcoin Composite ETF. But they're using ticker BTC. And there's some wonky stuff here, but I think they need the file have an active application because their hold on the ticker BTC might have gone. So I don't know if they actually plan to launch this. But if they do, it would be completely, it just shows the ridiculousness of like the SEC's current stance. And even if you talk to. Anyone in this, for the most part, they agree that improving futures dying spot. It doesn't make a lot of sense, even people who are vehemently anti crypto. So those people tend to advocate for the position that the SEC

• 1:27:54Speaker 00

  is going to have to basically reverse their decision in improving futures ETFs for Bitcoin.

• 1:28:00Ryan Sean Adams?

  Can they do that? They can't reverse.

• 1:28:02Speaker 00

  They have done it in some instances in the past, but it would it would probably open them up to more lawsuits.

• 1:28:08Ryan Sean Adams?

  Wow, this is very fascinating. Of course, this, you know, comes into play when you have a gatekeeper over kind of your tokenization types of events of which Gary Gensler in the SEC is. James, as we get to kind of the the end of this episode, then the concluding question to me is some people will have been listening to this, being fascinated by this exploration of ETFs and how this works and all the people involved in the companies, all of these things. And then they'll ask the question of like, well, why do I care? Like, I could just go buy Bitcoin or ETH or any asset that I want on Coinbase. This isn't a very bankless product, is it? An ETF product is by definition custodied by someone, so is by definition banked. Can you tell us the prize here?

• 1:28:53Ryan Sean Adams?

  Like, what markets does a Bitcoin ETF actually open up? Like, why is this good for maybe for people who are very price conscious Bitcoin price? Or for Bitcoin being price exposure being in the hands of more people? Why is even having a Bitcoin ETF a good thing? How does it affect the market? How does it affect price from your perspective?

• 1:29:17Speaker 00

  I mean, the dumbest answer is that it's just another way, another market in way that people could buy. But the really way I look at it is it's going to act like a bridge, right? There are going to be some people that go in this way and might go over to the bankless side of things, right? Like, it's that's not that's how a lot of people have acted. I know for a fact, some people have gone through the grayscale option and then have figured out ways to do it differently. The other side of it is it just opens a whole bunch of people. There's a lot of endowment pension funds, institutions that have mandates on what they can and cannot invest in. And a lot of them say they can only invest in securities or they can only invest in securities and debt instruments. So they are literally against it would be against their mandate against like everything they were founded on to hold Bitcoin directly. So when you have an ETF.

• 1:30:02Speaker 00

  All of a sudden, an ETF is security, so you're wrapping it and you're able to hold it in that instance. So that's just opens up for a lot of different people to to hold this and use it or trade it, if you will. The other side of it is, in the US, I hinted that I said this before, there's $30 trillion with advisors, right? And advisors love ETFs, specifically independent advisors, but because it's the most tried and true trusted practice, right? So if there are products out there like OnRamp and other things that are trying to work with advisors to custody the assets for their clients, right? If you had an advisor, typically the way they make money now, it used to be like you get paid commission kickbacks for for selling those mutual funds.

• 1:30:41Speaker 00

  Now it's a more fiduciary standard and you get paid, say, all right, if I was your advisor, I get paid like the average is like 1% of your assets every year. And so what's happened in many instances is clients of them, of these advisors, one, they couldn't, they had no way to get access to the crypto markets or Bitcoin. So their clients were doing it on their own and they don't know what they're doing. So they don't know what their risk exposures are. They don't know, like, they wouldn't, the advisor, one, just from like, this is a pro love, this is a positive way to look at it. Like, the advisor doesn't know that the client is risking all this money in this market that they can't control. The other part of it is selfish, is that it's not under their umbrella where they can charge the 1% fee. So they would much rather bring that under the 1%, under the umbrella where they can charge for it.

• 1:31:26Speaker 00

  The other part is, like, I mentioned this, OnRamp allows you to kind of do it directly. There's other competitors that are trying to allow advisors to store in cold storage wallets or what have you. But it's for most of these advisors, they're not going to be putting significant client assets in these things, right? They're going to give them one, 5% exposure to something like this. They probably would honestly prefer like a crypto index ETF to put like a couple percentage exposure. And if you're going to be doing that, you don't want to be setting up like tons of different contracts with different providers and custodians. Like, it's just so much easier to be like, I can just hit click and buy for these clients and then I have it under my traditional financial. It basically takes Bitcoin and puts it on the traditional financial rail. So this is what GBC did, GBTC did, but in a less efficient manner.

• 1:32:11Speaker 00

  We talked about all the issues with that, but this would be the holy grail of of doing that, as far as I'm concerned. I've actually talked with The CEO of OTC Markets, which is where GBTC trades, a lot of these pink sheets think penny stocks, but they have a market. And he thinks another area is these things will trade as basically depository receipts. I think that might happen as well, but I think just an ETF is a tried and true, tried and true technology wrapper and easy way to do this. We know it will work. We know it's clean. We know it's efficient. And people would love if they're, if they want exposure, that's how they'll get it.

• 1:32:50Ryan Sean Adams?

  Fantastic summary, James. I appreciate all your help on this. I think that the bottom line for, for Bankless listeners, for those crypto investors on the journey is this could be a bull catalyst. Of course, the exposure of potentially tens of trillions of dollars into crypto, the opportunity to purchase an ETF could affect price in some way.

• 1:33:13Speaker 00

  Yeah, I will. I'll give you one counteracting point.

• 1:33:16Ryan Sean Adams?

  Go.

• 1:33:16Speaker 00

  That we had CME Futures launched at the end of 2017 and early 2018. And Bitcoin Futures ETFs launched at the end of October in 2021. So if you've been in the crypto market.

• 1:33:30Ryan Sean Adams?

  Killed the market in 2017, you're saying?

• 1:33:32Speaker 00

  Yeah.

• 1:33:33Ryan Sean Adams?

  James, you can't kill what's already dead, man. Like crypto's down bad, you know?

• 1:33:38Speaker 00

  Exactly. It's a very different market cycle right now. But who knows where we'll be in January?

• 1:33:42Ryan Sean Adams?

  Yeah, that's a great point, James. This has been incredibly helpful. Some action items for the Bankless Nation. I think the first action item is you should go follow James on Twitter if you want updates on the Bitcoin ETF. James, what's your Twitter handle?

• 1:33:55Speaker 00

  JSEYFF.

• 1:33:58Ryan Sean Adams?

  There you go. We'll include a link in the show notes. James, I just want to thank you for coming on Bankless. It's been a lot of fun today.

• 1:34:04Speaker 00

  Yeah, thanks for having me, Ryan.

• 1:34:05Ryan Sean Adams?

  Also, another action item in the show notes, the 21 Shares podcast that James mentioned will include a link to that. Got to end with this. Risks and disclaimers. Crypto is risky. Price goes up and down. We don't know when we're getting an ETF. All of crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.