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Grayscale CEO on SEC lawsuit: Spot bitcoin ETF approval ‘a missed opportunity’

Grayscale CEO Michael Sonnenshein joins Yahoo Finance Live to discuss the company's lawsuit against the SEC after it didn't approve a spot bitcoin ETF.

Video transcript

- The manager of the largest Bitcoin fund, Grayscale, is suing the US Securities and Exchange Commission. That follows the regulator's rejection of Grayscale's bid to convert its Bitcoin Trust into a fund that would track the spot price of Bitcoin. For more on this, let's bring in Grayscale CEO Michael Sonnenshein. Yahoo Finance's David Hollerith, who covers crypto for us, is also here. Michael, it's good to see you. So the SEC's rejection--



- --was sort of centered on what it said was its desire to protect investors and that this conversion would not adequately protect investors. So in filing this lawsuit, what's sort of your response to that?

MICHAEL SONNENSHEIN: Well it's been a busy 12 hours for the Grayscale team. We were obviously very disappointed by the SEC's decision here. And we, of course, vehemently disagree with where they've netted out on the decision. What's interesting about the posturing, Julie, is that Grayscale Bitcoin Trust GBTC has been an SEC reporting company since January of 2020. And in looking to convert it to a spot Bitcoin ETF, we'd only be bringing it further into the regulatory perimeter, giving investors further protections, giving them fuller disclosures. So we really feel it's a missed opportunity on the part of the SEC, hence the lawsuit that we filed late last night.

DAVID HOLLERITH: Michael, David Hollerith here. Thanks for coming on the show. I was just curious in terms of the release you put out regarding the lawsuit. You've cited that the SEC has applied inconsistent regulation in terms of these products. Could you sort explain more what that means?

MICHAEL SONNENSHEIN: Well, really what we've seen in the US market is the SEC has continued to approve Bitcoin futures-based ETFs. So these are ETFs that either hold Bitcoin futures long, or now in recent days and weeks, are actually a product that holds short Bitcoin futures exposure. And they've done so continuing to deny spot Bitcoin ETF applications that time and again keep coming in front of the SEC only to be denied.

And what's curious about that disparate treatment is the fact that the Bitcoin futures ETFs derive their value from the Bitcoin futures contracts, which are, of course, getting their pricing and valuation from that underlying spot Bitcoin market. And the same is true of a spot Bitcoin ETF that, of course, holds Bitcoin and then is getting its pricing from the underlying Bitcoin market. So for the SEC to treat these two differently is an unfortunate situation and has led to the denial, but is also what we feel the grounds for an Administrative Procedure Act lawsuit, which is some of the arguments we've put out in recent weeks and months.

- Based on this decision, what transitive kind of property would you put on some of the other regulators that have yet to kind of voice their opinion on where crypto regulation will come forward?

MICHAEL SONNENSHEIN: I do think the next couple of months in the US and certainly in DC are going to be interesting around crypto. That's changed meaningfully. I mean, we've been working in DC for years now, often working proactively behind the scenes with regulators to develop full and fair disclosures and bring crypto investment vehicles even closer into the regulatory oversight and protections that we think investors want and they deserve. What you've seen now, though, is bipartisan support. So you've seen sitting US senators putting forward new rules and regulations around crypto.

You've seen the White House executive order coming out, asking all the federal agencies to really dive into crypto and ensure that they're protecting American competitiveness when it comes to technological innovation and not squandering it. So the next few months are going to be very, very telling for crypto. And I don't think that's just limited to the SEC. I think you'll see additional guidance, we hope, from other regulators as well.

- Michael, do you think the SEC just doesn't want to see your business be successful in the broader crypto industry?

MICHAEL SONNENSHEIN: I think that the SEC has to maintain their posturing and their mandate as a disclosure regulator, not as a merit-based regulator. And so that means that investors should have the opportunity to invest in any investment product that they deem appropriate for themselves, provided the appropriate risks and disclosures are outlined. And we hope that they continue to uphold that mandate that they've had for in perpetuity essentially.

- Michael, we've talked to a lot of folks who have talked about investment in the crypto space and that even when the prices are pulling back, this is a good time for that kind of investment. I'm curious though if this kind of regulation, not just on the part of the SEC, but also on the part of Congress, is a little tougher when prices are going down because we see some frauds exposed in the system, because we see people losing money that you might have a tougher row to hoe at this point.

MICHAEL SONNENSHEIN: I think that is a kind of short sighted or myopic view of it. We've seen now in the recent environment, whether it's rising inflationary pressures, rising costs of gas, food, you name it, set against a backdrop of volatility across almost every asset class. Julie, you have tech stocks today that are down 80%, 90% off their all-time highs.

And you're not seeing a lack of engagement or an inability for those companies to continue to come to the public markets or continue to trade. And so I think regardless of where crypto prices may be, this is not something that's going away. This is something that is only being further engaged in by American investors. And it's important that our regulators engage on these issues and begin to actually regulate beyond just giving enforcement actions and calling out bad actors in the ecosystem, which of course we do support.

- Michael, what do you believe it will take for the washout of this crypto winter to subside then? And what's going to be the remnants that the industry can actually build on?

MICHAEL SONNENSHEIN: Well, I don't have a crystal ball. But having been around the industry the last eight or nine years, we have experienced drawdowns of over 50% several times before in the crypto ecosystem. And each time we see this, we are seeing leverage coming out of the crypto ecosystem, we do see some consolidation, we're expecting some M&A activity this time around, and the industry demonstrates its resiliency. We get stronger. And the industry takes those lessons and continues to build and move on to achieve new applications and continue to have crypto be something that's more accessible by more investors.

- Just briefly here as well, though, one of the things that you mentioned earlier was that, for investors, they need to be able to access this new asset class here. But it's not necessarily apples to apples, especially if we're looking at tech, which has had a ton of institutional money for decades now versus the two decades-- fair-- crypto has been around in Bitcoin and the new whales that have now hopped in as well. And so in the comparison there, isn't it kind of different in that sense that we're looking at an asset class that the SEC and other regulatory bodies haven't necessarily wrapped their heads around fully?

MICHAEL SONNENSHEIN: It is early days for crypto. I do think over the next call it 12 to 18 months you will begin to see some of the great applications that have been built in the crypto ecosystem have their connectivity tied into the legacy financial system. That will be a tailwind that will allow more investors, institutional investors, get increasingly into crypto. But today, those two ecosystems do operate somewhat disparately from one another, which is why, again, I think it's such an amazing opportunity for some investors if they can stomach the volatility and do have the appropriate time horizon for investing in crypto.

- Grayscale CEO Michael Sonnenshein, we appreciate the time, as well as our own David Hollerith joining from Nashville, Tennessee. We appreciate it, David.