Bitcoin ETF applicant is not surprised by US delays

Transcript

Angie Lau: The Bitcoin ETF race is heating up in the U.S. Applications continue to flood in, but is the United States ready? It’s now up to the Securities and Exchange Commission to approve one — or some, maybe all, or none. But so far it is none. The approval of the highly-anticipated financial product called ETF has so far resulted in outright rejections and/or delays. Investors who want easier access to this new asset class called crypto will just have to look for exposure somewhere else for the time being. And it boils down to this: What’s all at stake?

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau.

Bitcoin ETF is an exchange-traded fund. It’s what investors are looking for, yet the SEC has not been so easy on these applications, either rejecting or delaying the approval of every single one that has so far landed at its door.

And one of the latest to have its Bitcoin ETF application decision delayed by the SEC is Valkyrie. They’re not alone. VanEck, WisdomTree applications were also delayed, but the applications have not stopped. In fact, they’re just coming, with Cathie Wood’s ARK Invest queuing in line as the latest ETF application.

So what’s going on here? Well, joining me today is the CEO of the alternative asset management group Valkyrie, an applicant for a Bitcoin ETF with the SEC, Leah Wald.

Leah, it’s been a long time coming up, and I’ve been eagerly anticipating this conversation and diving into the world of Bitcoin ETFs. Thanks so much for joining us.

Leah Wald: Thank you so much for having me.

Lau: All right. Let’s start off with Bitcoin ETF. Why do people want it? Why are you applying for it? Why do we keep seeing more and more firms trying to get a Bitcoin ETF off the ground in the United States?

Wald: Great question. There’s a lot of advantages to an ETF, especially the benefits of an ETF versus an OTC trust, which is what we see with [Grayscale Bitcoin Trust], or even a traditional mutual fund. Some of those benefits are much lower fees, often below 1%. It’s very tax-advantaged. Holders only incur capital gains upon the sale of shares in the ETF, versus mutual funds often pass on the capital gains taxes to investors for the duration of their holding. You can buy and sell at any time.

With mutual funds, they redeem once a day at the close of the market. So buy and sell orders are normally cut off at 2 p.m. [U.S.] Eastern Standard [time], which means that the [net asset value] could change before the close of the market. And OTC trusts have this notorious lock-up period — one year to six months — depending on their nature.

The ETF, on that point — one last important note is that there’s instant creation and redemption because of that. So that is important because it keeps the share price far closer to the net asset value versus an OTC trust. And that’s mainly, again, because of that one-year lock-up period. So this keeps investors from overpaying for exposure to a fund’s underlying assets. So it’s a much better wrapper.

Lau: From a practical point of view, a lot of people are curious about Bitcoin, want to get into it, want exposure in it, and we definitely saw that in the earlier part of this year. But then: “Wait — do I do a hot wallet? What exchange do I use? Is it a cold wallet? How many passes and seed phrases do I have to remember? And what if I lose it?” 

And it just gets super-intimidating super, super fast. ETF is a way for retail and institutional investors to participate in Bitcoin without the obtuseness and the obscurity, actually getting access via an ETF, which is much easier.

Wald: Do you still have your seed? Are you using Coldcard versus Trezor? Are you “not your keys not your coins”? I think you nailed it. There’s a lot of intricacies that perhaps you and I are obsessed with, because we love the industry. But it is a very complicated ecosystem, and retail investors are increasingly asking for Bitcoin exposure because they want to invest in Bitcoin in a vehicle that’s safe, familiar and simple to buy. That’s, again, what makes ETFs so great.

So to your point, ETFs have already been approved in Canada and Brazil, and they’ve shown to be extremely successful, and especially extremely successful for the retail investors. You mentioned both institutional — that’s also true. If you look at Purpose Investments at the high, there was a little over a billion [U.S. dollars] at the market high for [assets under management]. Evolve ETF — US$78 million at the market high. And again, to your point, Bitcoin ETF, because of that ease is important because it can open the floodgates to money from [individual retirement accounts], from 401k accounts, retirement funds, and also the popular trading apps of Robinhood, ETrade, TD Ameritrade and more, which we’ve seen is quite the market this past year.

Lau: But therein lies the point. The volatility of Bitcoin is so excessive. At the beginning of the year, we definitely saw a new all-time high broken every other week. And even more frequently than that, we’re currently at a stage where we have seen pullback. We’ve seen a correction in the market. It’s now half to what the high was earlier this year. Do you think it’s that volatility that is a concern? Do you think that is also affecting the appetite by regulators, by the SEC, to approve an ETF? How is this correlated with the Bitcoin market action and the volatility of prices?

Wald: I agree with you. I think that there are concerns. I don’t think it’s the volatility specifically, but I think it’s the infrastructure in the industry being able to handle that volatility. I think that the SEC has been pretty clear from the onset of all the Bitcoin ETF applications, even back in 2017, about concerns around custody. As an example, now, we finally do have true institutional-grade custodians, but there are still stress tests happening in that market. So if I were to look at the main concerns, in my opinion, of what the SEC is looking at — you’re looking at security, you’re looking at custody… of course, as is often talked about, market manipulation. But it’s really the greater conversation around, “Can the infrastructure providers, therefore the service providers for the ETF, handle the type of volatility?”. And also, therefore, if there is market manipulation, is it affecting in an adverse way that will harm retail investors? And I think that the industry is maturing in a way that that is becoming much better. To your greater question, I think that [SEC Chairman Gary] Gensler’s appointment is good for crypto assets. 

Lau: Gary Gensler is the new head of the SEC.

Wald: Correct. And I think he understands the asset class. I think the agency is trying to get the regulation right. I think they have investors’ best interests at heart. But I think that it’s taking extra time to review these Bitcoin ETF applications, which is necessary. There are warranted concerns that regulators had. We saw issues with some of the major exchanges with withdrawals during some of the price drops. And that is a bit concerning when it comes to an ETF. But the industry is doing a good job right now of trying to engage with the regulators and educate about this asset class and some of the fundamental technical indicators, and how to sift through what may look like harmful volatility and show how that’s more similar to other asset classes.

Lau: It’s so true that the SEC has got to get this right. If they get it wrong, it not only impacts their credibility with Americans and with the industry, but also the crypto industry. It’s going to be bad if they get it wrong. What do you think the SEC has got to do as it potentially approves its very first ETF? Why do you think they’ve not yet done this?

Wald: That’s a great question, and I do agree with you. I think that they still do have concerns. Gensler and the staff are looking into everything very diligently right now. And I think the industry clearly needs to do a better job of explaining how far it has come in recent years, really to protect the integrity of the markets and the data. I think we will get there, but I’m not particularly holding my breath right now for the spot ETF.

Lau: You very specifically filed this way back in January. You have two products waiting for approval right now with the SEC. Were you surprised when they delayed the decision?

Wald: I was not. Actually, when we first applied for a Bitcoin ETF back in January, right after VanEck’s, we had a timeline of about two to three years that we thought the application would be. We moved our timeline up when it seemed as if there was a lot more interest. It seemed as if things were moving much quicker. And we saw a flurry of applications behind us. However, we are not surprised and we think that this will be a bit of a longer route. But I think to your greater point, that’s because the SEC is going to get it right with this one. And I think they’re going to take their time to ensure that they’re checking all the boxes off.

Lau: So the next big date for you is Aug. 10. That’s when at least it’s scheduled in the books for a decision. What do you think is going to happen?

Wald: Yeah, that is exciting. The Valkyrie Innovative Balance Sheet ETF, which holds companies that hold Bitcoin on the balance sheet, hopefully, that will trade prior for the Bitcoin spot ETF. I’m hoping that we’ll be able to continue engaging with the staff, and other industry experts will also be able to engage with the SEC staff, and the dialog will continue so that more data is presented and we can hopefully work through some of their concerns.

Lau: These are products that investors have indicated that they want. Whether or not we see the volatility in the market right now with the prices, that’s one thing. But we also saw with Coinbase’s going to the public market. We saw people dive into other firms that have Bitcoin or crypto exposure and wanting some exposure to the crypto industry. Talk about access to that. Where do you see this greater appetite going? Where do you see it in terms of what investors want and what the market is developing? How is this evolving?

Wald: We’re definitely seeing that demand is very large. I think that the ETF is a great wrapper. But to your greater point, I think that any product that is well-built that provides access to the underlying is desired. We’re seeing good health in the [Chicago Mercantile Exchange] futures with their mini-futures and other derivatives products, not just in the United States but across the world. There are great products, there are great [exchange-traded products] in Europe, and there have been for a while.

So as I see the greater market develop, more structurally sound products — whether they’re ETFs or created in other vehicles — will continue to be created and provided for each niche, whether it’s retail or high-net-worth or other institutional clients, to serve their desires for buying Bitcoin — whether it’s an inflation hedge or whether it’s a store-of-value asset or whether it’s a speculative instrument. I think that whatever is needed for their portfolio allocation strategies, again, if it’s a sovereign wealth fund versus you and me, I think that the demand is quite apparent, and therefore I think that other asset managers around the world will continue building great products to satisfy that demand.

Lau: Are you concerned that as the SEC continues to delay and wait, and as more participants come into the market, it becomes a muddier field for you? You’ve got the likes of Cathie Wood and ARK. That’s a name that a lot of people know. You have Fidelity and CBOE [Global Markets] — those are names that a lot of people know and have been around for a long time. You’re starting to compete with some institutional names here.

Wald: I think it’s fantastic, and I’ve always been excited about it. I think more competition is only good. And to be honest, we’re definitely hanging out with the right crowd, should I say. It’s an honor to be associated with Cathie Woods or Fidelity or Goldman. The importance there for the other applicants is that they have very long-standing, sterling reputations for building ETFs and also ETFs with esoteric securities. VanEck, especially, has built some of the most innovative ETFs in the past and very much knows their way around the regulatory environment and how to engage effectively with the staff.

So I think the more applications is actually better, not just for our own chances, but also for the greater industry as a whole, while these brilliant minds start engaging on this front, all with a common goal.

Lau: And it’s just building more interest in potentially providing more liquidity into Bitcoin and crypto space. Do you think that once an ETF is approved — and everybody anticipates that at some point this year — the SEC is going to approve its very first one for the U.S. Do you think that once that’s done, it’s just going to open a door of liquidity from U.S. investors into the crypto market in a good way? Or how do you think it’s going to impact what the actual prices of crypto are going to look like?

Wald: That is a positive development. One of the more major points for an ETF approval is that we are getting to a very strong point of both liquidity and also market cap. So, I definitely agree with you. Just a quick note — I do think that now, again, there is enough market cap for liquidity. The SEC has a restriction on the amount of illiquid securities that can be held in an ETF — that’s 15%. So now that Bitcoin’s market cap has grown large enough, it may finally have surpassed an important threshold in the minds of the regulators, and I think that will be very important.

Lau: We have touched on this lightly, but I want to understand it a little more. The Innovative Balance Sheet ETF — you’re going to be investing in companies with Bitcoin in their balance sheets. Some have gotten pretty dinged-up by this latest correction and where prices are right now. How does the strategy work out? Do you think this is something that investors have a palate for, especially since there has been such a downward movement in appetite for crypto the past couple of months?

Wald: Unfortunately, because we are under SEC review, I can’t speak too much to the portfolio companies or to the model. But as a greater topic, you are correct. It’s both interesting as an investor to be able to have the divergence from both the underlying because you’re able to invest in a new strategy. I think that you’re right. You’ve seen a lot of volatility with miners, with MicroStrategy tracking, with a lot of other companies — both foreign and international. They are interesting in their own right to follow as well as to have within a fund. But unfortunately, while under SEC review, that’s probably all that I can say.

Lau: It’s totally understandable. For a lot of people who are watching this, they’re probably really interested in the ETF space, they’re interested in it for themselves. But what stoked your interest, Leah? What was it about Bitcoin? You’re one of the movers into this space in a significant way. But what was it about this cryptocurrency way back when… in 2008? What sparked that interest for you? Why are you moving into this space quite seriously?

Wald: My first foray into understanding about Bitcoin was quite a while ago — really around 2009, 2010 that I heard about it. I wish I had invested [when I] heard about it. I was working at the World Bank, very luckily for the vice president of the Africa region at the time, and some of my colleagues were working on and M-PESA [a mobile money transfer service in Kenya], which was really one of the first microfinance-based SMS systems. I was very keen on understanding the importance of having a fungible, permissionless, un-confiscatable value transfer, especially into rural areas for the unbanked. So when I heard about Bitcoin, it made complete sense — a value proposition absolutely made sense. And I thought it was fascinating. 

In regards to making a full career out of it, back in about 2017, I jumped in full-time with my former partner, Tyler Jenks, and we wanted to specialize in [Grayscale Bitcoin Trust]. Now, we did that because most of our clients were investing, and this is an asset management firm with Lucid Investment Strategies, their pensions, retirement funds. And we’re interested in Bitcoin but wanted to do it very safely. And there weren’t too many options in the market, obviously, just [Grayscale Bitcoin Trust] when it comes to securities.

So I decided to dive deep in this asset management Bitcoin arena specific avenue of this technology that I’ve been obsessed with since I learned about it, really to ensure that investors are able to engage with Bitcoin and the Bitcoin network and in a safe and secure way and have an enjoyable time. I think that no one should have to get wrecked. I don’t think anyone should need to lose their keys and all their Bitcoin or feel overwhelmed with the security practices that sometimes are needed. Obviously, I think the [user interface/user experience] and a lot of the companies that have emerged in the Bitcoin ecosystem have gotten to an incredibly easy-to-use situation at this point. However, from a financial investment perspective, if you’re investing your retirement funds, I think that you shouldn’t mess around. You should be very careful. And that’s also why I wanted to dive in full-time with my whole career to ensure that all investors can buy exposure to Bitcoin and do it safely.

Lau: What do you think the market is telling people right now in terms of the global economy? We’re experiencing increasing concerns about inflation. There’s intensifying concerns about not only crypto — so that’s entirely a different subject — but the equity markets. “Is there a bubble in the stock market?” And in all of the stimulus dollars that are essentially flooding fiat markets around the world with extra dollars against economies. We’re at a stage right now in the global economy where things are quite concerning. How do you think crypto positioned itself as a counter or as a potential option to that?

Wald: That’s a great question and I also agree. There’s a lot of macroeconomic fundamental indicators that are very important to watch right now, from everyday life-questions of what you should do with the cash on hand from your paycheck to longer-term investment strategies of what should you be investing in for thinking down the line generationally. Your question about where does Bitcoin fit is definitely the right question.

And I think that what’s very interesting about the industry right now is that we’ve progressed to a stage where people are using Bitcoin in many different ways, depending on their needs and use cases. So whether it’s legal tender in El Salvador, from issues with the remittance corridor and also general lack of access to banking, or whether it’s as a store of value in countries that are having issues with hyperinflation with their currency, or whether it’s as a speculative instrument here in the United States, where we’re enjoying very sophisticated derivative products. I think that there’s a place for everybody. It’ll be interesting to see as Bitcoin continues its maturity and maturation from a store of value, a unit of account, means of exchange, and where it really ends up settling for the greater populace and/or on very individualistic, smaller locations and on a very specific level.

As a general statement, long term, I am still extremely bullish — on both the price of Bitcoin as well as the Bitcoin network’s development. It was very fascinating to see how little impact the futures expirations had on the market. Many traders expected a massive decline, but we held mostly even. Despite a holding pattern in Bitcoin prices right now, several on-chain metrics are really showing serious signs of strength. You have new active users on the rise. Bitcoin miners have been accumulating for a solid month. Bitcoin withdrawals from exchanges have just hit a one-year high in early July, or so says my head of research. And Bitcoin is being reaccumulated into addresses of long-term holders, so I think that digital gold, store-of value-narrative will continue to be more and more important, as will its inflation hedge principles, to your point, about worries in the macroeconomic environment.

Lau: And then it brings the point of the likes of Ray Dalio, Bridgewater legend, of course, and long-time financial legend here that basically says the biggest danger to crypto is government, potentially shutting the crypto industry down. Do you think that threat is potentially still there considering that right now the fate of the industry lies in the hands of regulators at the moment?

Wald: I don’t agree. I actually think that the latest developments in China will lead to a healthier ecosystem for Bitcoin. I think that decentralization is necessary in an asset that is morally rooted in decentralization. And so whether certain countries, regulators, have decided to ban or [use] other regulatory methods that are negative against Bitcoin being utilized as a currency or as a financial instrument, I think in the long term, it will lead to the health and longevity of the industry. So I think that Ray Dalio is absolutely brilliant, but maybe on that one point, I don’t fully agree.

Lau: Well, we’ve got to bring it back to even what SEC Commissioner Hester Peirce said. We know her in the industry as “crypto mom” because she is very well versed and has thought about different scenarios in which the SEC could be working a little bit more closely with the blockchain and crypto industry. So, a long-time proponent. 

But even herself saying that the U.S. treats crypto differently, that if you were to take a look at traditional ETF applications based on the standards in which previous applications were approved, it should have gone through. And yet the SEC has not approved a single one. If that were the case, why is the U.S. treating crypto differently? And where do you think that positions the U.S., ultimately, in a decentralized world?

Wald: Very big question. There actually is precedent for it to take a long time for certain products to pass SEC regulatory approval. Even gold took a while. Especially esoteric securities that are still being figured out from the rest of the agencies. And it does matter on inter-agency support. The [U.S. Internal Revenue Service] is still figuring out its rules. Again, all agencies are looking at Bitcoin right now and trying to figure out the rules and regulations. I think that they will figure it out. I hope that we will get regulatory approval on these ETFs. The question for sure is when? But I think to your point, there is an understanding of how important it is to get this right.

There’s an onus of pressure on the SEC right now, and Chairman Gensler and his new staff. So I think that they’re taking a fine-tooth comb to not just the Bitcoin ETF, but to the greater industry and trying to figure out [if] everything is really primed and ready for the approval of the ETF, which is obviously a very important development for all investor activity.

Lau: Any thoughts from you as you think about future growth from Valkyrie, even, to apply elsewhere for an ETF, potentially in Asia, which we’re starting to see. Canada… there’s a handful of them already. But would you ever consider Asia? And if so, which country? And why?

Wald: I don’t like ever saying no to things. However, I will say that we’re pretty solely focused on the U.S. right now. One of the biggest reasons for that is simply it can be a bit of a compliance nightmare to try to list in other countries. That is specific to our ETFs. I think, again, it’s important to have boots on the ground. It’s important to be in a position to be successful in those countries when you finally do apply and launch an ETF there. However, some of our other products and dual listing across Asia is not off the table.

Lau: You gave yourself two years. You accelerated the time a little bit. Now it’s been delayed again. Let’s move the crystal ball needle a little bit and say in five years, where do you see this industry? What are your hopes? What do you think you’ll actually see?

Wald: I’m very optimistic about Bitcoin. Not just the price action but the industry as a whole. I’ve always been in awe of Bitcoin developers, of core, of all the improvements from the Lightning Network, to Liquid, to what Blockstream is up to. I just think we truly have the smartest developers in the entire world working on this.

I’m very excited about what Bitcoin will look like in the future because, again, we’re still in the early stages from an asset management perspective. I’m also very bullish and very excited.

So generally speaking, financially, from the development of the network for more participants joining in of ensuring that my grandparents are also asking about how Bitcoin is doing today and telling me price action, I’m very excited about the future.

Lau: It’s a brand new world. And to your point, Leah, it’s foundational. Bitcoin ETF introduces a big swath of liquidity that it potentially didn’t have before, and especially if you’re going to correlate it with your new product that’s under application review right now, it could potentially also support the growth of companies. So right now, will people get that access? Hey, it’s up to the SEC. What’s your bet? You think we’re going to see it this year or think we’re going to have to wait a little bit?

Wald: Well, I’m not going to put the SEC on a timeline, but I’m definitely hoping “to be continued,” I guess.

Lau: To be continued. And when you get it, we will sit down again and we’ll learn a whole lot more as to how that’s moving some markets there. Leah Wald, it was a pleasure speaking with you. I really appreciate you joining us for this latest episode here.

Wald: Thank you so much for having me.

Lau: That was Leah Wald, CEO of Valkyrie. And thank you, audience, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Editor-in-Chief of Forkast.News. Until the next time.