Blockchain and Crypto

The future of crypto ETFs

  • Spot-based crypto ETFs are still a no-go in the US. In Tearsheet’s inaugural Bankchain conference, Craig Salm, chief legal officer at digital asset manager Grayscale, dove into how the firm has managed to create a trusty Bitcoin fund despite this obstacle.
  • Salm also gave his thoughts on whether or not spot-based crypto ETFs are currently in the cards.

Email a Friend

The future of crypto ETFs

As crypto continues to become relevant in everyday use, more investors than ever are seeking to get in on the excitement.

The thing is, people are looking to invest – not gamble. And that’s a hard thing to do when you’re dealing with something as unregulated and volatile as these darling digital currencies.

ETFs would be the default solution here. According to Craig Salm, chief legal officer at digital asset manager Grayscale, exchange-traded funds have been proven to be the safest way to invest in an asset class. Unfortunately, as it is now, regulators remain iffy when it comes to the idea of crypto ETFs.

“Today, in the US at least, that type of investment vehicle has not been approved by our regulators for Bitcoin – let alone another digital asset,” said Salm. 

That means that, for now, at least, any offering of a real live crypto ETF is off the table. And that means Grayscale has had to get a little creative in its crypto-based offerings.

Building a makeshift ETF

In Tearsheet’s inaugural Bankchain conference, Salm walked us through how Grayscale built an offering, which he describes as ‘the next best thing’ to a crypto ETF – and it involves a four-stage product life cycle.   

“Each stage results in a box becoming more accessible to more types of investors, with the fourth and final stage being the ETF – the most accessible type of investment vehicle,” said Salm.

So what’s on the four-stage checklist? 

Well, Stage one, according to Salm, is focusing on offering a private placement – that means only selling stocks and shares to accredited investors – aka the folks who can invest in securities that aren’t registered with the SEC.

These investments then have a one-year lockup period, as per Rule 506.C under SEC registration. “It's the most restrictive type of offering,” said Salm, in short. He also points out that this is how Grayscale’s Bitcoin product was launched back in 2013.

Six months to one year later is when the next stage comes in. 

“We do something pretty innovative,” said Salm. “Which is that we obtain a public quotation on the over-the-counter markets for those investors that purchase shares in the private placement that have been held for a year and can now, if they want to, sell them.” 

This selling stage is essentially where retail investors can start buying shares. Back in 2015, for example, Grayscale’s Bitcoin Trust started publicly trading, and became the first publicly traded Bitcoin fund that way.

The third stage involves some more bureaucratic dazzling. “We do something called seeking SEC recording status, and that's through a document called the form 10 registration statement that registers our Securities and Exchange Act,” said Salm. 

This move makes the product feel more like a publicly traded fund in SEC spectacles. That means filing more forms but it also means reducing that original one-year holding period to six months. 

And finally, the fourth stage is about converting the product to ETF status. This stage allows for shares to be uplifted to the New York Stock Exchange and for better tracking of the net asset value. This stage is currently where Grayscale’s Bitcoin Trust is in. 

“And as you can imagine, all of our investment vehicles for the different digital assets that we support are each at various stages of their life cycles,” said Salm.

So far Grayscale’s Bitcoin Trust has been pretty successful, to say the least: it has about $20 billion, over 850 thousand investors, and is the world’s largest publicly traded Bitcoin 

Plus, in a lot of ways, GBTC functions like an ETF – you can open up your brokerage account, type in GBTC, and the fund will pop up. According to Salm, if GBTC were an ETF today, it would be among the top ten.

But for now, Grayscale’s Bitcoin Fund is not a real ETF, but rather more of a closed-end fund. “It's important for investors to always be aware of that,” said Salm.

And that then begs the question – where are we at with an actual crypto ETF?

As it turns out, we may not be all that far off. While the SEC continues to deny applications for spot-based crypto ETFs, it is permitting futures-based ETFs. 

In October last year, Proshares’s futures-based Bitcoin ETF became the first-ever crypto ETF to be approved

For Grayscale’s Bitcoin Trust, this development is sort of lukewarm. On the one hand, it keeps this trust in a state of waiting, but on the other hand, it’s a less abstract sort of waiting.

“We already have a futures based ETF,” said Salm. “The natural next step is to approve a spot-based ETF.”   

Then there’s Biden’s executive order a few months back, which essentially urged the federal agencies to get going with their crypto regulations. According to Salm, that helped create a synchrony among the different agencies, putting them all in the same boat, heading towards destination crypto.

“And then hopefully, they'll produce either guidance or suggestions on how the existing rules can fit within the digital asset ecosystem,” said Salm. “Or maybe it’s worth going into Congress seeking to amend some rules so that digital assets can fit within our US framework.”

0 comments on “The future of crypto ETFs”

4 charts, Blockchain and Crypto

4 charts on the year of the ‘crypto credit crisis’

  • The collapse of multiple centralized exchanges has plunged the crypto industry into what CoinDesk calls a 'crypto credit crisis', with circumstances still unfolding today.
  • For a broad perspective on the market, we discuss the macro returns, Bitcoin and Ethereum's performance, and the state of capital raised for crypto funding over the past year.
Lindi Miti | January 30, 2023
Blockchain and Crypto, Member Exclusive

Bankchain Briefing: Banks onboard the blockchain train

  • The lawsuits and insults season is in full swing within the unregulated cryptocurrency space.
  • But cryptocurrency is just one facet of blockchain technology. Tearsheet asked experts for commentary on how traditional banks are experimenting with blockchains.
Lindi Miti | January 27, 2023
Blockchain and Crypto

2023 predictions for crypto VCs, Bitcoin mining, and stablecoins

  • From entire stablecoin ecosystems collapsing to multiple centralized exchanges declaring bankruptcy, 2022 was Armageddon for the crypto industry.
  • As the crypto clean-up phase ensues in 2023, it’s worthwhile looking to crypto insiders, the battle-hardened survivors, for predictions: where to from here?
Lindi Miti | January 20, 2023
Blockchain and Crypto, Member Exclusive

BankChain Briefing: As crypto cools, VCs get back in the drivers seat

  • It is Friday the 13th, but the Freddy Kruger horror show is nothing compared to the carnage in the crypto industry.
  • As the crypto winter rages on, we step inside the conversations being held by crypto VCs about the industry moving forward.
Lindi Miti | January 13, 2023
Blockchain and Crypto

‘We are committed to saying Visa should be a crypto-native company’: Cuy Sheffield on Visa’s crypto strategy

  • While most FIs wait for crypto regulations to kick in to get involved, Visa is rolling up its sleeves and stepping in to contribute towards its architecture.
  • We sat down with Cuy Sheffield, head of Visa Crypto, to learn more about shifting trends in the space, how Visa wants to shape blockchain payments, and what the future of crypto looks like.
Lindi Miti | January 05, 2023
More Articles