Grayscale Investments CEO Michael Sonnenshein joins Yahoo Finance Live to discuss his company's bitcoin ETF and also weighs in on the fallout of the FTX collapse.
- Well, Grayscale Investments made headlines this morning after pledging to explore a tender offer for a portion of the shares of its Bitcoin fund should its conversion to an ETF not go through. Grayscale Investments CEO Michael Sonnenshein is joining me now to discuss.
So this is a pretty big deal that you guys are doing this. So just to give viewers a little bit of history, you applied to the Securities and Exchange Commission to convert your trust into an ETF. That request was rejected earlier this year. You filed suit. So you're still pushing to get that done.
MICHAEL SONNENSHEIN: Yes.
- So this is sort of a contingency plan. But talk to me about what's behind the decision and how it would work.
MICHAEL SONNENSHEIN: Well, so we have been focused on creating a Bitcoin ETF going all the way back to 2013. That's how we initially structured Grayscale Bitcoin Trust. It's always been our mission. And the full resources of the firm are still behind that initiative.
We filed for a Bitcoin ETF in 2017. The SEC wasn't ready for it. GBTC has continued to grow and expand. It's now the world's largest Bitcoin investment vehicle.
This past summer, the SEC denied our ETF application. To your point, we filed a lawsuit right away. And that's a reflection of us as a business. We're prepared for all outcomes. And so moving forward, even though yes, now we are in the middle of litigation and we believe strongly in our arguments-- they're common-sense legal arguments that we think will be appealing to the courts-- ultimately, if we exhaust all of our options in the judicial system, we want our investors to know that we're prepared for that outcome as well and would explore a tender offer at that time.
- And so the tender offer would effectively be that for 20% of shares, you would offer to buy them back?
MICHAEL SONNENSHEIN: The specifics of the tender offer would need SEC approval and shareholder approval. So it's tough to speculate on the exact mechanisms and exact pricing. But at this time, we expect that it would be for up to 20% of the outstanding shares.
- So acknowledging there's a lot of hypotheticals here, is this an acknowledgment that you might not win the suit and the spot Bitcoin ETF maybe will never be?
MICHAEL SONNENSHEIN: It is not an acknowledgment of that at all. We are steadfast in our belief, particularly in the wake of FTX and the wake of all recent events in crypto, now more than ever, investors deserve the protections and familiarity of a Bitcoin ETF. I certainly think that when you look at an asset, investment vehicle like GBTC that is the largest in the world-- it has almost a million Americans that own GBTC-- why the SEC, why our regulators wouldn't take the opportunity to bring it closer into the regulatory perimeter, it seems like a really missed opportunity on their part, particularly in light of recent events.
- Right. Be that as it may, it still might not happen if they don't agree. The other thing that potentially can happen is even for a tender offer, whatever the structure it might take, you need SEC approval for that, too. So as you're making contingency plans, what's the contingency plan if the SEC doesn't approve a tender offer? Do you have another way to give cash back to the people who are holding the trust?
MICHAEL SONNENSHEIN: Ultimately, an ETF, a spot Bitcoin ETF here in the US is a matter of when, not a matter of if. And so if there is no legal clarity, if there is no regulatory clarity, we will continue to pursue the spot Bitcoin ETF. And eventually investors will get what they've been so patiently waiting for.
- OK. I know you've been pushing for this for a long time here. At the same time that all this is going on, there was an investor that filed a lawsuit against Grayscale called Fir Tree, which has called for more transparency and in particular wants a vehicle for investors to get redemptions, which is either what the Bitcoin ETF or the tender offer would also achieve. Why don't you currently allow redemptions? What in your structure-- because it's self-imposed, right, it's not something that is regulatory imposed upon you, if I'm understanding that correctly?
MICHAEL SONNENSHEIN: So GBTC briefly had a redemption program in 2014. The SEC deemed it to be in violation of Reg M. And at that time, as a result of that, we shut down the redemption program and have not been able to offer it since. So, contrary to popular belief, it's as a result of that SEC shutdown.
But I think when we zoom out, a lot of investors kind of conflate what we're actually doing in this lawsuit. What we're actually litigating for is the ability to do redemptions, right? We're litigating to have the ETF structure that has that built-in mechanism to both create and redeem and keep GBTC shares in line with its underlying net asset value.
- Right, because right now they are not at all, right? You're at a big discount. Is there anything you can do to close that gap besides what you're talking about?
MICHAEL SONNENSHEIN: Well, I think in the environment that we're in, we've had a year where pretty much every risk asset has fallen precipitously in value. That's been true of tech stocks, certainly been true of crypto. And I think in the wake of recent events, there's a lot of mistrust in the system. And that is certainly putting a lot of sell pressure on GBTC but a lot of assets as well. As we get into the end of the year here as well, I'm sure you'll also see some added pressure across markets, not just crypto or GBTC, but across all assets, with investors doing some tax loss harvesting as we get into the end of the year.
- I mean, there's also concern because of the fallout from FTX, which then has spread to an entity also owned by your parent company, DGC. I'm talking about Genesis, which has a hole that it is now trying to fill. There's also concern about potential spillover for Grayscale, which, again, is, again, under the same umbrella entity, although separate. What do you say to investors who are concerned about that?
MICHAEL SONNENSHEIN: It's such a good question, Julie. I'm glad you bring it up because I address this in the letter I put out to shareholders today. All of the assets underpinning our products are safe, secure, accounted for, and unencumbered.
And it's important to know for investors that when you're a shareholder in any one of these products, those assets belong to that product and you as a shareholder own the assets of that product. So these are separate and distinct entities that have no direct tie or impacted by any other entities that are affiliated with Grayscale or anywhere under the DCG umbrella.
- And you guys are under much more regulation than, say, an FTX or some of the other entities that have gotten into trouble as of late?
MICHAEL SONNENSHEIN: You know what? I'm going to go as far as to say that we've been pioneers when it comes to regulation. We were the ones that proactively went to the SEC in a voluntary fashion, became the first SEC-reporting company that was a digital currency investment product.
We work constructively with regulators. We always have. We always will. And it's really been about defining with them full and fair disclosures, audited financials, coming up together with what the treatments, policies, definitions should be. And now that's really the model for all other digital asset products that are coming into the market.
- All of this said, you guys are linked to an asset that you don't control, right? It's not like your stock of a publicly traded company that you can manage through. What happens if Bitcoin never recovers?
MICHAEL SONNENSHEIN: Julie, I have been in crypto now for nine years. And although there is a lot of mistrust in the system at the moment, I've never been more confident in the staying power of this asset class.
- Come on. Really?
MICHAEL SONNENSHEIN: 100%.
- How so? I mean, when you-- I mean, because the value of the asset is based upon the perception of its value, the perception now is pretty bad.
MICHAEL SONNENSHEIN: What would you say about tech stocks that have fallen 90% from their all-time highs that are now-- those companies are facing layoffs. They're shedding business lines, et cetera. There's not a ton of confidence in them either.
- No, but there's a use case there. They actually make stuff and do stuff, whereas Bitcoin still, its use case, I think, is still questionable at this point.
MICHAEL SONNENSHEIN: Bitcoin has solidified at least one use case. And that's as digital gold. That is the narrative around Bitcoin that has been there, that will continue to be there.
Ultimately, whether Bitcoin is able to achieve other use cases that are commonly known and commonly accepted as a payment rail or other use cases is still yet to be determined. Time will tell. But certainly the narrative around digital gold, nonsoverign assets in an environment where a lot of people around the world are being directly harmed by the actions of their governments and the ways that they control their currencies, Bitcoin as a store of value, a digital gold for the digital age, is certainly a narrative that's here to stay.
- Well, as you say, time will tell. We really appreciate you coming in to talk to us about this. And we'll be in touch, obviously, as the lawsuit progresses and we get closer into next year.
MICHAEL SONNENSHEIN: Thank you.
- Thanks so much, Michael. Appreciate it. Grayscale Investments CEO Michael Sonnenshein.