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ETF conversion is a chance to take largest bitcoin fund ‘closer into regulatory perimeter’: Grayscale CEO

Grayscale CEO Michael Sonnenshein joins Yahoo Finance Live’s Julie Hyman to discuss Grayscale’s push to convert its bitcoin ETF trust into an ETF, FTX’s current lawsuit against Grayscale, and the outlook for Grayscale.

Video transcript

JULIE HYMAN: Earlier this week, a panel of judges on the DC Circuit Court of Appeals heard arguments from Grayscale Investments and the Securities and Exchange Commission to determine whether the SEC's reasoning for rejecting Grayscale's application to convert its Bitcoin Trust to an ETF was reasonable. I talked to Grayscale CEO Michael Sonnenshein following those closing arguments and started off by asking him how confident he is that the ruling will go his way.

MICHAEL SONNENSHEIN: We were certainly really appreciative of the opportunity to have this case heard by the DC Circuit Court of Appeals. Walking out of the courtroom, I would say we all felt very encouraged by how oral arguments transpired. And I think that's really a function of the legal team we have in place. We've put together the best-in-class legal team, and we've been consistent. The arguments that we've outlined why GBTC should be an ETF was the same when we filed our application, was the same when we had to litigate and file our briefs with the SEC, and they were the same yest-- earlier this week when we had oral arguments.

And I think that consistency really works in our favor. And I think the market reaction is similar. Investors and folks are telling us, anecdotally, that they appreciated the oral arguments, and they're hopeful that the court will side in our favor.

JULIE HYMAN: Yeah, GBTC rising in the wake of the hearing. You've talked about a timeline. If you do get positive approval, which can take some months, maybe even as soon as fall, we could see that ruling and a conversion. How quickly can a conversion happen if it goes in your favor?

MICHAEL SONNENSHEIN: Well-- so what we've been guided by counsel is that we should expect a decision out of the DC Circuit by this fall. What transpires from there in terms of proactively working with the SEC on a conversion will obviously be something that we'll need to work out with them when that time comes.

JULIE HYMAN: One of the things that you were questioned about yesterday is the possibility-- right now, the SEC allows Bitcoin futures ETFs but not a spot ETF, and the judges really talked about the sort of dichotomy or the questioning around that. On the flip side, the Securities and Exchange Commission, which has approved those products, in theory could at some point rescind approvals, not just for the ETFs but for Bitcoin futures, for whatever reason. What then would that do? What would be the cascading effect for you if that were the case?

MICHAEL SONNENSHEIN: I'm not aware of precedent where we've had a year plus and billions of dollars of capital in investment products that are trading every single day and seeing the SEC rescind those types of approvals, right? We don't have just one Bitcoin futures based ETF here in the US. I think we have three, maybe even four of them.

JULIE HYMAN: And some in Canada, too, I believe.

MICHAEL SONNENSHEIN: Some in Canada, some in other jurisdictions as well. And so that, again, is really the bedrock of the case that we have. These are two markets that are inextricably linked. Bitcoin futures is a derivative of the Bitcoin spot market. So if the SEC got comfortable with Bitcoin futures as the underlying asset for a Bitcoin futures ETF, well, then they ultimately really also got themselves comfortable with the underlying spot market as well. And that's why GBTC should convert as well as giving investors greater protections, right?

That's the big takeaway from oral arguments and what we've been hearing from investors. This is the chance to take the world's largest Bitcoin fund, built in the US, raised under US rules and regulations, and to bring it closer into the regulatory perimeter. That's an opportunity that as a regulator who's meant to protect investors should be seizing.

JULIE HYMAN: Why is it so important-- forget about the regulatory perspective for a moment. Why do you think it's so important for investors to have the trust be converted to an ETF?

MICHAEL SONNENSHEIN: Well, certainly, today, the trust trades at premiums and discounts. It doesn't have that embedded arbitrage mechanism. And so GBTC today could e at a 30 some odd, 40 some odd percent discount to its actual net asset value, to the discount of the Bitcoin that it actually holds. And so in an ETF format, investors trading in GBTC, whether it's short term, long term, holding it for a very long time, investors will be in an instrument that effectively tracks the price of the underlying Bitcoin it holds, and we've seen now in the US-- I think there's over 2,000 ETFs. This is a tried and true wrapper that will give greater protections, greater transparency, and all of that also comes with sitting on a National Securities Exchange, which, in our case, is the NYSE ARCA.

JULIE HYMAN: You could also argue an ETF is easier and more liquid to trade, right? Just sort of ETFs by definition is not a closed-end fund. And you can also redeem your funds. And this is something you've been hearing from investors as of late, some of whom want to more easily redeem their funds. There is sort of a loophole, if you will called, Regulation M. You guys could, in theory, go under Regulation M and allow some of your investors to redeem those funds. Why not? Why not go that route? Why not even go that route simultaneously while you're still trying to get ETF approval?

MICHAEL SONNENSHEIN: Well, so Reg M is a separate and distinct set of rules than things like tender offer rules, right? So Reg M is something that is granted-- or actually, relief from Reg M is granted to ETF applicants. So the lawsuit itself is actually at its core asking for Reg M relief, the ability to simultaneously create and redeem shares of the fund, which will allow it to track the underlying value of the Bitcoin that it holds.

Earlier in our lifecycle, Grayscale did have a redemption program for GBTC way before it even went to the public markets as GBTC, and it was deemed to be in violation of Reg M. So since that time, we haven't operated a redemption program. We got a cease and desist from the SEC back then and haven't been able to operate a redemption program. So what we--

JULIE HYMAN: Have you tried to do it in other ways in talks with the SEC, or--


JULIE HYMAN: --did you just sort of say, OK, once you got the cease and desist, we're not going to try and do that again?

MICHAEL SONNENSHEIN: Well, under the cease and desist, we can't operate a redemption program. So what we've really been focusing on is offering public market liquidity for GBTC on the secondary market. It's become one of the most liquid securities on the OTC market here in the US and was really a pioneering move on our part to be able to take a private fund and bring it out into the public market, which is really opening the opportunity of investing in Bitcoin to a very wide audience.

JULIE HYMAN: One of the specific examples of an investor who is asking for a redemption is FTX, or I should say now the administrator in bankruptcy of FTX who wants to redeem some of the funds. Is there any way to do that under the existing framework?

MICHAEL SONNENSHEIN: So I think the complaint you're referring to is actually coming out of Alameda, right? So Alameda is the now defunct hedge fund arm of Sam Bankman-Fried's FTX empire. So if we look at Alameda, they're not a US-based business. They are not under US regulations. And that's really in sharp contrast to a business like Grayscale or Grayscale products built in the US under US rules and regs.

Alameda now-- obviously we all know. We've talked about this-- a lot of fraud, a lot of things that transpired that have forced those companies into Chapter 11. And so under the new leadership at Alameda, from a fiduciary standpoint, they're wanting to try and recoup assets wherever they possibly can. And we don't fault them for doing so. But they're quite misguided with this complaint.

It completely flies in the face of what we're doing with GBTC. Converting it to a Bitcoin ETF is the best long-term product structure and also, more importantly, the product structure that's going to actually unlock the most value for investors, which includes Alameda.

JULIE HYMAN: But they're not long-term holders. The job of John J. Ray is to retrieve as many of the assets as possible.


JULIE HYMAN: Right? So you're referring to an investment case, which is not really necessarily relevant to what they're seeking, right?

MICHAEL SONNENSHEIN: Well, I think it's fair to say that the newly appointed management at Alameda is inheriting a series of investment decisions that were made prior to them. So actually being able to speak to the intent of their timeline or however it was that they made those investments would be really tough to do.

JULIE HYMAN: And that was Michael Sonnenshein of Grayscale Investments.