Grayscale chief executive Michael Sonnenshein says consumer trust in the firm, one of the largest cryptocurrency asset managers, comes from its mantra of “ask for permission, not for forgiveness”.
It’s a fitting phrase for a company that aims to offer a range of products to consumers, but has some big regulatory hurdles to overcome first.
As compliance issues prevent many institutional investors from investing in crypto directly, a number of crypto derivatives and ETFs based on those derivatives have sprung up instead.
The CME has bitcoin futures contracts, inter-dealer broker TP ICAP has crypto-linked ETPs, and brokerage firm eToro offers ETFs based on crypto futures.
Grayscale, based in Stamford, Connecticut, has close to $40bn in assets under management across 18 investment products.
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A crypto ETF based on the spot market might be next.
Sonnenshein told Financial News that Grayscale is now aiming to get approval from the Securities and Exchange Commission to change its products from ‘SEC reporting companies’ to fully fledged ETFs — which he classifies as phase four for Grayscale’s products.
“Phase four is the holy grail,” he said. “These product structures were always thought of to become ETFs. We certainly believe that the bitcoin ETF will become the first. Over time, we do believe that this product family will continue to transform into a family of digital currency ETFs.”
Investor interest in crypto has exploded. Wall Street has taken notice. According to Morningstar, in 2015, the top 100 digital coins were valued at $5.2bn. Seven years on, market capitalisation is roughly $1.7tn. A survey from crypto exchange Bitstamp found that 79% of institutional investors expect crypto to be mainstream within a decade.
Most of Grayscale’s 18 products are single-asset offerings, referencing only a single digital coin like bitcoin or ether. The bulk of Grayscale’s $40bn in assets under management are in its bitcoin and ether trusts, which hold $25bn and $9bn respectively.
Investor attention remains focused on the big two coins, but Sonnenshein said that interest in other digital assets is growing.
“Theres an overwhelming majority of Grayscale investors that own more than one product,” he said. “For a lot of investors, they’re seeing the maturation of the asset class, the same way that we look at equities, we are starting to see some of that develop within the digital currency space.”
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But Grayscale, and others, face an uphill battle on the regulatory front. Rivals’ attempts to operate similar spot ETF funds have been rejected by the SEC as chair Gary Gensler has called the industry the “Wild West”.
Jan van Eck, head of VanEck, which offers a crypto ETF, has lamented US regulatory headaches when it comes to offering a spot product.
Sonnenshein echoes industry proponents in saying there is a double standard when it comes to regulation. While crypto’s risky nature is well-known, ETFs are typically some of the least complex products in the market — a chunk of stocks that you can buy and sell like a single share.
However, with bitcoin futures ETFs, the ETFs aren’t tied to bitcoin directly — they are underpinned by bitcoin futures.
That has opened up thorny issues that have concerned crypto experts, who question the SEC’s call to allow futures products over spot ones.
“The SEC is comfortable with a futures ETF that gets its pricing from the spot market, but it’s not comfortable with a spot product which gets its pricing from the underlying bitcoin market,” Sonnenshein said.
“These markets are inextricably one and the same. It is very difficult to understand how the SEC is only comfortable with one but not the other.”
Sonnenshein said that the approval of one bitcoin spot ETF would open the gates for others like it.
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“When the SEC does approve a spot bitcoin ETF, the market will end up having several spot bitcoin ETFs, much the same way we saw the first bitcoin futures ETF and now we have several futures based ETFs.”
But even if another company or jurisdiction allows for spot ETFs, Sonnenshein said it would ultimately benefit the entire asset class.
“The rising tide lifts all boats. If any other company is engaged in providing access to digital assets, investment vehicles or funds, we think that is a net benefit to the ecosystem,” he said.
“A lot of what we do, and a lot of our focus is investor education. There is so much yet to be understood.”
To contact the author of this story with feedback or news, email Jeremy Chan
