Valkyrie CIO expects US spot Bitcoin ETF approval in Q2 2024

Transcript

Angie Lau:  The time for a spot Bitcoin exchange-traded fund in the United States may be upon us in a legal battle that’s being compared to the story of David and Goliath or maybe David and David. Grayscale, the world’s largest Bitcoin fund manager has emerged victorious against the U.S. Securities and Exchange Commission (SEC) — at least for now. The securities regulator has until mid-October to appeal the ruling.

In June 2022 the SEC put the brakes on Grayscale’s application to turn its spot Bitcoin trust into an ETF. And now that decision has been overturned due to the SEC’s failure to furnish a coherent rationale for the rejection of a spot ETF while approving a futures ETF for the same underlying asset, according to the court.

While the crypto community celebrated the victory, the tale is really still unfolding, and it’s raising some really important questions here. 

Why did the SEC approve Bitcoin futures in the past but is putting a resistance against Bitcoin spot ETFs? And how will this verdict influence similar applications currently in the SEC’s pipeline?

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

I’m really excited because joining us today, we have Steven McClurg. He’s the co-founder and chief investment officer of Valkyrie. This is a specialized alternative asset management firm that also has a pending spot ETF application with the SEC. They’ve been around for years and they’ve been following the rules and also playing by the rules. And really that is the critical nature of this conversation.

Welcome to the show, Steven. Let’s get straight to it. It’s great to have you.

Steven McClurg: Thanks so much for having me, Angie. I’ve been a big fan of yours for years.

Lau: Thank you so much. I want to talk about this landmark ruling, to start off. The price of Bitcoin went up more than 6% right after the verdict. What do you think? Is this setting a precedent for the broader crypto industry here?

McClurg: I think it is. First of all, I believe that we should have had a Bitcoin spot ETF for a few years now. And this ruling really shows that the court’s view is that the SEC probably should have let something be released at least two years ago, if not maybe a year ago. And by the way, I know why the SEC has been reluctant and I agree with them on a lot of the reasons. But I do think it’s time.

Lau: So why has the SEC been reluctant? It is because part of the court’s ruling in favor of Grayscale was based on the perception that it was arbitrary? The SEC’s denial of Grayscale’s proposal was arbitrary and capricious because the commission failed to explain its different treatment of similar products.

Why do you think that the SEC is kind of really arbitrary here?

McClurg: There was another flood of ETF filings back in 2017, 2018 and the response from the SEC was in the famous Dalia Blass letter in January 2018. That listed five items that really laid out why they were suspicious and why they were reluctant to actually let a Bitcoin ETF go.

One of them was custodian. And previous to all of those filings, there were a few custodial failures, a few custodial frauds. And then there’s loss of keys that have actually caused loss of capital for people.

Even recently, if you look at the Prime Trust issue. Prime Trust lost their private keys to certain cryptocurrencies and they ended up imploding. And then they covered up the fact that they had lost their private keys and continued to collect customer money. So that’s the thing that the SEC is actually trying to prevent.

Lau: JPMorgan now believes that ETFs will be approved in one go. To your point, the custodial issue, the technology is there. Do you think now is the time where that concern might be a little bit neutered now? Do you think it’s go time for all ETFs?

McClurg: When we filed for our Bitcoin spot ETF in January of 2021, we simultaneously filed for a Bitcoin futures ETF. And the reason why we did that was we felt like Bitcoin futures was a baby step to get the SEC comfortable. The Bitcoin futures ETF doesn’t have the same custodial issues.

I believe that custody has been solved. There are really good players out there with really good cyber security, with really good processes, with really good technology. BitGo and Coinbase are two of the big ones.

So you have really good tools that you didn’t have in 2017 to your point. And I feel like now is go time. If you can get BlackRock and Fidelity and Schwab comfortable — because they’re very risk-averse — then you can get anybody comfortable.

Lau: Do you remember Larry Fink? He basically criticized crypto and was really apprehensive about it. Very hesitant about it. This is the largest wealth manager with over US$9 trillion in assets. Now they’re in play.

The BlackRock ETF is in play and they’ve got that in the marketplace. So then why if we’ve got these institutions coming into the space, why are they still holding back on your application and on all of these other applications as well?

McClurg: I was a trader and a portfolio manager for years in other areas outside of crypto. And I understand the need for proper surveillance in the world of ETFs, particularly when it comes to pricing surveillance. But now we have that and we have the largest exchange in the U.S. that processes over 50% of all Bitcoin trades that are offered up their data for the surveillance software. 

So now that we have that, there really is no other reason to deny this. But I do believe the SEC just needs time to process that surveillance software to make sure that it properly runs and operates to fulfill their needs.

Lau: You’ve been super accurate in your insights as obviously with skin in the game. I know that you had predicted that Grayscale would win out on this ruling here. Why did you think that? Why did you feel that? And what’s your optimism right now for the rest of the industry and spot ETFs?

McClurg: I think their arguments were just very solid. They took the position of comparing Bitcoin spot to Bitcoin futures and they said, well, if there’s good surveillance and pricing for futures, then that obviously applies to spot as well. 

And some of the other arguments that I’ve always made is, okay, we’ll look at some of the global commodities markets such as gold or oil. Those two markets are highly manipulated, globally. However, there are futures markets in the U.S. that the markets and regulators are very comfortable with. So futures, yes, easy. But even Bitcoin itself, it’s now gotten so large that it’s hard to be manipulated. 

Even looking at the stock market. If you look at microcap equities, they are subject to a high amount of manipulation just because they’re thinly traded and you put in big block orders, it’ll move the price.

Lau:  But I want to ask you right after this break, I want to know how the U.S. is positioning itself here. And will whoever starts first launching a U.S. spot Bitcoin ETF, will they have first mover advantage?

But stay right there, Steven. We’re going to take a quick break right now. But when we come back, we’re going to talk about that. And we’re also going to talk about Valkyrie’s own pending application with the SEC. Stay with us.

Welcome back! You’re watching Word on the Block. I’m Angie Lau, editor-in-chief of Forkast and I’m here with Steven McClurg. We’re talking about spot ETFs here. Bitcoin in particular.

You filed an application with the SEC June 21st, also of this year, to launch the Valkyrie Bitcoin Fund on the Nasdaq. So you’ve got a couple of pending ones. You’re joining a growing list of asset managers, including BlackRock and Fidelity. So what do you think? Who will be the first one to be approved? Do you think that they’ll have first mover advantage or do you think this space is ripe for competition?

McClurg: I do believe that there is room for competition. There’s a first mover advantage, but there’s also people that fit into different categories of what they’re looking for in an asset manager or a name, for instance.

So if you look at, say, Fidelity or BlackRock or even Schwab, Invesco, all of these players will be competing against each other. They’re going to be competing for financial advisors’ share of the market. Whereas I believe that some of the other ETF providers, like us, are really going to resonate with probably more retail clients, but also, oddly enough, institutions such as pension funds. 

Pension funds like to diversify across managers and find experts or niche players in a field to allocate to. On top of that, a lot of pension funds aren’t allowed to allocate to BlackRock. So given some of the ESG (environmental, social, and corporate governance) issues that have come up in the last year. I believe there are about twelve states that aren’t allowed to allocate to BlackRock in their pensions. We actually have an opportunity to capture some of that.

I do believe there’s going to be diversification across the board. But I also agree with the comment that the SEC will likely have everybody go at the same time. It’s just too much of a heated battle in order to not do that. 

Lau: The SEC has rejected the filing, saying that the New York Stock Exchange (NYSE) ARCA, did not meet rules designed to prevent fraudulent, manipulative acts and practices. 

It’s exactly what you were talking about. Now we’ve got the technology. We’ve got more surveillance sharing technology. We’ve got the custodial ones. Tell us more about where you are right now. Did you have to tweak your investment strategy, compliance measures to align with the regulator here?

McClurg: We did, and we were prepared for that. We actually have a very strong compliance program where anybody that trades crypto on any account has to also supply that data and report it through our compliance systems. But even on surveillance tracking, we do have to report those right away. And that’s the biggest part of the surveillance because you could go and buy Bitcoin from some OTC desk at a price if those prices aren’t being reported. And you’re simply looking at retail data. You can manipulate the ETF itself and actually take some for yourself. So that’s one of the things the SEC is trying to eliminate. They want those prices reported as they’re being traded so that you’re not too far off from the reported price from, say, Coinbase.

Lau: Some of the strongest teams right now are those that understand the opportunity, that has been in the space for a while, but really taking on that kind of traditional finance experience. Case in point, your experience with the esoteric bond ETFs and the team at Guggenheim, and to understand that underneath this product is really an understanding of what the SEC needs. 

Let’s say they approve spot ETFs in the United States. What impact do you think that’s going to have on the marketplace and on Bitcoin, and the price of Bitcoin in particular?

McClurg: It’s going to be massive because this instrument now allows a lot of people that weren’t able to get to it previously, into it. I mean anybody can go onto Coinbase and open up an account, trade Bitcoin and buy it. But if you’re running a family office or a pension fund or an insurance company account, you’re not just opening up an account on Coinbase. You have to have a regulated instrument in which to invest in. 

Now, there are some that exist that are in the form of privates. We have one, for instance, that it’s a private vehicle to hold Bitcoin through a grantor trust. And there’s a few other people that have that as well. But the larger institutional investors are slower to invest in that because there is still a lack of regulation in those. 

In an ETF, it makes it easier. Now, I will say that most pension funds and insurance companies don’t invest in ETFs. It’s a good first step and it will prove it out. But eventually they’ll all move to separately managed accounts or private vehicles to invest in Bitcoin once that vehicle exists. So I think it’ll be massive. It makes sense.

Lau: Yeah, it makes sense because it’s a tracking mechanism. They can track to see the market activity before they decide to hold the asset.

McClurg: That’s exactly right. But the ETF itself probably won’t grow too much after its initial launch. What will the growth be? Are those ancillary vehicles? And like you said, the ETF is the tracking mechanism.

Lau: It’s the gateway. I’d like to say that it’s the gateway to something. You think that I’m just going to stop at Bitcoin and in fact, want to ask you, you’re creating lots of gateways here because it really is about the future, right? 

You think BlackRock is going to just stick and stop at a Bitcoin ETF? What’s more and what’s next? 

You’ve got a new filing at Valkyrie for Ethereum futures ETF. So you already have a Bitcoin futures ETF listed on Nasdaq that was approved back in 2022. But tell us more about the strategy behind the other products that you want to bring into the ETF space?

McClurg: Ethereum futures are really important because I don’t see the SEC necessarily approving an Ethereum spot ETF for a little bit longer given how it trades in a much more thin market than Bitcoin does. Eventually, it’ll happen. That’s probably two years from now, maybe one year from now. But in the meantime, we can utilize futures to get that exposure. 

Even more importantly, what a lot of financial advisors and other investors are looking for isn’t necessarily a vehicle just to get exposure to Bitcoin or Ethereum. A lot of them are looking for ways to diversify across either those two or multiple crypto assets through an investment vehicle and they want an expert to do it. They don’t want to do it themselves. They don’t want to say, well, we’re going to allocate 60% to Bitcoin and 40% to Ethereum. They want to say, you, Valkyrie, go and do that for us. 

So we actually think that this dual Bitcoin, Ethereum futures ETF is going to be a really big deal in the ETF space in the short run, and that’s probably sometime in October.

Lau: Well, the U.S. is definitely not the first. Whether or not it’s going to be the last. There are a lot of other nations that have already launched. 

We’re going to go for a quick break. 

The world’s first spot Bitcoin ETF was actually launched in Canada two and a half years ago. But when will the industry get regulatory clarity in the U.S.? I’m going to ask that of Steven and a whole lot more when we come back. Stay with us.

Welcome back to Word on the Block.

Bitcoin ETF launched in Canada two and a half years ago. That came to market very quickly. There was some really interesting market demand and activity there. Did you see that from afar or was it a much closer view of the Canadian ETF?

McClurg: I was watching what 3iQ was doing and I felt like they were really one of the first ones. So I was actually an investor in 3iQ as well as a board member. And I had the opportunity to be there when they launched their first Bitcoin closed-end fund and then when they launched their Bitcoin spot ETF. And that’s really about the time that we started Valkyrie. We took a step back and said, okay, this just happened in Canada. It’s time to do it in the U.S. too. So we launched Valkyrie and tried to replicate a lot of things that were happening in Canada.

Lau: Did you think it would take this long?

McClurg: No. Short answer. But I really thought that we were going to have something in 2021. During 2020, we did a lot of work on analyzing the custody solutions. We felt like from a tech and from a cybersecurity perspective, they were there. They were ready to go and we had solved all the problems that were brought up in 2018 by the SEC. 

And then another interesting thing that happened was at the end of 2020, we started getting whispers of trading chairmans and that Dalia Blass was retiring from the SEC and she was one of the biggest opponents of a Bitcoin ETF. So we thought 2021 was really the year. And when Gensler was announced as the new chair, we said, “Oh, slam dunk. This is happening, right?” But it didn’t happen.

Lau: But here we are. The SEC, he’s (Gary Gensler) very clear on how he feels about crypto. It’s the Wild West. A lot of bad actors in his view. They’ve gone from, this year calling out mostly all crypto — except for Bitcoin and Ethereum — everybody else is in the crosshairs now. NFTs are in the crosshairs.

Where does this stand? When you have an opportunity to present it to the marketplace and for the average person to actually access a Bitcoin or Ether futures ETF or a spot ETF, and then at the same time being barraged with this FUD, this fear, uncertainty, and doubt coming from the SEC and coming from government agencies. Do they even have the appetite to actually want to participate in an ETF? This is kind of the scenario we have in the marketplace right now.

McClurg: I’m going to focus on the positives first. For some strange reason in 2021, Bitcoin became highly political and divisive, which was something that we didn’t expect either. Just given the nature of what it is. But focusing on the positives, I will say that we thought that Gensler was going to deliver a spot Bitcoin ETF. Well, he did help make some baby steps that got us there. So the approval of Bitcoin futures came not too long after he stepped in as chairman. So I certainly want to applaud him on that.

They have taken a lot of enforcement action on some bad actors, which is great and it’s really cleaned up some of the other areas of the space. But at the same time, I think they’ve attacked people who are good actors, in my opinion as well. So that’s been a little bit difficult. But even from a political perspective, there’s been a lot of stepping up by current politicians.

 
Warren Davidson has really stepped up. Overall, it seems like the House of Representatives is moving forward on passing positive legislation for the space. And he’s one of the leaders of that which I really want to applaud him for. There are many others. I’m not going to go through the whole list, but there are many others. 

And then you also have the current primary race for president. The number of primary candidates, Republicans and Democrats that are pro-Bitcoin is astounding. The Republican debate really showed that. And it’s usually the younger ones that are very positive and pro-Bitcoin. And then on the other side of the aisle, you have Robert Kennedy Jr. who is a big proponent of Bitcoin. So you’re seeing in both races and it’s going to be a hotly debated issue moving into the primaries and probably into the presidential election. So that’s very positive for where we stand right now.

Lau: It is the intersection of business, politics and economy. It’s right there. We’re watching it unfold in the U.S. And you’re in the hot seat, Steven. Literally and proverbially you are. 

I have one last question for you. What’s next for Valkyrie? And if you were to gaze into the crystal ball of where this space is going to be a year from now, what’s your prediction?

McClurg:  For the space, I think Ethereum futures ETF is going to be really interesting and it’s really going to broaden the horizons of who invests because it’s not just a single asset security like you have with Bitcoin futures. 

I really do believe that we’re going to get a Bitcoin spot ETF by at least Q2 of next year. I’ve been wrong before. I was wrong in 2021, But I do think that the time is right, if not sooner than that. And that will really open the door to a lot of other types of products and investment ideas. As you mentioned earlier, it really does open up institutional investors to more things. 

And then what’s next for Valkyrie? We’re really leading the charge on Bitcoin, but we’re also focused on other areas of innovation that don’t have to do with crypto assets. So I think that’s going to be a lot of fun for us in the coming months and years.

Lau: I can’t wait to find out. And when it’s ready, you come back right here and you let us all know about it.

McClurg: Thank you, Angie. I will.

Lau: Steven, thank you so much for joining us. And that is a wrap, everyone. Thank you for joining us as well, everyone, for this latest episode of Word on the Block and watching. 

I’m Angie Lau, Forkast, Editor-in-Chief. We always appreciate hanging out with you. Until the next time.