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Speaker A: Yeah, yeah, let's be. I'll be very blunt. If you look at all the things that they have said and written over the last three years, this will be denied. But really a lot, there's a lot of circumstantial evidence that suggests that it will be approved. It goes back to what I said. They can back into whatever d... |
Speaker B: Okay, well, you said two things there, James. I want to be clear. When I. Bitcoin ETF. That is the question on our mind today. Is the bitcoin ETF actually happening or not? Will it happen this year or not? Blackrock fidelity, some of the largest ETF issuers in the world, have now submitted filings for ETF's ... |
Speaker A: Thanks for having me, Ryan. Happy to be here. |
Speaker B: You know, we talk a lot about crypto in on bankless, of course. And so I think it's in some people, some listeners, they got their first exposure to finance by way of crypto. Actually, my co host David Hoffman's very much like this. So I don't know if David's ever purchased an ETF in his life. And I think th... |
Speaker A: Talking about today that is 100% correct. So it's exchange traded fund. It's basically people, a lot of people have 401 ks, 403 bs, these types of plans, at least in the US. And usually what you're investing in is a mutual fund. And those have much longer tickers with an x at the end, typically. But essentia... |
Speaker B: You just opened up probably a thousand questions in my mind and you want to get to them. That last point that you mentioned, I want to draw an analogy for bankless listeners. So as the demand changes, you can increase the supply. USDC, a stablecoin kind of works like that as well. Think of that, right? So ho... |
Speaker A: 93 was the first one. So technically 93. I told you about that guy Nate most. He actually went. The first ETF ever launched was technically in Canada a few years because the SEC took like three years to get comfortable with the idea. |
Speaker B: Nobody done this before. |
Speaker A: Yeah. So Canada did it first in like 91 after talking with Nate most and these guys. So they got it done in like a year and then we came along afterwards in the US and finally figured it out. But yeah, so 93 was the first time. And along the whole way there's been people questioning the structure, saying it ... |
Speaker B: It's interesting that people would say that this would cause issues because it actually seems much simpler than the other price exposure mechanisms based on derivatives and that sort of thing. Because it's pretty simple. It's just a wrapper for underlying assets. What can go wrong. |
Speaker A: Yeah, we don't need to get too far into the weeds here. But essentially, a lot of the people say if you're looking at bonds, there's bond ETF's. They hold other assets that are less liquid than typical stocks. So people think you're adding liquidity. There's a lot of nuance here. But essentially what it come... |
Speaker B: You sound like an ETF bull, my friend. Are you like, do you like this asset? |
Speaker A: One of the things we've always said is like, we're going to get into a lot of this. But if the SEC had approved this thing, honestly, all the people and these markets, these market makers that operate in this market, they're not going to let some of the fishy stuff that has been going on in crypto, they're g... |
Speaker B: I think I was first exposed to the ETF concept just earlier in my adulthood and early investing career through Vanguard Group and John Bogle. The idea that, hey, you know what, you don't have to like outperform the market. You just buy, buy an index fund, buy a low cost index fund of some sort and you'll out... |
Speaker A: That's the beauty of the ETF. It's everyone in the old mutual fund world, what you're used to looking at in your 401k or whatever it might be. If you're a us listener, there are multiple share classes. So you need to invest a certain amount of money to get access to this lower fee because you get these other... |
Speaker B: How big is the ETF market, James, in terms of assets inside of ETF's, are we talking hundreds of billions? Are we getting into the trillions here? |
Speaker A: Yeah, we're definitely a trillion. So we're right around 10 trillion globally. But most of that is in the US. I believe we have. I'm looking it up right now. I think we have seven. I think we're right around 7 trillion in the US alone. I'll tell you the exact number, 7.25 trillion. |
Speaker B: Where do you find that info? Is that like a Bloomberg terminal? |
Speaker A: Yeah, that's a Bloomberg function, but I don't probably vetify eTf.com. things like that will probably have that type of information. But the global markets like over ten as well. But that, you got to remember that includes like, it holds stocks, that's going to hold bonds, it'll hold treasuries, commodities... |
Speaker B: Right, right. We'll get there to crypto. You know, we're building here, building our understanding here. So $10 trillion worldwide, how much of that would you guess is retail? Mom and pops versus the big guys? |
Speaker A: It's hard. So if you look at the way the us market works, for the most part, a lot of the money is via advisors and platforms. So we can't see exactly how much is retail, but a lot of people will use advisors. So roughly, we estimate right now that us advisors, the people that are helping, if you went to som... |
Speaker B: And I'm looking at kind of a list of different ETF's. And you probably have a better list in your head, but you basically buy any collection, any set of assets in an ETF. So we mentioned the spy, it's S and P 500 index. If you want general stock index in the US, there's a Nasdaq, we've got equity, precious m... |
Speaker A: Platinum, palladium, you name it. |
Speaker B: Yeah, I've seen certainly oil ETF's as well, if you want to go down the commodity stack. Real estate ETF's of various types. I don't know if it gets as specific as, let's say I want to bet on the real estate market in California. California, maybe that's a bit too specific, but maybe they have something like... |
Speaker A: Actually, they do have some stuff. They have muni bonds that focus on. They have muni bonds that hold. Focus on that. So you could bet on the California muni market, but also basically there are those real estate ones. They don't own physical real estate, they own reits. The real estate investment trusts, wh... |
Speaker B: Can you buy money markets? Can you just buy like dollars in an ETF or something? Could you buy. |
Speaker A: Yeah, there's actually. Yeah, so there's some dollar ETF's that like, basically they. The way those work, though, isn't like they're just holding dollars. There are money market fund ETF's elsewhere. There's money market funds, obviously, that aren't ETF's. For the most part. People just use, like, Treasury ... |
Speaker B: All right. For crypto natives. Chris, crypto listeners, tradfi, you thought of this idea of tokenization before crypto did. This looks a lot like tokenization of different assets, doesn't it? Okay, so this other point that you raised, which is like, the thing that's different about ETF's is you can always ac... |
Speaker A: Hope, at least so actually. So for oil, I was debating saying this before, but oil, one of the we like to call some ETF's or like Wolf's in sheep's clothing, because they look like they're simple. There are no ETF's that hold physical oil because you can't really store it. It costs too much money. There's a ... |
Speaker B: All right, well, so let's talk about those. So first let's talk about maybe the precious metal ones. So if I buy a gold ETF of some sort, where is the actual gold bar stored? And can I actually, like, can I actually redeem that for gold? And you said, you said it's always able to access the underlying assets... |
Speaker A: Yeah. So this is going to get in the weeds of, like, market mechanics of ETF's a little bit. So I'll do my best to keep it simple. But essentially, the way to think about it is there are. There's a few people involved in a creation redemption process. So usually it's what we refer to as a market maker. Think... |
Speaker B: So hopefully they're using a brink's truck or some security apparatus for that transfer. |
Speaker A: No. And literally, sometimes it's the same building. It's just literally a different. Like, it's moving it from one vault to another. |
Speaker B: And if they didn't. If they didn't move it, would we really know? |
Speaker A: Yeah. Okay. There is like auditing and stuff. And more than the. I'd like to think it's better than the auditing we've seen in the. Well, it couldn't. |
Speaker B: It couldn't get worse with respect to FTX and the custody. But what's interesting is, like, we have, you know, as with crypto, we have, like, with the gold example, we have an actual bear asset, which is like, when you have it, like it's kind of valuable. Like, that's the thing. Possession is the asset itsel... |
Speaker A: That is correct. Which is one of the things that the SEC is going after Coinbase for in this lawsuit. They want them to break up their brokerage, their custody, all those things into separate legal entities. Cool. |
Speaker B: You know, I appreciate Coinbase or, sorry, the SEC is like asking for these things, but it's also not providing a clear way to actually do that, which is this weird scenario we're in. Okay, but so if I own a gold ETF, it's pretty much like, it's pretty rare to own an ETF where I could actually get the gold b... |
Speaker A: Well, so for the average person, if you had millions of dollars in there, you could absolutely get the gold, right? It would not be a problem. But for the average person, who's not going to have millions of dollars in this ETF, I don't even know with gold. |
Speaker B: It's so weird, though. It's like, let's say I had millions of dollars of golden. What do I just show up with my minivan or something like load. |
Speaker A: Yes. So Canada specifically, they have ETF's that do this as well. The canadian royal Mint has. They're actually, I don't even think they're technically ETF's, but they operate like ETF's. You can do the same thing, right? You can get it delivered to your house, essentially. I don't know exactly what it look... |
Speaker B: And to be clear, who is responsible for approving ETF's, who is kind of the gatekeeper? Is this somebody in government? Is this always the SEC? You have to. You have to register. |
Speaker A: There are different divisions in the SEC that make these decisions on different ETF's, but it's always the SEC. The one that we're specifically these issuers are dealing with right now. And the one that has been the traditional holdup is a place called the division of markets and trading. But it's really the... |
Speaker B: So Gary Gensler, or whoever, the current chair of the SEC, is basically emperor king of giving this final sign off for an ETF. It. |
Speaker A: Yeah, pretty much. But the thing is here, like, the way that you might have seen notice about some of these republican senators who are pro crypto trying to change the way the SEC is set up. But basically there's four commissioners and then also a chairman, and usually it's two Republicans, two Democrats. Th... |
Speaker B: Draw that out because shouldn't the ETF process, or maybe I'm asking a question of historically, how has it been? So who are the issuers of ETF's who are filing and asking for the SEC's permission to do this? Is this a small collection of very large companies, or is it pretty distributed and diverse? And wha... |
Speaker A: So let's just say that they can do that and they do do that and I'll go into why they do that, but they basically can make the decision and back into it legally. But wait, wait, wait. |
Speaker B: They can be biased however they want? |
Speaker A: Technically, they shouldn't be, but they can are. You would have to prove it, and I. That grayscale is trying to prove that in court right now. Right. But for the most part, they have been biased in some of the things that they're doing. And it's definitely coming down from what the democratic side of the, t... |
Speaker B: So it's already been criticized. Prior to crypto, you would say, is this like, kind of like a part of it on the inside? |
Speaker A: Yeah. So I would say, like, the Winklevals twins tried to do this first in 2013. Right? They were small. They got denied. They tried again. They ended up getting denied again in 2018. That was the first time that Hester Peirce dissented on a decision. I would argue that the denial then actually kind of made ... |
Speaker B: What do you mean you have them? You're just seeing them in some. |
Speaker A: I just looked at a list. Yeah, I have a list of, like, it's literally an excel spreadsheet of where I track them and I can look at the links and see what the SEC is saying about them and all the above. I try to track everything that's going on. It's basically. So when I first came to bi, I was covering commo... |
Speaker B: So how many on those lists are crypto related in your queue? Do you say it was like 40 or so. |
Speaker A: A lot of them have been denied. There's only eight that are currently active on the spot side. But if you look at all the filings, you're at. Let me see. Yeah, you're at 40 plus 37. You're at 77 total filings and 30 ish issuers. |
Speaker B: How many, how many filings so far? If you include the ones that have been denied and are active, and these are bitcoin ETF filings, to be clear. |
Speaker A: Not just bitcoin, their crypto. Some of them eat futures ETF. A couple of them are ETH spot, which had no shot of ever getting approved, but I guess people figured they'd try. But, yeah, 77 different filings. And there's some others that you could argue that are kind of like crypto ETF's, but they're a littl... |
Speaker B: Well, jumping back to that question about the neutrality of kind of a regulator, like, how are they supposed to go through the process of approving an issuer? And then also contrast that with how it happens practically for requests outside of crypto. |
Speaker A: Yeah. So the SEC is supposed to be a disclosure regulator. They are not just merit regulators. So there are some countries that have merit regulators that decide whether an investment has any merit and should be allowed. The SEC is job is to do, basically. Have they disclosed all the risk? They're not saying... |
Speaker B: That'S stated in the law. |
Speaker A: That's a long time. Yeah, exactly. So Hester has written dissent, saying we're getting dangerously close to being a merit regulator, which is a key term that I think a lot of people don't realize how strong that statement is, but they're really doing a really good job of toeing that line. And I would argue t... |
Speaker B: Okay, so they're supposed to be basically a neutral regulator. They're not supposed to make merit based decisions. And what that means, effectively, is they may personally think that gold is just a shitcoin asset or whatever. It's, like, completely useless. They might hate it, but they cannot have that deter... |
Speaker A: Yeah. So the way to think about it is their job is to prevent fraud, manipulation. Anybody getting taken in advantage of, that's what they're there to do. They want to make sure that's not happening. And honestly, some of the stuff that they've done that has been questionable has probably saved some people f... |
Speaker B: This is where the SEC was formed. There wasn't an SEC previous to this, right? |
Speaker A: Yeah. Yes. So essentially, the way that it initially worked was like everyone had to go through this 19 b four process, which is essentially where what we're doing right now with these spot applications and what that means is it's exchanges that apply to the SEC for a proposal for a rule change. And at the e... |
Speaker B: Can you define that term? Spot bitcoin ETF? Spot bitcoin. What's the significance of saying spot bitcoin versus just bitcoin etfeminal? |
Speaker A: Yeah, so we have bitcoin futures ETF's, which like a futures ETF, typically the way it works is most of them hold like the front month futures contract. So a futures contract basically means you enter an agreement to either buy or sell bitcoin at the end of a month on a given date, and you can trade that rig... |
Speaker B: So we want spot bitcoin because it's just a much better user experience. Right. I can't imagine if I was purchasing sort of a bitcoin ETF in my fidelity account as a retail user. And I'm trying to deal with like selling at the end of the month to buy the kind of the next month and just what terrible user exp... |
Speaker A: Compare all the ETF you don't have. The ETF does that for you. So it does that for you. So you can just hold it. But that rolling is the problem right? And it's not actually holding holding spot bitcoin. It's paper exposure. It's derivative exposure. So a lot of people prefer not to handle that. So we talked... |
Speaker B: So if Im recalling correctly and you might remember the full history. So correct me if Im wrong here James, but I think when Gensler took over, that was when maybe the bitcoin futures ETF was approved somewhere around there, or am I wrong with that? |
Speaker A: Yeah so he was already in charge. He took over after the ripple lawsuit had been filed. So thats what most people associate with him. And after Coinbase was approved to go public. But he is the reason that we have futures ETF's. He gave a speech in late July, Gensler was 2021 and this is not verbatim, but he... |
Speaker B: We also have eth one too, right? An ether one? |
Speaker A: No, we don't have any. |
Speaker B: We don't. |
Speaker A: Yes. Yeah. So they've applied, but they haven't been approved. So the SEC will not approve Ethereum futures ETF's largely we gensler. The one thing he will admit is the security is not a security, is bitcoin. And he won't say the same now for Ethereum, which has been covered extensively. So I don't think he'... |
Speaker B: So why is Gensler in favor of the futures bitcoin ETF style and not the spot bitcoin etfeminal? |
Speaker A: I can tell you his argument. |
Speaker B: What's the difference? |
Speaker A: Yeah, his argument is that they're CME futures, so they are covered by the CFTC. It's a regulated market. There is not going to be any manipulation of those futures contracts. That's what they would say. But the real fact of the matter is the pricing of those futures markets are dictated by something called ... |
Speaker B: Okay, well, Gary's a smart guy. I mean, he surely knows what you just said, right? So that's what he said. What do you think the real reason is? Do you care to speculate? |
Speaker A: I don't know why he. I think the problem is they couldn't deny they realized they were going to run into issues with the fact that the CFTC had approved these things and let them list. They are not making argument that bitcoin is security, basically saying that you can't launch these ETF's. First of all, lik... |
Speaker B: Guys, I think we're going to get to the crypto part of this conversation, all in on whether we're going to get a bitcoin ETF anytime soon. I've got a lot more questions for James but before we do, I want to thank the sponsors that made this episode possible, including Metamask and their portfolio application... |
Speaker A: I would say that's a huge part of it. But you also part of it. The other side of that is one that sounds very wrong, but at the same time, look what's happened with FTX. Look what's happened with Celsius. Those are the ones that seem to be ones that committed really bad acts. Then you have prime trust also, ... |
Speaker B: Let me ask you this, though. But, like, if they. To your point earlier, I think you made this point that if we do get an ETF, it'll clean things up. Right? I mean, like, the reason that people had to trust an FTX or felt like they did wanted to trust a Celsius or something else is because our regulator, our ... |
Speaker A: I lend a lot of credibility to that argument. So I find that when I'm on tradfi type, we'll say podcast, but it's really anything if it's a client call. I find that I talk about that side a lot more than the side I spoke about earlier because they focus on that side. So basically the whole thing is like, the... |
Speaker B: It feels like the Spider man meme of all the Spider man, like, just pointing at each other and blaming each other here. All right, so something new it feels like has happened this year, but I want you to tell us if there really is anything new here. Of course. You said there were 77 different applications fo... |
Speaker A: When we, we basically coindesk broke the news that they were going to file and we saw it, and me and Eric and other people were like, whoa. And the industry were like, can this be true? Sure enough, a few hours later, we got the filing hit and we were like, my eyes were wide open. |
Speaker B: You were not expecting this. |
Speaker A: So let me explain what we were expecting. So, like, one Blackrock is the only new entrant. Everybody else has already tried this this year. So the only new entrance to this space to try and launch one of these is Blackrock. |
Speaker B: Like even fidelity they had tried previously? |
Speaker A: Yes, yes, multiple times. So there's been multiple people that everyone else who's doing this has already done it in the past, aside from Blackrock. That said, we always expected Blackrock, no matter. At one point they were going to launch bitcoin, ETF, particularly after they partnered with Coinbase last ye... |
Speaker B: You just thought they'd be a fast follow after somebody else gets it approved. Then, of course, Blackrock's going to throw their hat in the ring, like, why be, you know, machete ing your way through the jungle and be kind of a lead here. |
Speaker A: Yeah, exactly. And honestly, you mentioned that fink interview. That was like, way stronger than I expected him to. Like we always. So, one thing we also knew, once they filed this, we knew Larry signed it off on this. Right. Larry is one of the biggest figures in traditional finance, and we knew that if Bla... |
Speaker B: Well, that seems to lend a bit more credibility to. I don't know how this works. But when you say Nasdaq plus Blackrock is filing rather than just Blackrock, that's very interesting. Or Nasdaq on their behalf. But is this also with kind of the comments this week from Larry Fink, is this also a signal from Bl... |
Speaker A: So I would say that's putting your tinfoil hat on a little bit. That might be the case, honestly. We also thought that it's because of Blackrock. Let's be clear. Blackrock is the gorilla in the room, right? Blackrock is 31, 33% of US ETF assets. Vanguard is 28%. And then everybody else is nowhere close. Righ... |
Speaker B: They're more conservative. |
Speaker A: They don't even have a gold ETF. It's not something they believe in. It's not something they do. Their low cost index, equity and bonds, that's what they do. Right? Like, that's what they specialize in. They don't even have a gold ETF. Jack Boldle didn't believe. John Bogle didn't believe in investing in gol... |
Speaker B: He was g for stocks. |
Speaker A: Yeah, he was a. Yeah, exactly. Eric Baltunis, my boss, has written a note, basically says, like, defi, people can learn a thing from, like, from Jack Bogle, from Lloyd patience. |
Speaker B: Crypto natives. You learn that. |
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