Sep 18, 2023

A growing number of asset management companies are joining the race for the approval of a Bitcoin spot exchange-traded fund in the United States while the Securities and Exchange Commission keeps delaying its decision on existing applications.

Video transcript

Crypto witnessed a major breakthrough when in a lawsuit between Gray Scale and the Securities and Exchange Commission in the USA Federal Court sided with Gray scale. The court said the SEC was wrong to reject gray scales proposed Bitcoin Spot Exchange traded fund or Bitcoin spot ef without adequately explaining its reasoning, the SEC still has time to appeal the court's decision and the story is far from over could one decision be holding back billions from pouring into crypto and is the launch of a Bitcoin Spot ETF on the horizon coming up on word on the block, Stephen mcclurg, co founder and Chief Investment Officer of Valk Investments joins us to dive deep into those topics and a whole lot more the time for a spot. Bitcoin Exchange traded fund in the United States may be upon us in a legal battle that's being compared to the story of David and Goliath or maybe David and David Gray scale. The world's largest Bitcoin Fund manager has emerged victorious against the US Securities and Exchange Commission. At least for now, the securities regulator has until mid October to appeal the ruling. Now in June 2022 the sec put the brakes on gray scales application to turn it spot Bitcoin trust into an ETF. And now that decision has been overturned due to the sec's failure to furnish a coherent rationale for the rejection of a spot while approving a futures TF for the same underlying asset according to the court. While the crypto community celebrated the victory. The tale is really still unfolding and it's raising some really important questions here. Why did the SEC approve Bitcoin futures in the past? But is putting a resistance against Bitcoin spot ETF s and how will this verdict influence similar applications currently in the Se C's pipeline? Well, let's dive into all of that and a whole lot more on this edition of Word on the block, the series that takes a deeper dive into Blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. That's what we cover right here on forecast. I'm editor in chief Angie Lau. All right. I'm really excited today everyone because joining us today, we have Stephen mcclurg, he's founder, chief Investment Officer of Val. This is a specialized alternative asset management firm that also has a pending spot ETF application with the SEC. They've been around for years and they've been following the rules and also playing by the rules. And really that is the critical nature of this conversation. Welcome to the show, Steven, let's get straight to it. It's great to have you? Hey, thanks so much for having me, Angie. I've been a big fan of yours for years. Oh, thank you so much. I want to talk about this landmark ruling to start off the price of Bitcoin went up more than 6% right after the verdict. Um What do you think is this, is this setting a precedent for the broader crypto industry here? I, I think it is. Uh, first of all, I believe that we should have had a Bitcoin spot ETF for a few years now. And this ruling really shows that the court's view is that the SEC probably should have uh let something be released uh at least two years ago, if not, maybe a year ago. By the way, I'm, I know why the SEC has been reluctant and I agree with them on a lot of, of, of the reasons why. Uh but I do think it's time. OK. So why, why, why has the SEC been reluctant? It has because part of the part of the court's ruling in favor of gray scale um was based on uh uh the, the, the perception that it was arbitrary. The Se C's proposal, uh denial was uh of gray scales. Proposal was arbitrary and capricious because the commission failed to explain its different treatment of similar products. But if you look back to uh there was another flood of ETF filings back in 2017, 2018. And the response from the SEC was in the famous uh Dalia Bloss letter in January of 2018. Uh that list five items that really laid out why they were suspicious and why they were reluctant to actually let a Bitcoin spot ETF go. One of them was custodian. And previous to all of those filings, there were a few custodial failures, a few custodial frauds. And then there's a loss of keys that have actually caused loss of, of capital for people. And even recently, if you look at the prime trust issue, prime trust lost their private keys to certain cryptocurrencies and they ended up imploding and then they covered up the fact that they had lost their private keys and continued to collect customer money. So that's the thing that the SEC is actually trying to prevent JP Morgan now believes. Uh also that ETF S will now be approved in one go uh to your point, the custodial issue. Um The technology is there, do you think now is the time where? Ok, that you know that concern might be a little bit neutered? Now, um, do you think it's go time for all ETF S when we filed for our Bitcoin Spot ETF in January of 2021 We simultaneously filed for a Bitcoin Futures ETF and the reason why we did that was, we felt like Bitcoin Futures was a baby step to get the SEC comfortable. The Bitcoin Futures. ETF doesn't have the same custodial issue. So if we could get them comfortable and everything else, the next step would get, be comfortable on custody. I believe that custody has been solved. Uh There's really good players out there with really good uh cybersecurity with really good processes with really good technology. Uh bit go coin base uh or two of the of, of the big ones that I think of. So, so you have really good uh tools that you didn't have in 2017 to your point. And I feel like now it's go time and uh if, if you can get Black Rock and fidelity and Schwab comfortable because they're very risk adverse, then uh you can get anybody comfortable. Oh, do you remember uh Larry Fink? I mean, he, he basically criticized crypto was really apprehensive about it, very hesitant about it. Uh Now, uh this is the largest wealth manager with over $9 trillion in assets. You know, now they're in play. The Black Rock ETF is, is in play. Uh And you know, they've, they've got that they've got that uh uh in the marketplace. Um So then why if we've got these institutions coming into the space? Why are they still holding back on your application on all of these other applications as well? I was a trader and a portfolio manager for years and in other areas outside of crypto. And I, and I understand the need for proper surveillance uh in the world of ETF S uh particularly when it comes to pricing surveillance. Uh But now we have that and uh we have the largest exchange in the US that processes over 50% of all Bitcoin trades that is offered up their data for uh so for the surveillance software. So now that we have that uh there really is no other reason why to deny this. But I, but I do believe the SCC just needs time to process that surveillance software to make sure that it, it properly runs and, and operates and fulfills their needs. Well, you've been super accurate in your insights uh as obviously with skin in the game. But uh uh I know that you had uh predicted that gray scale would win out on this ruling here. Why, why did you think that, why did you feel that? And you know, what, what's your optimism right now for, for the rest of the industry and spot ETF S? Yeah, I think their arguments were just very solid. Um You know, they, they took the position of comparing Bitcoin spot to Bitcoin futures. And they said, well, if there's good surveillance and pricing for futures, then that obviously apply, applies to uh to spot as well. And uh some of the other arguments that I've always made is OK, we'll look at some of the global commodities markets such as gold or oil, those two markets are highly manipulated globally. However, there are futures markets in the US that uh the markets and regulators are very comfortable with. So, so, so futures, yes, easy. But, but even Bitcoin itself, uh it's now gotten so large that it's hard to be manipulated. Uh e even looking at the stock market, if you look at microcap equities, they are subject to a high amount of manipulation just because they're thinly traded and you put in big block orders, it'll move the price. But I wanna ask you uh right after this break, I want to know if you know how the US is positioning itself here. Uh And will whoever starts first launching a US bought Bitcoin ETF will they have first mover advantage but stay right there, Steven, we're gonna take a quick break right now. But when we come back, we're gonna talk about that and we're also gonna talk about Val Cry's own pending application with the SEC. Stay with us. The SEC postponed its decisions on six applications for spot Bitcoin Etfs, including that of Val Val refilled its application on June 21. Joining a long list of asset managers including Black Rock. Will the regulator approve all Bitcoin spot ETF S in one go and who will get the first mover advantage? When word on the block returns? If you don't understand the future, you'll never see your place in it. Introducing forecast plus covering all things, Blockchain, independent reporting, insights and access from Asia to the world and you cut through the noise, where technology insights and access meet, where smart conversations happen, make friends with disruption forecast plus. All right, welcome back. You're watching Word on the block. I'm Angie Lau editor-in-chief of forecast. And I'm here with Stephen mcclure. We're talking about who spot ETF S here uh Bitcoin uh in particular, but I wanted to know um oh, you filed an application with the SEC June uh 21st also of this year to launch the Bitcoin Fund on the NASDAQ. Um So you've got a couple of pending ones. Um You're joining a growing list of asset managers including Black Rock and Fidelity. So what do you think? What for the, for the first one to be approved? Do you think that they'll have first mover advantage or do you think this space is ripe for competition? Uh So I do believe that there is room for competition. Uh There is first mover advantage, but there's also people that fit into different categories of what they're looking for in a asset manager or a name for instance. Uh So if you look at say, uh Fidelity or Black Rock or even Schwab, um you know, Invesco, uh all of these players uh will be competing against each other. They're gonna be uh competing for advi uh financial advisor share of the market. Uh where as I believe that some of the other uh ETF providers like us uh are really going to resonate with, um probably more in uh probably more retail clients, but also oddly enough institutional uh such as pension funds, pension funds like to diversify across managers and find experts or, or, or niche players in a field to allocate to. Uh So, um and on top of that, a lot of pension funds aren't allowed to allocate to Black Rock. So uh given uh some of the ESG issues that have come up in the last year. Uh So I believe there's about 12 states uh that, that aren't allowed to allocate to Black Rock and their pensions. So, so we actually have an opportunity to capture some of that. Uh So, so, yeah, I, I do believe there's gonna be diversification across the board, but I also agree with the comment that the SEC will likely have everybody go at the same time. It's just too much of a, of a, of a heated battle in order to not do that. The SEC has, you know, rejected the filing saying that uh you know, um that the New York Stock Exchange ARCA uh did not meet rules designed to prevent fraudulent manipulative acts and practices. It's exactly what you were talking about. Um Now we've got, you know, we've got the technology, we've got uh more surveillance sharing uh technology, we've got the custodial ones. Tell us more about where you are right. Now. Did you have to tweak your investment strategy, compliance measures to align with the regulator here. We did and, uh, but we were prepared for that, you know, back in my days at Guggenheim and this was back in 2010, 2012 when we were launching some of these, uh, we had to, uh, we had to change our own compliance process as well as our reporting. And it was actually kind of a pain. So if I was buying, uh, bonds to put inside an ETF, I actually had to then report it right away. And I had about a 15 minute window to report my pricing. And that's hard to do when you're calling se five or seven OTC dealers for a bond. And then, and then, and then, and then at the same time tracking in a spreadsheet what you're buying what the prices are and what your bid was and then reporting it. Um It's actually much easier in Bitcoin. And we took a lot of those learnings from, from a lot of our team that, that did come from Guggenheim is now at and we took a lot of our learnings from from then and applied them now. And uh you know, so, so we actually have a, a very strong compliance uh program where, you know, anybody that trades crypto on a, you know, on, on any account has to also supply that data uh and, and report it through our compliance systems. Uh But even on, on surveillance tracking, uh we do have to, we do have to report those right away and, and that's the biggest part of the surveillance because, you know, you could go and buy Bitcoin from some OTC desk at a price if those prices aren't being reported and you're simply looking at retail data, you can manipulate the ETF itself and actually take some for yourself. So that's one of the things the SEC is trying to eliminate, uh, they want those prices reported as they're being traded so that you're not too far off from the uh the reported price from say coin base. I think some of the strongest teams right now are those that understand the opportunity obviously has been in the space for a while, but really taking on that kind of traditional finance experience, um case in point, you know, your experience with the Esoteric Bond, ETF S and the team at Guggenheim. And to understand that, you know, underneath this product is really an understanding of what the SEC needs and let's say they approve spot ETF S in the United States. What impact do you think that that's gonna have on the marketplace and on Bitcoin and the price of Bitcoin in particular? Yeah, I, I really, Angie, I think it's gonna be massive because uh this instrument now allows a lot of people that weren't able to get to it previously into it. And, and, and really my point is, I mean, anybody can go on to, you know, Coinbase and open up an account and trade Bitcoin and buy it. But if you're running a family office or a pension fund or an insurance, uh, company account, um, you're not just opening up an account on coin base. Uh, you have to have a regulated instrument in which to invest in. Now, there are some that exist that are in the form of privates. Um, you know, we, we have one for instance that, uh, it's, it's a, it's a private vehicle to hold Bitcoin uh through a grant or trust. And uh there's a few other people that have that as well and uh but the larger institutional investors are slower to invest in that because of there, there is still a lack of regulation in those uh in an ETF it makes it easier. Now, I will say this, um, most pension funds and insurance companies don't invest in ETF S. It's a good first step and it will prove it out. But eventually they'll all move to separately managed accounts or private vehicles to invest in Bitcoin once that vehicle exists. So I think it'll be massive for Bitcoin. It, it makes sense because, um, you know, it's a, it's a tracking mechanism, you know, they, they can track to see the market activity before they decide to hold the asset. That's, that's exactly right. But, but the ETF itself probably won't grow too much after its initial launch. What, where the growth will be of the, are those ancillary vehicles and, and like you said, the ETF is the tracking mechanism. It's the gateway. I'd like to say that it's the gateway to something if you think that it's just gonna stop at Bitcoin. And in fact, when I ask you about, you know, you, you're creating lots of gateways here because it really is about the future, right? You think Black Rock is gonna just stick and stop at a Bitcoin ETF, what is it? That is the more, what is it that, that is the next, right? You've got a new filing at Val for Ethereum Futures. ETF. So you already have a Bitcoin Futures ETF listed on NASDAQ uh that was approved back in 2022 but tell us more about the strategy behind the other products um that you want to bring into the ETF space. Yeah. So I think the uh uh Ethereum Futures is really important because I don't see the sec necessarily approving a Ethereum spot ETF for a little bit longer. Uh just given how it trades in a, in a much more thin uh thin market than Bitcoin does. Eventually, it'll happen. It's probably two years from now, maybe one year from now. But um but in the meantime, we can utilize futures to get that exposure. And even more importantly, um what a lot of uh financial advisers and other investors are looking for isn't necessarily a vehicle just to get exposure to Bitcoin or Ethereum a lot of them are looking for ways to diversify across either those two or multiple crypto assets uh through an investment vehicle and they want an expert to do it. They don't want to do it themselves. They don't want to say, well, we're gonna allocate 60% to Bitcoin and 40% to Ethereum. Uh, they want to say no, you go and do that for us. So we actually think that this dual Bitcoin Ethereum futures ETF uh is really gonna be um uh a, a really big deal uh in the ETF space in the short run. And that's probably sometime in October. Well, the US is definitely not the first, whether or not it's going to be the last, there's a lot of other nations that, that have already launched. Um uh we're gonna go to a quick break but the world's first spot Bitcoin eo it's actually launched in Canada 2.5 years ago. Uh So the EC is moving, the goal post, keeps moving it, uh bringing it uh to market in the US. But when will the industry get the regulatory clarity in the US? Uh gonna ask that of Stephen and a whole lot more when we come back, stay with us. It was 2.5 years ago when the world's first Bitcoin spot EF was approved in Canada, several nations have readily embraced crypto ETFS, but the US has been slow in granting approval for these products, citing regulatory concerns. What lessons can the US learn from Canada more when we come back? All right, welcome back to word on the blog ETF. S for crypto Bitcoin ETF launched in Canada 2.5 years ago. Um You know, that came to market very quickly. There was, there was some really interesting market demand and activity there. Um When is the, you know, you, did you see that from afar or was it much closer view for the Canadian ETF? I was watching what three IQ was doing and I felt like they were really one of the first ones. So I was actually an investor in three IQ uh as well as a board member. And uh I uh I had the, the uh opportunity to be there when they launched their first uh Bitcoin closed in fund and then when they launched their uh Bitcoin spot ETF. And that's really about the time that we started Bakry, we were, we, we, we took a step back and say, OK, this just happened in Canada. I think it's time to do it in the US too. So, so we launched Bakry and uh and tried to uh replicate uh a lot of things that was happening in Canada. Did you think it would take this long? No. Hm II I know short answer. But I really, I really thought that um we were gonna have something in 2021. Um And during, during 2020 we did a lot of work on analyzing the uh custody solutions. And we felt like from a, from a, from a tech and from a cybersecurity perspective, they were there, they were ready to go and we had solved all the problems that were brought up in 2018 by the SEC. Uh And then the other interesting thing that happened was at the end of 2020 we started getting whispers that, uh you know, we were trading chairmans and that Daa Blass was retiring from the SEC and she was one of the biggest um opponents of a Bitcoin spot. ETF. Uh So we thought 2021 was really the year and uh when Ginzler was announced as the new chair, we said, oh, slam duck. Uh this is happening but it didn't happen. But here we are right. The SEC as Ginzler had appeared to be, you know, having taught it, you know, and, and been around it, he's very clear on how he feels about crypto. It's the wild west, you know, uh a lot of bad actors in his view. Um They've gone from, I think this year, uh going, you know, calling out mostly all crypto uh you know, except for, you know, Bitcoin and Ethereum, I guess, but everybody else is, is in the crosshairs now, NFTS are in the crosshairs, you know, where, where does this stand when you have an opportunity to present it to the marketplace? And for the average person to actually access a Bitcoin or E futures ETF or a spot ETF and then at the same time being barraged with this thud, this fear, uncertainty and doubt coming from the sec and coming from, you know, government agencies do they even have the appetite to actually want to participate in an ETF, this is, this is kind of the scenario we have in the marketplace right now. Yeah. Well, I, I'm, I'm gonna focus on the positives. Um First thing, first thing I'm gonna say is for some strange reason in 2021 Bitcoin became highly political and, and, and divisive uh which was something that we didn't expect either. Um Just, just given the nature of what it is. Uh But focusing on the positives, I will say that, you know, we thought that that Ginzler was going to deliver a spot. Bitcoin ETF, well, he did help make some baby steps that, that got us there, right. So the approval of Bitcoin futures came not too long after he stepped in as chairman. So I certainly want to applaud him on that. Um They did, they have taken a lot of enforcement action on some bad actors which I think is great and it's really cleaned up some of the other areas of, of the space. Uh But at the same time, I think they've attacked people that are good actors in my opinion as well. So, so that's been a little bit difficult. Um But, but even from a political perspective, there's been a lot of, of stepping up uh by um current um politicians. Uh you know, I, I, I'll just use it as, you know, Warren Davidson has uh really, really stepped up and uh overall, it seems like the House of Representatives is, is moving forward on passing positive legislation uh for the space. And, uh and he's one of the leaders of that, which, which I really want to applaud him for that. Uh There's many others, you know, I, you know, not gonna go through the whole list, but there's, there are many others. And then you also have the current um primary race for president, the number of primary candidates, Republicans and Democrats that are pro Bitcoin is astounding. Uh The Republican debate really showed that it's usually, and it's the younger ones uh that are, that are, that are very positive in pro Bitcoin. Uh And then on the other side of the aisle, you have, uh you know, Robert, uh Kennedy Junior who is a big proponent of Bitcoin. Uh So you're seeing it in, in both races and it's gonna be a hotly debated issue uh moving into the primaries and probably into the presidential election. Uh So I think that's very positive for uh for where we stand right now. It is the intersection of business politics and economy. It's right there. We're watching it unfold in the US Um And you're, you're in the hot seat, Stephen uh literally and Proverb, um you are 11 last question for you, what's next for Val? And if you're to gaze into the crystal ball of where this space is gonna be a year from now, what's, what's your prediction? Yeah. So what's next for the space and what's, what's next for Valk or, you know, both, both interesting questions, I think for the space we, we, I think this uh uh Ethereum Futures ETF is gonna be really interesting and it's really going to broaden the horizons of who invest because it's not just a single asset, you know, security like you have with Bitcoin futures. And then I really do believe that we're going to get a Bitcoin spot ETF by, at least by Q two of next year. So, but I've been wrong before I was wrong in 2021. But uh but I, but I do think that the time is right, if not sooner than that and that will really open the door to a lot of other types of product and investment ideas. Uh as, as you mentioned earlier, it really does open up uh in institutional investors to more things. Um And then what's next for val, I think, you know, we're, we're really leading the charge on uh on, on Bitcoin. Uh but we're also focused on other areas of innovation that doesn't have to do with crypto assets. So, uh I think that's gonna be uh a lot of fun for us in the coming months and years. I can't wait to find out. And, uh, and, and when it's ready, you come back right here and you let us all know about it. Thank you, Angie Will Steven. Thank you so much for joining us and that is a wrap. Everyone. Thank you for joining us as well. Everyone for uh this latest episode of Word on the block and watching. I'm Angie Lau forecast editor in chief. We always appreciate hanging out with you until the next time.

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