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Dear Subscribers, I hope that your week is getting off to a good start. I have been getting a lot of additional questions about the Grayscale legal win over the SEC in court last month (for a refresher please check out my report) and whether it makes sense to put some of your bitcoin holdings into GBTC. There have also been quite a few questions about the mechanics of commodity ETFs and precisely how issuers, exchanges, and the SEC look at such products. This report should answer all of that. First, regarding GBTC, as I’ve said before there is nothing wrong with allocating some funds to GBTC. The wind is certainly in Grayscale’s sales after its major court win last month. However, there is a reason that the GBTC discount remains at 17%. There is no precedent for what happens next with regards to Grayscale’s application — will they need to refile? The company asked the SEC to allow it to convert the product into an ETF right away, but there is no indication that the SEC will comply. The regulator actually has until the middle of next month to decide on whether it will appeal the ruling. Time matters here too, as the clock is ticking. The final deadlines for certain bitcoin ETF applications will begin to run out in January, starting with a product created by Ark Invest and 21shares, so if Grayscale has to refile it would put them in the back of the line. However, sources I’ve spoken to think that this is unlikely. So what should you do? Well, a 17% discount on the spot price of bitcoin looks pretty enticing. And while I’m not comfortable putting an exact number on the likelihood of a spot ETF getting approved anytime soon like some analysts at Bloomberg that ascribe a 75% likelihood, I do think that it is more likely than not. But it could still take 8-9 months. Are you willing to lock up your money that long? If so, it may be something to consider. Something else came across my mind as I was thinking about GBTC. What about the other products that Grayscale offers that also trade at a discount? There are several. Take a look at this chart below. Grayscale’s products tracking ether, ether classic, and zcash are all trading at sizable discounts. Could those be picked up on the cheap? Yes, but again it all depends on how long you are willing to wait. Momentum is growing for ether futures and spot ETFs, but my sense is that at a minimum they will not get to list until well after a spot bitcoin product. Ether’s discount (25%) is about 33% higher than bitcoin, but the additional delay may not be worth the payoff. Ether classic and zcash do not have similar products in the docket right now, so I would avoid those. I also included XLM because of its substantial outperformance. Obviously this has to do with investor excitement over the favorable XRP ruling that came out this summer regarding its lawsuit with the SEC. Some of you may be thinking that there could be ways to generate alpha from this opportunity, recreating the GBTC trade that had been so profitable in years past. However, a word of caution. Grayscale’s XLM product has significantly outperformed XLM’s spot price since the ruling, which means that it could be in for a quick reversal. It has almost 5x’d the asset. Second, GLXM is a thinly-traded asset meaning that prices can move suddenly up or down, the latter being more likely given the current macro outlook. As you can see in the chart below, the price surged on the back of historically high-volume, meaning that a reversal can be fast and steep. I’m not sure of many regulated venues to short XLM as a downside protection like with bitcoin and ether, so if the market turns you could be left out in the cold. But with all of that said, I want to move on to a special interview with Nasdaq’s Giang Bui. Bui is Head of U.S. Equities & Exchange-Traded Products (ETP) at Nasdaq. She is responsible for developing and executing the growth and strategic vision of Nasdaq’s ETP business, the three equities exchanges operated by Nasdaq: The Nasdaq Stock Market, Nasdaq BX, Nasdaq PSX, and the Nasdaq over-the-counter Trade Reporting Facility. Prior to joining Nasdaq, she was a Director of Listings at Cboe Global Markets, where she was focused on ETF business development, liquidity programs, and strategic initiatives. Before her role at Cboe, Giang played a crucial role in developing and marketing new indexes at the New York Stock Exchange (NYSE). She began her career as a business analyst for NYSE’s global index and exchange-traded products group. In this discussion she breaks down the process for creating bitcoin ETFs and why there seem to be so many special rules when compared to traditional ETFs. She gives some great perspective on what is going on at the SEC from her vantage point, and what signs she is looking towards next following the Grayscale ruling. Forbes: What are the different ways that an ETF can come to market? Bui: There are several ways that an exchange-traded fund can come to market. Most ETFs are registered under the Investment Company Act of 1940. A number of bitcoin futures-based products have come to market under the 40 Act, but if it's a spot commodity-based product, they're going to be registered as a 33 Act, referring to the Securities Act of 1933. For a commodity based-product, there is a little bit more of an extensive rule filing and approval process than your typical 40 Act-based product. With the 40 Act, there's been a lot of work done with the SEC, and they recently passed a rule that allows ETFs that are compliant with that rule to come to market much quicker. The exchanges have standard or generic listing standards to be able to list those products without needing to go to the SEC for prior approval. But that's different for a commodity-based product. Spot bitcoin is considered a commodity-based spot ETF. Forbes: What is an example of one of these traditional ETFs? Bui: The most standard ETFs, like for example iShares 20 Plus Year Treasury Bond ETF (TLT) , come under the 40 Act. For the 33 Act you think about SPDR Gold Shares (GLD) or iShares Gold Trust (IAU), a commodity based product. These would typically be registered under the 1933 Securities Act. Forbes: So how is the 33 Act different from the 40 Act with regards to ETFs? Bui: Spot bitcoin ETFs are considered to be commodity ETFs. So similar to other smart spot ETFs like gold or silver, there's an extensive filing and approval process because the exchange, unlike some of the 40 Acts that are eligible to be compliant with these templates, do not have generic listing standards or standard rules to allow us just to list the products without going to the SEC approval process first. Forbes: Why has there been no sort of generic rule created? Bui: Getting generic rules for anything takes time. The first ETF was launched in 1992, and it took until 2019 to get generic listing standards for the 40 Act-based products. There's not as many spot products or commodity products that come to market. With everything at the SEC it takes time, and so they don't want to just lump everything together because these commodities can be fairly different. You have gold, silver, palladium, now you have bitcoin, so there's no general bucket that you can have together. Forbes: What is the approval process for a commodity ETF? Bui: For bitcoin or anything else that is a commodity there is a very similar process. How you talk about the product and prevent fraud and manipulation might be different, but the process itself is consistent regardless of the commodity. So the issuer, such as BlackRock and Valkyrie, in this case, will file a Form S-1, which is their registration statement for the product with the SEC. They also add the listing exchange that they want to work with. So if Nasdaq is your listing exchange, we will file a Form 19-b4 with the SEC, to amend our rules to allow us to list and trade this commodity product on our platform. Forbes: What happens next in a situation where you need to file a 19-b4? Bui: The filings are reviewed by two different divisions of the SEC, and they follow different timelines. The S-1 is reviewed by the SEC Division of Corporate Finance, and the 19-b4 is reviewed by the SEC Division of Trading and Markets. For additional context, a proposed issuer for a 40 Act product will file a form N-1a as their registration statement. And that's reviewed by the SEC Division of Investment Management. So they're all different divisions. Forbes: From your perspective, what happened when news came out over the summer that the Blackrock ETF application, which would trade on Nasdaq, was inadequate? Bui: This news was related to 19-b4. Once the exchange files it, the SEC has seven business days to reject it if it determines that it doesn't comply with the SEC rules related to form. The rejection at that stage is purely procedural, rather than an indication of viability of the product. Forbes: The big hangup appeared to be your failure to list Coinbase as the surveillance sharing partner. Is it normal to list such a partner in applications like this? Bui: This is not typical for any filing. Usually, we have information sharing agreements with many of the other exchanges. So this is really unique to this particular filing. And it was just in response to trying to make our filing as strong as possible. Forbes: Why do you think the SEC has rejected previous spot bitcoin ETFs? What do you think they are looking for in a surveillance sharing agreement? Bui: In previous 19-b4s that they've disapproved of, they talked about the listing exchanges not meeting their burden under the Exchange Act to demonstrate that their proposal is designed to prevent fraud and manipulation. The SEC explained that the listing exchange of a bitcoin ETF can meet those obligations by demonstrating to the SEC that the exchange has a comprehensive surveillance sharing agreement with a regulated market of significant size as it relates to the underlying reference asset. And their thought process behind that is if a person is attempting to manipulate the ETF, there's a very reasonable likelihood that they would also need to trade on this market of size. So the presence of a surveillance sharing agreement would assist in detecting and deterring any type of misconduct related to the ETF itself. Forbes: What do you think constitutes a market of significant size in the minds of the SEC? Bui: We made that representation in our 19-b4 filing that we believe that Coinbase represents a significant portion of U.S.-based bitcoin trading. There's language in the form that talks about it being the operator of the largest U.S.-based spot bitcoin trading platform representing a majority of the global spot bitcoin trading paired with USD. Forbes: What are your thoughts on Grayscale's win over the SEC in court last month regarding its effort to convert GBTC into an ETF? Bui: So the D.C. Court of Appeal ruled in favor of Grayscale. It’s really a big milestone in the effort to launch a spot bitcoin ETF. So now the SEC must go back and review its rejection of the Grayscale 19-b4 to convert its bitcoin trust to an ETF. We're reviewing the court ruling very closely; we're analyzing what that means for our filings, as well as know what that means for the timeline. But there's really not much we can comment at this point about what that means. Forbes: There is a race going on to list the first spot bitcoin ETF. Have you ever seen a similar situation? Bui: The ETF business is very competitive. Everyone is always competing for the best idea, and if there's similar types of product ideas, then the question is how to get to the market the fastest? Being first to market makes such a big difference. We've worked very closely with the issuers, with our internal ops and legal team, with all the different market participants that are involved in the product to be ready to go as soon as we're allowed to do so. Forbes: How do you think that a spot ETF will coexist with the futures products on the market today? Bui: Futures generally, because they're on the predicted future value, are subject to contango effects that could impact the performance of the fund. So there could be times that they might deviate from the spot price. Rolling over the contract could require more trading and effort in terms of managing the futures versus the spot. Whenever there's a commodity ETF, if there's a spot version versus a future, we do tend to see the spot one gaining more assets. In the past, there was a gold futures-based product, but the spot gold one really has been the one that investors gravitate towards. But a spot ETF really is about choice, it's another wrapper for investors to gain access to spot bitcoin. It could potentially be more efficient and attractive than investing directly into bitcoin; you don't have to worry about signing up for the different crypto platforms and having to store and secure your products. The ETF also can be used as a trading vehicle and a hedge. And because it's being regulated by the SEC trading on a regulated exchange, there could be additional investor protection related to the ETF. So really, the ETF wrapper is always about providing access and choice to investors. And that's what the issuers are looking to do, and bring to market with the spot bitcoin product as well. Forbes: What are you looking for next regarding all of the pending ETF applications today? Bui: There's different milestones that we watch. We're watching, like the mid-January date, which is the 240th day for the Ark 21 shares filing. Our 240th day is mid-March. So we really rely on some of those milestones because those are marks that the SEC has to make some kind of action in the filing.
Read more: forbes
