The Evolution of Digital Finance & Bitcoin Futures ETFs with Michael Sonnenshein of Grayscale Investments

Jeremy: Hello and welcome to The Money Movement. I'm very excited. We're here recording a money movement episode at Consensus 22 in Austin, Texas. I think 17,000 people, probably the largest event post pandemic. I don't know if I can say that happening. I'm thrilled to have Michael Sonnenshein, CEO of Grayscale, a crypto OG, and someone who I've had the pleasure of getting to know for, I don't know, eight years or whatever.

Michael: About eight years, yes.

Jeremy: Something like that. It's awesome to have you on the show, and we're doing it here in DCG land.

Michael: Thanks for having me.

Jeremy: Awesome. There's obviously so much to talk about. Maybe just start with, we can go look back as well, but just where we are today, which is very specifically you guys have been at the forefront of asset management in digital assets, you've been at the forefront of making Bitcoin, an accessible investment product through traditional investment means. It seems like you're right on the cusp of potentially getting the coveted Bitcoin ETF product, which you, in my view, so greatly deserve.

Michael: Thank you.

Jeremy: I'm a very happy investor in the GBTC product and in the E product as well. I have elected to be an aggressive user of those in my IRAs and other formats.

Michael: Fantastic.

Jeremy: It's a little testimonial. When I go long, I'm finding every avenue I can. It's a great product. I would love to see you guys, I hate to use the word prevail in a sense, but it feels like that.

Michael: I think that's the right word.

Jeremy: I guess, indicatively on that. You've just hired a former solicitor general to help you guys. I'm sure there's areas that you may or may not want to talk about, but you guys have been really upfront about the legal basis, really, for having this product. Maybe just talk a little bit about the thinking there and where you're at and then we'll go from there.

Michael: Sure. First of all, thanks for having me. This is long overdue, so I'm glad we're finally having this conversation, and it's great to be here. Jeremy, this has been eight years in the making. When I think about gray scales, earliest days, we were early to identify that digital currency was going to become a bonafide asset class, and investors would want access to it.

Most people don't really realize that when we launched Grayscale Bitcoin trust all the way back in 2013, we actually chose a legal structure. That's identical to what you see for a lot of commodity ETFs today, GLD probably being the most well known to them. It's a Delaware grant or trust. It's not like somewhere along these last eight years, we suddenly decided that an ETF would be optimal. This was always the plan at Grayscale.

To your point, and on your very kind introduction, it's really been our core focus, making, investing in this asset class accessible, low barriers to entry, giving people the ability to do so through traditional means to buy securities that have audited financial statements, risk disclosures, offering memorandums, tax reporting, things that investors are usually used to seeing.

I think what's been so fascinating is how not only the asset class has evolved, the fact that Grayscale Bitcoin trust has become the largest Bitcoin vehicle in the world, it holds about three and a half percent of all Bitcoin in circulation, but that it's made its way into almost a million investor accounts in the US, all 50 states. This has really become the vehicle of choice for so many investors looking to access Bitcoin in a brokerage account, retirement account, 401k, et cetera.

If you fast forward to where we are today in 2022, we are now down to the last couple of weeks before the SEC ultimately has to weigh a decision to approve or deny taking GBTC and converting it into a spa ETF. The playing field that we find ourselves in is an uneven one. The SEC had historically said, no Bitcoin ETFs. They were looking at that through the lens of both Bitcoin futures based ETFs, as well as Bitcoin spot based ETFs, which is what GBTC is since it just holds Bitcoin itself, as opposed to holding Bitcoin futures.

If we look at the last couple of months, that thinking has really evolved. You now have, I think it's three, maybe even four Bitcoin futures products on the market. I think you and I, and everybody else in this industry, as well as the investment management industry as a whole, would say, that's a huge milestone. Bitcoin only came along a little over a decade ago, and we now have a healthy two-sided market derivatives lending and borrowing, all this infrastructure. To have Bitcoin futures ETFs, it's fantastic, but we shouldn't be forcing investors into that because it's only thing that exists. We know that a Bitcoin futures ETF and a Bitcoin spot ETF don't actually provide the exact same exposure, and maybe aren't appropriate for the same types of investors. As that thinking has evolved, you've now seen the SEC approve Bitcoin futures ETFs under both the '40 Act, which governs primarily those kinds of products that hold Bitcoin futures, as well as now under the 33' Act.

The evolution of that thinking, the next natural step in that, is to approve a spot Bitcoin ETF. Our attorneys at Davis Polk, who we've worked with for a very long time, have outlined some really strong arguments as to why potentially the SEC here is possibly violating The Administrative Procedure Act, which for those of you less familiar with it, you and I probably moonlight as securities attorneys these days, essentially governs the way regulators regulate.

When they're looking at two issues that are alike, and they're looking at them desperately, that's really when an APA or Administrative Procedure Act violation comes into play. Hiring-- We just announced recently that we hired Don Verrilli. Don is not just a great guy and a fantastic attorney, but he's the former Solicitor General of the United States under the Obama administration.

A lot of folks are asking, "Why are you hiring this very powerful attorney, this litigator?" We've said, "We may have to ultimately enter into a lawsuit with the SEC if they continue to have this posturing where they're looking at these two issues desperately." We're really down now to the last couple of weeks, and we're on keeping all options on the table.

Jeremy: There are so many issues in regulatory treatment, what are digital assets, these investment structures. Look, there's legitimate investor protection questions and things like that. I think there is also a little bit of concern of letting the fox in the hen house or whatever metaphor you want to use. The bottom line is, digital commodities are a new major invention. They didn't exist before. Actual digital commodities didn't exist.

It's a breakthrough. Genie is out of the bottle. We now have digital commodities. We have digital commodities that are decentralized. We have digital commodities that have varying degrees of centralization, but the ability to use a digital commodity in some way to power something and use something or incentivize something, it's an incredible human invention.

Michael: It is. People should have safe access to it.

Jeremy: People should have safe access to it. I think the-- Moving topics a little bit, and I'd just be really interested to hear your take, because you guys evaluate a lot of different digital assets as assets that people might want to invest in or own. Similarly, you could choose to purchase copper and manufacture something with it or you could say, "I believe copper is going to have more utility this year or less utility this year or whatever the demand drivers are." You can choose to invest in the price of copper. These blockchain networks, these layer 1 blockchains, and protocols, it's this new category of these digital commodity assets, and it's irreversible. This is here.

A lot of people are struggling with, how does one classify and define these? There's a lot of legislative initiatives on that. As Grayscale looks at this burgeoning ecosystem and thinks about that, how are you adjudicating both what you're interested in making available in a safe way for investors, but also adjudicating what you feel really are these lasting digital commodity products?

Michael: Sure. Listen, I think [unintelligible 00:08:43] burgeoning is the exact correct adjective to use. We feel that we're maybe just rounding the bottom of the first inning as to not only the use cases but the really whole development of this asset class and investor access to it and the utility around it.

To your point at Grayscale, we now offer 17 different digital currency vehicles. Most of them are single-asset products. It's a long only passive fund for Bitcoin, a long only passive fund for Ethereum, so on and so forth. We've also begun to develop a suite of diversified funds where investors can gain exposure to, for instance, large-cap digital assets, or a basket of DeFi assets, or a basket of smart contract protocol assets.

The way that we really think about our product roadmap is actually quite straightforward. There's two things that I think we really hold in really high regard. Number one, we're really transparent with the market about how we evaluate tokens. There is persistently, on our website, a list of not only assets that underpin the Grayscale product family, but also a list of all the assets under consideration to potentially make their way into the Grayscale product family.

As we evaluate assets, it's everything you could possibly imagine about them. We're looking at where they came from, who the teams are behind them, are they centralized or decentralized, are they solving real-world problems, or are they in fact solutions in search of problems? Where does price discovery happen? Are they potentially securities and or are they digital commodities? Are they pre-mind? Are they proof of work? Are they proof of stake? What are the custodial solutions available? The list goes on and on and on.

What we've seen from investors is that today, midway through 2022, their perspective, for the most part, is having now have that core Bitcoin and or Core Ethereum positions, and while diversification has been something that's gained momentum amongst investors in terms of building out a diversified portfolio of crypto assets, there is now suddenly, which is super encouraging to our team, an appreciation of subthemes or subcategories of crypto assets.

When we look at the equities market, we look at financials, we look at healthcare, we look at sectors and so on. Now investors are appreciating the crypto space that there's smart contracts, there's DeFi, there's privacy, and the list goes on and on. As the asset class is developing, investors are keen to make that singular investment, but then get broad-based exposure to a variety of those assets.

Jeremy: Absolutely. I'm interested, as someone who has been at this, as long as you have, I've had a few guests over the past several months who are similarly OG, as it were. I think there's waves of getting involved in this space, whether it's as an investor or as a market participant, or as just frankly, an observer, just how much attention people pay to it. We have these successive waves, oftentimes those waves are tied to the price in the market, but it's also generally tied to just the volume of activity and projects and other things.

Coming back to the basics, the very, very basics, I'd love to hear you talk about your global macro thesis, just as you see it. Maybe this isn't a Grayscale point of view, but your point of view, global macro thesis for Bitcoin. Has it evolved? Has it changed? How has it responded to the current-- we're seeing macro response in all risk assets and markets and commodities and other things. Maybe just, first, fundamental macro thesis, which I just want to hear it from you.

Michael: Yes, sure.

Jeremy: Then I want to tie it back to, we really now see this real interplay between macro and Bitcoin at a global level, which is remarkable. If you had said that to people five, six years ago, I thought it would always be the case, but if you had said that-- whatever, but it's right there, you've got commodities markets, equities markets, Bitcoin, everywhere, every market watch, everyone's looking, and there's an interplay.

Michael: Sure.

Jeremy: I want to explore that a bit.

Michael: Yes. I think for me, going all the way back to January of 2014 when I got into the crypto space, what sparked that light bulb moment for me was really the idea of Bitcoin being the springboard to financial inclusion. I have never wavered over the last eight years in my long-term goal of seeing Bitcoin be able to do that. I think both folks like yourself, me, others in the industry, you can't really come to appreciate Bitcoin or a lot of the development work that's going on in and around this space without also becoming a money historian, if you will.

Looking at over time, just how much money has changed that ultimately society is who dictates what money is. The world we live in today, Bitcoin is not necessarily acting in that capacity just yet. Certainly in the US and a lot of other developed nations, it's still being used as a speculative asset, as a digital gold or a digital storage of value.

Jeremy: I remember-- just something real quick.

Michael: Yes, go for it.

Jeremy: I remember back when there was the block size-

Michael: Debate.

Jeremy: -wars. There was a lot of passionate discussion about what's Bitcoin for right now. Actually, the camp that won, which was the keep the block size small camp, was really the digital gold camp. I remember some of the smartest minds saying, there's a period of, maybe it's 30 years, maybe it's 50 years, there's going to be this long period where there's this monetization that happens where the monetary base in Bitcoin gets to really significant scale, and where effectively price stability actually there's more stability inherently in it, and it's only then at that point in the future where it really could become a unit of account, because it's clearly a medium of exchange, meaning it's got these digital properties, it's phenomenal.

Michael: Absolutely.

Jeremy: As a stable unit of account where people are going to denominate contracts and other things. Then I think for a lot of people, that's hard to get your head wrapped around. It's like [inaudible 00:15:23] this thing has this.

Michael: Well, you've got to be patient. You've got to stomach the volatility. You have to continue to see the regulatory environment continue to firm up around the asset itself. Even here at Consensus, there's really starting to be a conversation around starting to denominate things in Satoshis, which is not necessarily part of the conversation that's usually been had.

I think that I still have such a long-term optimistic outlook on Bitcoin's ability to do this because as you shrug off that developed world lens that we all walk around with, and you really do look all around the globe, and you see the lack of infrastructure around financial assets, the ability to store value, transfer it to the next generation, finance a business, finance an education, the ability to have a non-sovereign asset when-

Jeremy: Totally.

Michael: -wherever it is that you live is hyperinflating 10%, 20% overnight, that's really scary. I really believe that this is the democratization of money. It's super, super powerful.

Jeremy: It's pretty interesting like here I am, Mr. Dollar or digital currency purveyor, dollars everywhere. I think people sometimes are puzzled when I--

Michael: They think it's at odds with one another?

Jeremy: They think it's at odds. I'm like, "No, no, not at all."

Michael: No. [chuckles]

Jeremy: There's the world of currency today and how people are paying for things and denominating contracts and all of these things, and that's got a lot of lens.

Michael: [crosstalk]

Jeremy: It's getting a lot of lens for a long time. Likewise, there is this ongoing growth in digital commodity money. In fact, a digital currency dollar and digital commodity money have this really strong interplay with each other. I think it's an interesting thing. I have a very long-term view, like you, I share that view.

I think one of the really interesting questions that is worth thinking about and is actually in the founding of Circle nine years ago when we were writing our strategy white papers and all these sort of stuff, was over the long run, could you imagine units of account that are digital currencies that are backed by Bitcoin as a model? That's actually what the Taler and a lot of fiat currencies have been for a very long, long time in. I'd love to hear your thoughts on that.

Michael: I think that's entirely right. I think honestly, one of the ways that we can get there is getting globally people to stop thinking about the health of this ecosystem and the traction that it's gaining, to solely be a reflection of its price.

Jeremy: Totally.

Michael: That's tough, because today, so much of the use case is around a diversifying asset in people's portfolios and they're speculating on it. Bitcoin, it does nothing else other than fulfill this digital gold part. It could still be widely successful, and I'd argue it's already been widely successful.

Jeremy: Absolutely.

Michael: There is certainly use cases coming for all kinds of industries and all kinds of assets where the rails on which all kinds of things are moving, very often folks may not even know Bitcoin is the rail on which things are moving in the background. You're going to see the denominations of all kinds of assets, and probably the proliferation of an entire industry around microfinancing, microtransactions, things today that our infrastructure just doesn't allow for.

Jeremy: We're definitely seeing that with USDC, just this proliferation of financial application use cases that are just hard to do. You can't do them in the existing banking system. Actually, maybe just a little bit of a segue into, again, coming back to this idea of digital commodities, there is more and more types of digital commodities.

I think in real life, [chuckles] we're in the real world or we're in the real world, but in the traditional world of commodities, it's not controversial that you'd have a commodity like gold, you'd have a commodity like wheat, infinite number of commodities, in some sense. It's just physical things and other things, and commodities that have utility to control something. Oil is probably the best example of a commodity that has incredible utility.

There is these machines that get built, and you've got to put this stuff in the machines, and then they burn and do shit like that. Then buildings got built and all these, cars got built, and all these sort of stuff. One of the analogies that I like to use is that these blockchains are a new set of machine technologies. It's a new set of computing machines. These are computing machines that can perform computing tasks that allow for disremediation, allow for various types of complex interactions where incontrovertible data or transactions or business logic can execute safely. That's a really powerful invention, these new machines, these new trust computing machines, and they are fueled by digital commodities.

Michael: Let me push you on that though, because this is a question I always get, which is, will there just be one, right? Or can there be a landscape of several digital commodities that co-exist with different use cases, different prices, different addressable markets? When are we going to consolidate from the, I don't know, now nearly, probably 20,000 of these assets to something that's far more digestible.

Jeremy: As an internet software platform, practitioner of almost 30 years, I have watched platform wars over many, many generations of technology-

Michael: That's exactly right.

Jeremy: There's a lot of good analogies that one can use or can look at. One that I like to use, which is a relatively recent, and many people can relate to, is smartphone operating systems. We all remember the compact IPAC, or at least I do, the Palm pilot, the--

Michael: Don't show your age.

Jeremy: Nokia Symbian phones, Windows phone, NTT.com phones, all of these carriers, mobile handset manufacturers with all their own. It was like--

Michael: There was a lot of momentum around each of them.

Jeremy: Every one of those was like, we are solving-- we're mobile. They all were getting developer ecosystems, and who's going to build the apps. There was the open models, like what was called warp, which was just the way you built a mobile web app. It was an intense platform work, and with big companies too. These were big companies that were trying to win these. None of it was very good. In some ways, it was, no one had yet gotten to the hardware device that brought it to life in the right way, or they hadn't figured out the user experience, or there wasn't 3G. It's just-- you really just couldn't do much with that. There were just so many things that were there.

Michael: I think that analogy tracks.

Jeremy: Eventually, technological capabilities, screens, the compute that you could fit on the size, the user interface paradigms, 3G coming online. A number of things came together, and then someone solved it, and it was none of the prior 17. None of them, they all died, basically. They all died.

Then the paradigm was established, and you had Android emerge as a very viable alternative paradigm. You've seen some other mobile and device-centric operating systems emerge. I think of layer one blockchains in a very similar way, that right now there's, whatever, 17. I'm just using the-- there's more than that, obviously. There's a lot of people chasing this, and there are some first movers that have really good early traction. I remember how many developers were building for Simian, because Nokia had all this distribution, there's like Simian and Simian and Simian. It was really, really passionate about that. It looked like it could be the winner.

Michael: Sure. When we look at timeframes associated with that analogy, my frustration is that the momentum and the progress that we're making as an industry is unmatched. Compared to this-- looking at those. There's somehow all this impatience that is not happening fast enough around a crypto's phase.

Jeremy: I have a long term view as well. My take is, this is actually moving along at a pretty nice steady clip actually. It's--

Michael: I say a week in crypto is like a month or couple of months in the real world.

Jeremy: If you zoom in, you're like, holy shit, the velocity of things is unbelievable. This ties into a lot of other themes around technological obsolescence. It's one of the reasons why USDC-- we have a multi-chain strategy because there's so much innovation happening, and the paradigms are rolling over. We have third generation blockchain technologies now, and there's people who are designing fourth generation blockchain technologies that can do a million transactions per second. That have like total-- like using ZK, having very deep levels of privacy and confidentiality, which is-- if you're going to have mass society adopting this really important. That's like R&D right now. These are the things that are getting laid out. The broadband infrastructure is getting laid down for people to do it. I think generally skeptics will look at the here and the now and go, "Oh, you can only do 15 transactions per second.

Michael: I think we bear a responsibility then as an industry to dumb this down, to make it as user friendly as possible. Getting these digital commodities into the hands of the next million, the next a hundred million, the next 500 million, next billion people, we have to dumb this down and have to bring it behind the scenes and make these interfaces.

Jeremy: Absolutely. I'd be interested to get your reaction to this. I have this, I've been actually saying this for like a long time, but feels very real now, which is there's the speculative value phase, and then there's the utility value phase. We've begun to achieve some of the utility value phase. I think this most recent cycle over the past couple of years has actually introduced some pretty significant utility value.

The utility of stable points is one example that the utility of DeFi, the utility of NFTs, there's really interesting utility. Certainly the utility of a non-sovereign store value's extremely extraordinary utility for a large number of people in the world. We're starting to get into the utility value phase, but in some ways if we're in another crypto, winter, and people are going to build and people are going to do this, it feels like the next phase of this is very large scale utility value.

Michael: I would agree with that.

Jeremy: The user experience problem is a really big piece of that. I think about that a lot from the perspective of coming back to your origin interest of financial inclusion, and how do we make a more efficient, more inclusive, more fair, more simple-

Michael: More equitable financial system.

Jeremy: -more equitable financial system. There's the infrastructure layer, there's the unity economic layer, there's the access layer, and then there's the UX layer.

Michael: Sure.

Jeremy: Solving for that. It's encouraging to see the amount of work that's happening there, but I'd be interested too, just as it ties back to Grayscale specifically. As you guys think about how do you help people navigate their way here, is that helping people into the utility value phase and figuring out what to be aligned with a big part of that.

Michael: I certainly hope so. Today being the largest asset manager for crypto globally, a lot of people are having their very first experiences with crypto, anything via Grayscale. Whether that's buying one share of GBTC in their brokerage account, or it's gaining exposure to a basket of DeFi assets, we're really trying to make it as familiar and easy as possible for folks. I'm going to say that it is too soon to say whether or not we have now entered a new crypto winter. Just seeing--

Jeremy: I agree, I'm not sure about that either.

Michael: I'm not sure about it yet. Quite frankly, I think that as we move through this next phase and we do see all the wonderful things you guys are doing at Circle, the continued expansion of the Grayscale product family, all the other industry participants that are continuing to build. I think one of our biggest responsibilities is really around regulation. Today I see no shortage, no slowing down of momentum of investors of every shape and size getting into this asset class. As a regulator, they do have a tough job because half the things you just rattled off in your last commentary were things that weren't happening in crypto 12 months ago.

As a regulator, it's tough to keep pace with that, but I know you guys are spending a lot of time in DC. We're spending a lot of time in DC as well, and we have to move this entire industry forward through new rules and new regulations. Otherwise, everyone is merely just trying to do their best, trying to deliver the best products and services they can, but just trying not to repeat the same mistakes that other companies have made that have led to enforcement actions. We need to see regulation beyond enforcement.

Jeremy: We definitely need to see that. Frankly, we need, I think, a fairly wide birth, I don't know if it's the right phrase, in terms of ensuring that the pace of technological change and improvement can continue because-

Michael: The regs won't slow it down.

Jeremy: I think this is just one of those things where this is a choice for society. This isn't a choice for some regulator. Society gets to make these choices. Policymakers and regulators are vehicles for society. Society made a choice in the 90s' that they wanted to allow really broad, open, free-market competition in the development of software technology and the internet.

They kept a fairly open model, a very, very open model. They didn't decide that a website is the equivalent of a radio tower and regulate it through the FCC, or whatever the examples you want to use are, and there were inherent risks, and people talked about, well, if you have something where anyone can publish information, then criminals will run free. All these horrible things will happen. Guess what, they do, horrible things do happen. They happen in a lot of different worlds. I think as an example, terrorists are organizing right now on WhatsApp, and they're organizing right now on Telegram, and they're publishing recruiting videos on YouTube. No one in society is saying take away YouTube, take away Telegram, take away this. They've decided that we have to have free society, and we want to allow for this innovation. We have to find ways to address these risks because so much of crypto is not just about financial services or financial technology, it covers so many things. It's like we have to keep that openness.

Jeremy: We do.

Michael: I think there's a race right now, and the race is between innovators, developers, builders, technologists and users and adopters who are driving and catalyzing and capital that's coming in they're driving and catalyzing this, and there's a race to get it to achieve planetary scale. If you achieve that planetary scale and you connect the world together through this infrastructure, in some ways regulation will have to adapt to the new world that's been created. That's happened with the internet as well in different ways, and I think it's just the internet movie playing on the next cereal. If people aren't paying close enough attention to this, what is transpiring in DC, what you're seeing in the UK, what you're seeing in Germany, what you're seeing in China, all around the world there is a global competition amongst nations, amongst state action.

Jeremy: This is a huge change in the last 12 months [crosstalk].

Michael: Absolutely.

Jeremy: I feel it every time I go into one of these countries, it's like there's a real change.

Michael: Whether you want to look at the White House executive order from earlier this year that I think was a really big wake up call. I think it slammed the door shut on anyone continuing to call crypto the wild, wild west in the United States because the highest office in the United States said to all of the federal regulators, it's time to get focused. It's time to figure out what we're going to do here, it's time to foster innovation, it's time to make sure that we keep these technological advancements in the US and we don't lose out on this to other countries. How fast this is happening, is really encouraging to us. Even just this week, you now have a bipartisan drafted bill from two senators really looking to begin to develop that framework for crypto regulations.

Jeremy: We've seen the same thing bipartisan bills around stable points, which is tremendous.

Michael: These are not things that were happening even just a few months ago, and I think as we get up to the midterm elections and you see how much these types of issues are part of a lot of politicians platforms. It's continuing to gain momentum, and we're excited about it, we really, really are.

Jeremy: Is it the digital currency act of 2023, or is there going to be an omnibus just like the telecommunications act of 1996 which I remember well I'm dating myself, which was like the BFD of making the open internet happen right.

Michael: Tough to put a timeframe on it, but I think you and I would both agree that we want more regulation, but we want it, to your point, have a really open architecture. We want companies to have hopefully a regulatory sandbox within which they can build and test and develop their products and services.

That regulation will continue to try to keep pace with how things are transpiring and not squander it. Whether that happens in six months or 12 months, I'm not sure but I do know that we and others are very engaged on these issues, and the hill is as well.

Jeremy: It's incredible. Since I think our first early chats in the early days to hear it's pretty amazing, and congrats on all its success and really, really excited. Thanks so much for joining the podcast.

Michael: Thanks for having me.