David LaValle

Two incredible innovations of finance, the ETF in terms of an investment product and crypto or more broadly, digital assets coming together. So it's been great. Yeah. No, that's exciting and a really perfect background for this show. Before we get into Grayscale, before we get into GBTC, I want to just ask, and I ask everybody, any hobbies? What do you like to do when you're not working? Oh, man. You know what people would tell me? I had a nickname that I'm the concierge. So people in the ETF industry and people that I've worked with will reach out to me and say, Hey, I'm going to be in St. Louis. Where should I go? And I'll be like, you should go to Pappy's for ribs. Or where should I go if I'm in Dallas and I want coffee? And I'll be like, go to weekend

Coffee. So I'm passionate about food, coffee, and enjoying time with my friends and working out and running. And I don't know. I got a bunch of stuff that I do. Yeah. So I'm going to have to get your number because I've been traveling more and I would take the recommendations. So... Anytime. You wouldn't be the only person, I promise. The concierge. I'm going to be calling you that. So we all know Grayscale. It's a household name at this point. It's been popularized for GBTC, which is the Bitcoin ETF. However, you have many other products. Can you talk about all the things Grayscale does for clients? Yeah. Look, we're the largest digital currency asset manager in the world. Our flagship product is absolutely GBTC, which is the largest Bitcoin ETF now in the world. We used to say the largest

Bitcoin fund in the world. It's the largest Bitcoin ETF in the world. And we're really, really proud about that. But I think if you take a step back and look more holistically at Grayscale and what we've done for the market, it's not about tokenizing the world and changing the way that everybody does everything and using crypto to do that. It's really taking a look at how can we bring access to the broadest range of investors and deliver these crypto opportunities to them. And it's really about taking a look at the regulatory framework and utilizing the regulatory framework to really bring products to market that make sense for investors. It's about education. And look, 2013 was when this product was created with the expressive promise to turn it into an ETF.

Yeah. And we finally did it. It took 10 years. But we have been on a journey to bring a number of different exposures and a number of different digital assets to market, utilizing the same exact process that we utilize for GBTC. And we like to boast a four-phase lifecycle. So we have 17 digital asset products that have come to market. And they start as private placements. They season under rule 144. After a year or so, we apply for them to be quoted on the OTC markets. After they're on the OTC markets, being quoted and traded, that allows anybody to buy and sell them. So seeking liquidity in those products, we have the opportunity to make them SEC reporting companies, which would be phase three.

And then ultimately, phase four is turning them into an ETF. So we have 17 digital asset products that are living in one of those four phases. Some of them are single asset products like GBTC representing Bitcoin. So ETHE for Ethereum and GSOL for Solana. And some of them are index-based in nature. So our digital large cap fund, which is an index-based product that holds a number of different tokens. So those are some products that we have in market. That's probably less exciting because people know about that stuff. The more exciting stuff is what's the product we're going to launch or think about launching today that's in our product development cycles. That's the GBTC of 2013 that the marketplace probably isn't necessarily yet ready for, but we know is going to be something that's going to be in

Demand in five or 10 years from now. And we've partnered with FTSE on developing the crypto sectors. So we have all sorts of very interesting, innovative ideas. So it's about innovation. It's about utilizing the regulatory framework. It's about delivering exposure of crypto to our investors and really being that crypto specialist for the market. Yeah. No. And it's definitely an exciting time, I think, to be at Grayscale. It seems like a lot of really cool things happening. Before we get into products and some of the regulatory framework and everything that just happened to get this Bitcoin ETF to market, I think it's important because I've talked to a lot of advisors. You talked to a lot of advisors. I think the biggest hurdle for mass adoption in the wealth space is just basically education. Yeah. We would agree.

Yeah. So can we do just what is Bitcoin and why should advisors be looking at this asset class? Yeah. So at its core, Bitcoin was developed with a purpose in mind. And that purpose was to be a peer-to-peer payment system and to be decentralized and totally decentralized and off the rails of anything that we are currently utilizing for our own banking or for our own ability to transfer fiat currency. And I think part of the problem with the advised community and with people in the US is that they're relatively pretty happy with their payment system that currently exists.

And so you're absolutely right that it takes a bit of education in facing off with not even the skeptics, but people that just don't understand the utility of this innovation and the conversations that we have had. And listen, when I joined Grayscale, my parents asked me the question. My aunts asked me the question. My kids asked me the question. And I think I also needed to be educated on it. And through that education, there's real world utility. And the question that we get asked mostly, although it started to dissipate from the advisors, is why would I ever use Bitcoin to buy a coffee in the morning when I get up? And the answer is you probably wouldn't if you're in the US market. And that's where the conversation starts. And that's where the education starts. And then it

Leads to a really fruitful discussion about how advisors can think about Bitcoin, how advisors can think about digital assets more broadly, and then how they can think about incorporating it into their portfolios and their clients' portfolios. And it's been really, really rewarding to be that educator and to be that source of education. We created a Bitcoin book. And the Grayscale Bitcoin book is an actual physical book that talks through exactly what Bitcoin is. And it's meant to be an education source for advisors to keep on their desk, to utilize as a resource, and then to also share with their clients. So look, if any of your listeners want to get a Bitcoin book, info at grayscale.com and ask for it and tell them that you heard about it on your podcast.

Yeah. Tell them that David sent you. Exactly. Exactly. Exactly. So I would buy coffee with Bitcoin if I got my airline points, right? As long as I can get my reward points, maybe we can work that into the system if Satoshi is listening. You're not that far off. So stay tuned. Who knows what we'll innovate with. Right. So the race to spot Bitcoin approval was a bit, to me, like a soap opera. I watched it from afar on Twitter. Can you talk about everything that had to happen to really make this a reality? Like, when did you start thinking, it seems like a long time ago that we were going to get this in an ETF? Can you talk about some of the hurdles that you had to jump through in order to get this product

Actually approved as a spot Bitcoin product? How long we got? We got as much time as you want. So first of all, I never thought of it as a soap opera. I think maybe I would have, if I was going to use a TV analogy, it might be more like a reality show. So, but, and we'll have to, we'll have to think on that. It's a good one. I like analogies. Look, we had tremendous, tremendous conviction that we were going to deliver on the promise that we offered our investors, that we were going to deliver Bitcoin in an ETF wrapper. And in 2013, when this product was built and it predates me, but it was built to mimic GLD's construct, a 33 act Delaware grantor trust that was going to be a building block for clients in their portfolios.

And it was going to be an allocation that they were going to want, just like it's an allocation that they have for gold or for S&P 500 exposure or, or other commodities. Um, and so that conviction, uh, was held very tightly by the entirety of our firm. And upon joining, there was kind of a very interesting opportunity that presented where, whereby chair Gensler made, uh, some comments in Q3, uh, of 2021, where he said the SEC was ready to entertain the opportunity for, Bitcoin futures ETF. So that's an ETF that holds Bitcoin futures. And, we thought, wow, that's interesting. If you're good with futures, you should be good with spot. It seems to me, I think, um, Eric Belchunas once said, you know,

That's kind of like saying we're okay with a rated R movie, but we're not okay with a PG 13 movie, to another analogy. Uh, and so we, we were ready to go. And on the first day of trading in October, that those Bitcoin futures ETFs traded, we filed to uplist GBTC from being a publicly quoted, uh, over the counter private placement to become an ETF listed and traded on NYC ARCA. And, as I think you probably know, and your listeners probably know there's a regulatory review process. We respect the regulatory review process. It was about 240 days. Uh, and in, late June of 2022, we were, we were denied by the SEC.

And on that day that we were denied, we, challenged that decision ultimately in the DC circuit court of appeals, uh, under the administrative procedures act. And we basically said, listen, we've been treating unfairly. We're being treated in an arbitrary and capricious manner. If you're good with Bitcoin futures, you should be good with Bitcoin spot. And as a regulator, as a government regulator, you need to treat like pieces of business alike. And we challenged that decision. And ultimately in late August of 2023, we got a unanimous decision from the DC circuit court of appeals and they agreed with us. And they said that the SEC behaved in an impermissible way under the administrative procedures act. Uh, and they could not deny us on those grounds. And that set off a 45 day

Period where it was a little bit tense at times at Grayscale, we were wondering if the SEC was going to appeal that decision. We didn't think they had a strong case to appeal, but they had the right to appeal. And after those 45 days expired, the SEC decided not to appeal. And that, put us on a path to have some really constructive dialogue with the SEC. And ultimately on January 11th, get to a place where we were, listing and trading on the NYSE exchange. Um, between that denial and the, the, decision by the SEC to not appeal, there was a tremendous amount of work by the industry that largely goes unspoken about, but everybody showed up. Obviously the issuers were

Interested in launching the products, but you had administrators, you had custodians, you had authorized participants, you had market makers, you had exchanges that all really needed to show up. And in the two weeks before Christmas and the two weeks after the Christmas holidays, uh, leading into that January 11th date, it was, uh, quite a bit of gymnastics that the, uh, that the industry kind of went through. Uh, I've been quoted as saying, we were all pretty much twisted up into a pretzel to make this thing happen. And the beauty of it is everybody showed up and it worked and these products are behaving as designed. And it's an incredible, incredible, uh, commitment by the industry to, to have shown up and given the ETF investors, what they wanted,

Which was a Bitcoin spot ETF. What just out of curiosity, what was, the major hurdle and or to that the SEC was pushing back on to make it difficult? Yeah. So they essentially made three comments. Um, one was that '40 Act products have, um, greater protections for investors than 33 act products. So let's pause there for a second. I'm not a securities attorney and I'm going to oversimplify this for your listeners, but '40 Act, um, essentially governs products that hold securities, stocks, bonds, futures. Um, and so the Bitcoin futures products came to market under the '40 Act and the SEC said the '40 Act has greater protections than the 33 act 33 act again, broad strokes governs commodity based products, gold, silver, platinum, palladium,

Bitcoin. And so our products were coming to market under the 33 act. So that was number one. Um, the issue with that concern that they had is shortly after the initial wave of approvals for Bitcoin futures products under the '40 Act, they had approved a product that was brought to market by two cream, uh, which was a Bitcoin futures product under the 33 act. So we said, Oh, I guess the 33 act and the '40 Act are both permissible. So that kind of, um, hurt their argument there. They also said that, um, the underlying Bitcoin market is susceptible to fraud manipulation. Uh, and the underlying Bitcoin market does not have the appropriate surveillance in place, uh, to ensure that, fraud manipulation can be kind of governed. And those two arguments, um, we appreciated.

However, if they were good with Bitcoin futures, they were essentially saying that Bitcoin futures market has appropriate level of surveillance. And if, Bitcoin futures are based on Bitcoin spot, then implicitly, they're comfortable with the surveillance that's going on in the underlying Bitcoin markets. And ultimately when we kind of fast forward and we go through the written briefs and the, we get into the courtroom, the, the judges rightfully focused on the SEC's decision, which said many times that Bitcoin futures are different than Bitcoin spot. And the Bitcoin futures market is different than the Bitcoin spot market, but the judges very rightly asked very directly to the SEC. Um, you've said a number of times in your written briefs that these are different,

But you haven't said why. So tell us why. And ultimately, um, the SEC didn't have a, didn't have a, a strong enough answer to that question. Yeah. Well, no, I appreciate you sharing all that. I, it was, again, I was watching from afar and didn't really know all the inner workings. And I'm sure those who are, interested in the products and interested in these spot Bitcoin products are going to appreciate that as well. So can we talk about the changes that needed to be made to GBTC once this approval was made? So sure. The structure or, how you had to probably underlying swap underlying holdings, like how did that all work? Yeah. Structurally. Yeah. It seems like a, a sexier question

Than it actually is given that in 2013, when we built this product that we had an ETF in mind, we built it exactly for that purpose. And so the product didn't change. Um, two things changed. Number one, uh, the listing venue changed. So it went from being, traded and quoted on the OTC markets to being traded and quoted, uh, on NYC ARCA. So think of that as like a corporate action and a listing venue change. Very simple happens all the time. Uh, and the second is the permission to have simultaneous creation and redemption, which is the hallmark and kind of the bedrock of how an ETF works in the, the, the previous structure under the private placement construct, you could either have creations or you can have redemptions. Um, and the problem was redemptions weren't permitted in the

Current construct. And so we were really kind of stuck in this, limbo where, we really wanted to uplist the product to become an ETF to allow for simultaneous creation redemption, which would allow for our product to much more closely track the underlying value of the assets. And in the absence of that, simultaneous creation redemption, our product was somewhat behaving like a closed end fund and wasn't doing a really efficient job of tracking the underlying asset. So it was at times trading at a premium and then at times trading at a discount and we wanted to deliver better for our investors. So that was really the driver of us creating, this ETF, um, and uplisting it to become an ETF, but it was really just a corporate action for an uplisting

And then simultaneous creation redemption. I think a lot of advisors too are curious, how the fund or how the ETF actually custodies this asset and trades it like, cause it's atypical from going through a exchange like Nisey, right? Where you're trading equities or, you're trading fixed income, this is a different type of asset class. Can you just talk structurally about, about that? Yeah. So it was incredibly innovative in some ways and the same old story in other ways. So if you're an ETF geek, like I am, I'm proudly an ETF geek. We leveraged a lot of what we had already seen in the past. And when GLD came to market, it was also a bit of a conundrum in the sense

That you had an administrator that was responsible for managing the creation and redemption of ETF shares. those firms are like, Bank of New York or State Street or JP Morgan or U.S. Bank or Northern Trust. But typically with ETFs, that administrator is also the custodian. And those, providers of administrative services for ETFs, didn't have the ability to custody the actual gold. there are rocks. I always used to say that, GLD is a pretty simple product. It's rocks in a box, but they didn't have the box to hold. They didn't have the vaults. And so you had this, strange situation where HSBC was going to be the custodian of the gold. But, Bank of New York in that case was going to be the

Custodian, excuse me, the administrator of the ETF shares. And so you have this kind of divorced situation where the administration and the custody of the product are separate. It's the same exact thing that we have seen with these Bitcoin spot products coming to market. Now, fortunate for us with a 10-year track record and having a strong relationship with Coinbase and actually understanding how to strike a NAV for our product and already having Bank of New York as our administrator. we actually understood exactly how this was going to work. And we were really proud about that. And we were preparing for that because we knew we ultimately wanted to have an ETF in market. But it wasn't actually that complex, to be honest. For others who are not digitally native, perhaps,

It was something that was a little bit more difficult for them. But for us, honestly, we already had a relationship with Coinbase. And at launch, we had $28 billion in assets that were custodied there. And we already had a relationship with Bank of New York, who was striking our navs on a daily basis and doing the administrative functions for GBTC in the current form before it was an ETF. So it's actually a lot less sophisticated and curious than you might think it was. So this was the first time, at least in my career, since I've been in the ETF space that we watched a bunch of horses at the gate at the same time, and the whistle blew off. And now you have competition in similar products, right? So how is Grayscale viewing competing in the space?

Obviously, you're the oldest, but how are you viewing competing and growing in this space as... we just got off the finish line. Yeah. Yeah. Listen, we're happy to have everybody competing with us, candidly. We showed up with $28 billion in assets and a million investors and a 10-year track record. this is not new game for us. And we're a firm that really understands how the ETF market works as well. And by the way, I say that respectfully. And we are big, big believers in investor choice. So I know we talked about Bitcoin futures and the Bitcoin futures products. We're not anti-Bitcoin futures products. It's about investor choice. There are people that are going to utilize that for their Bitcoin exposure. Great. But we showed up with a tremendous amount of

Expertise. And it is unprecedented to have 10 products kick off on the same day. That was something to really, really watch. But I think more importantly, it was watching the industry show up and support all those products. Nothing broke. Everything worked as designed. Day one, we had, I think, $4.3 billion of notional trading volume. That is insane. GBTC traded... GBTC was the ninth most actively traded ETF out of the 3,500 ETFs in market with the likes of the Qs and SPY and IWM. And that's incredible. So this thing all kind of worked as designed. Investors are going to have choice. That comes with a responsibility. And I know there's going to be advisors that are listening that need to understand, not every ETF issuer is created equally and not every ETF is created

Equally. And that's something that I have been saying for the 15 years I've been, peddling ETFs. I'm a huge believer in ETFs, but you have to do your homework and you have to know who you're partnering with. And you have to understand, explicit costs and the implicit costs and how to best make a decision for you and your clients and your clients' portfolios. So now that this product has been approved, where do you see the evolution from here? I see leveraged products already in the market. I'm sure we're going to get active. So where do you kind of see the evolution now that you've got the first spot approved? it was like a race to the start line as opposed to a race to the finish line. It's,

I don't know if any of your listeners ran track, but you're looking across and you're like, oh my gosh, I'm running the 400 and everyone is lining up and I'm across the infield. And so you do a dead sprint diagonal across the, that football field and you're ripping your track suit off and hopping in line sweaty. And then you have to run the 400. That's the way it feels, right? We sprinted to the start line with everybody else. And now we actually have a real race to run. And I think there's two components to the evolution. I think you were alluding to, what's going to come next from a product perspective. There is absolutely going to be a whole ecosystem of products that are in and around, just a spot Bitcoin exposure.

You mentioned levered, you mentioned inverse, there's going to be an options market that's going to be established and there's going to be target outcome products and buffered products, and there's going to be covered call products. We filed for one. There's also going to be, other traditional overlays. You could see a, low vol Bitcoin ETF. You could see, something that targets a certain growth or looks at other factors. You might see some that are, bringing and incorporating factors that are really only, in the crypto market that are going to now be incorporated into the traditional ETF market. That's kind of one side of it. But then the other side of it is all about access. We haven't even like scratched the surface

On access. So the story here is that ETFs have long democratized investing for investors and bringing asset classes that were available to a subset of the market and made available to everybody. And I know we talk about SPY being the first ETF in market. And we talk about that being, a very plain vanilla exposure, S&P 500 exposure with a market cap weight. Well, let's be honest. In 1993, that was an exotic institutional exposure that was brought, to the masses. And then we saw international equities and fixed income and subsects, subsectors of fixed income and commodities and currency and currency hedge. Like this is just another, example of an asset class or an exposure that was available to a subset of the market that now is available to the masses. And when I say the masses, I mean the

Advised market. We are big believers in partnering with our advisors. Sure, there are going to be individual investors who are going to buy on their, self-directed accounts. But this is really about partnering with the advised market, partnering with advisors, educating advisors, educating the client base. And that's going to take onboarding at all these platforms, the wire house platforms, the independent platforms, and going through due diligence exercises at all these, houses that are going to look to incorporate, Bitcoin into their clients' portfolios. Historically, before the ETF, didn't really fit. And these wealth management platforms were saying, this is not for us. We are not wading into the digital asset market. Now that they have it in the form, Bitcoin in the form of an ETF, it kind of fits into the due diligence process.

And they can no longer really avoid the question. Advisors tell me their clients are asking about it. Advisors tell me that they need to be as educated or more educated on this topic than their clients are. And we're here to do that. So it's about new product exposures and it's about access. Yeah. And it's interesting. Bitcoin is probably the first asset class where the client may know more than the advisor, right? And they bring that to the advisor. They bring the idea to the advisor. The million dollar question, and you walked right into this, which would be, if you're sitting down with an advisor, where does GBTC kind of fit in the overall model portfolio construction, in your opinion? So Bitcoin means different things to different

People. And that makes it fascinating for like an asset allocation conversation. But let's actually mimic that conversation because the advisor is first going to say, I wouldn't use Bitcoin to buy my coffee in the morning. And I'm like, you're right, because you're in the US market and you trust your financial system. But maybe you were in a country that had 40% annualized inflation. You would want something that has a little bit more stability to it. And by the way, we're not saying that Bitcoin isn't a volatile, asset. It absolutely is. It's going to go up, it's going to go down. And we've seen that even since the launch. But I would say, the use case for Bitcoin is something that is in the eye of the beholder. And if you are someone who needs to transact cross border,

And you need to maybe get money to your family in another country that doesn't have, strong payment rails, and you're going to rely on a 50 year old, process of very slow, very expensive, wire transfers cross border, you might really find it attractive to have a 24 seven payment rail that's very cheap and lightning fast. And so we'll talk about that use case. But for that advisor, and the use case that they need, it's like, No, how does it fit into my portfolio and my client's portfolio, there's really two things. One, it's a digital store value, and has properties that are much like gold, and quite frankly, even better than gold. And so you might trim back your gold allocation and put a Bitcoin allocation in.

But but for me, the strongest reception that I've had is this is a transformational technology. And for the demographic of the traditional advisor, which is not much different than myself, we've lived through a couple of very disruptive technologies. And the first disruptive technology that I experienced was in probably late 90s, I'm on the floor of the American Stock Exchange, making jokes about Jeff Bezos, like why in the world would I use the internet to like buy a book, there's two borders across the street and two Barnes and Noble down the block, like I would never do that. And it's expensive to ship stuff. And I was a knucklehead, I was young. And I didn't appreciate that there was going to be an application of this disruptive technology, the internet that went

Beyond communication, chat rooms and email, I was like, I get it, I'm using it. I'm never buying anything over the internet. I was young, I was silly, I was dumb. The second disruptive technology in our lifetime for me was a smartphone. And I was so excited about having my first smartphone because, I didn't have to carry around some sort of MP3 player and a phone, I didn't have my first smartphone and complain that it didn't have GPS enabled technology. And I didn't have a, the ability to have, a black car come out in front of my, my apartment to pick me up. So those are two disruptive technologies that the first application was really, really useful for me. And then it permeated the rest of my life,

The smartphone and the internet. The issue here is we have another disruptive technology upon us. The first use case is kind of useless to many people in the US market. And I remind them it's a disruptive technology. And this is going to have the properties of growth tech. And so you should think about it as a disruptive technology. And to have an allocation in your portfolio, portfolio that has a feel of growth tech, volatile, high returns. And, we've done a bunch of research on this in terms of, 60, 40 portfolios, and where does it fit in and what the allocation should be. And our research on our website, which, I encourage your listeners to check out is that a 5% allocation is really a sweet spot of having like, you know,

Great risk adjusted returns, and high quality sharp ratios and the like. So that's the way that I have the conversation and it resonates. It puts it in real world terms for the advisors out there. Well, David, I can't thank you enough for joining me. This was educational, insightful, fun conversation. Before I let you go, where can people learn more about you? Where can people learn more about Grayscale? You can learn more about me hanging around ETF conferences like we are here. But grayscale.com is much more interesting for your listeners. We have a tremendous amount of research and a tremendous amount of resource to educate our advisors and our clients and potential investors. So we welcome you to do that. Well, again, thank you so much for joining me.

Thank you so much.