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.
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.”