2023 is “the year where regulation takes center stage,” says the Grayscale CEO
Grayscale CEO Michael Sonnenshein joins Yahoo Finance Live to discuss the current cryptocurrency landscape, how the SEC’s Paxos handling affects fund flows, the collapse of FTX, and the outlook for the crypto industry amid the government’s ongoing regulatory battle.
Video transcription
BRAD SMITH: Welcome back. You are viewing a Yahoo Finance special, “Crypto in 2023,” brought to you by Intuit TurboTax.
Joining us now for a deeper dive into the world of cryptocurrency, we have Grayscale CEO Michael Sonnenshein. Michael, great to have you here with us as well as Yahoo Finance’s Jen Schonberger.
Michael, just to start things off, rough draft here, crypto 2023. People are wondering when 2022 and the crypto winter we’ve entered, what 2023 holds. What do you think is on the horizon?
MICHAEL SONNENSHEIN: Well, firstly, it’s great to be here. Thanks for having me, guys.
I would say that investors are not deterred. What we’ve seen in crypto over the last couple of months is a huge amount of influence that has come out of the crypto ecosystem. And as we move into the better part of 2023, I think investors are focused on some upcoming catalysts around the crypto ecosystem. There’s a big upgrade coming to Ethereum. We are about a little more than a year away from the next Bitcoin halving.
And today I join you from Washington. There is a lot of talk around crypto in Washington, with recent events certainly not deterring politicians, but instead we may see 2023 as a year where regulation becomes front and center for crypto.
BRAD SMITH: We’ll certainly get to that regulation, as our own Jen Schonberger covers Washington very closely here. But Michael, I have to wonder, especially for grayscale, how do you see the next 6 to 12 months and how critical they might be?
MICHAEL SONNENSHEIN: There is no doubt that the full resources of the firm are focused on our lawsuit right now. So for those of you just tuning in, you know, Grayscale sponsors the world’s largest Bitcoin trust, the Grayscale Bitcoin Trust, ticker GBTC. And we’ve been proactively working to convert GBTC to a spot-based Bitcoin ETF here in the US. And the SEC denied GBTC’s conversion in June 2022, and since then we have been in active litigation with the SEC. And so the case is moving quickly and the oral arguments will be heard in early March and we could get a decision on the case as soon as the fall of 2023. So completely focused on our trial there and really, again, protecting our investors and doing what is right for them.
JENNIFER SCHONBERGER: Hi, Michael, Jennifer Schonberger here. It’s great to see you.
MICHAEL SONNENSHEIN: Same.
JENNIFER SCHONBERGER: What can we expect from the oral arguments set for March 7 here in Washington? What do you intend to argue for? What is your business?
MICHAEL SONNENSHEIN: Well, the SEC has really taken a stance that is, we believe, arbitrary and capricious. They allowed, you know, Bitcoin futures-based ETFs into the market and have continued to deny spot-based Bitcoin ETFs into the market.
Ultimately, we have simple, sound legal arguments that we believe the court will be persuaded by and feel that when we think about recent events in crypto, we need to think about protecting investors, continuing to give them full and fair disclosure. . And there’s absolutely no doubt that moving to a spot-based ETF will certainly give investors greater protection, greater regulatory oversight. And again, very confident in our arguments as we head into oral arguments in early March.
JENNIFER SCHONBERGER: Michael if you do not get the outcome you are hoping for with this lawsuit, I know you have proposed a possible plan B where you could offer 20% of the outstanding shares. It will require a conversation with the Securities and Exchange Commission for a more customized plan to comply with legal requirements. Have you talked to the SEC to try to lay the groundwork for that if you don’t get the outcome you want in this lawsuit?
MICHAEL SONNENSHEIN: It is absolutely right. So earlier this year we announced the possibility of a tender offer if we exhaust all of our legal options to contest the SEC’s decision surrounding the GBTC conversion to an ETF. To facilitate a tender offer, we will certainly need shareholder approval, but we will also need to proactively work with the SEC to obtain exemptions from the tender offer rules.
Unfortunately, I have to say that reaching a tender offer would be a less than optimal outcome. You know, the most optimal product structure here is a spot-based ETF. It would allow the product to track the bitcoin it owns from day to day, as all ETFs have the built-in arbitrage mechanism, and again, it would really give investors greater oversight and protection on a national stock exchange.
So if we ended up in a scenario where we were pursuing a tender offer, that would really mean– you know, solidify that the SEC and the regulatory community here in the United States continued to close the door to bring Bitcoin, you know, even closer to the regulatory perimeter.
BRAD SMITH: Michael, how has the SEC process affected fund flows right now?
MICHAEL SONNENSHEIN: I would say investors are usually in it for the long term. Grayscale investors are really people who have long-term convictions in crypto, and luckily we have investors in all 50 states. This includes private investors. This includes institutional investors. And what we typically see is when we’re in these range times, investors are typically slow to allocate. And as soon as they see crypto starting to break out, they start dollar cost averaging back into those positions.
JENNIFER SCHONBERGER: Michael, you are a subsidiary of Digital Currency Group, which is also the parent company of Genesis Global Capital, which recently filed for bankruptcy in the wake of FTX’s failure. DCG is reportedly selling large positions in several crypto trusts run by Grayscale at a steep discount to try to raise money to repay creditors. What can you tell us about this and what kind of additional ripples might we see as a result of this bankruptcy emerging?
MICHAEL SONNENSHEIN: It would be very difficult to comment on the details of what is happening with the Digital Currency Group as it is not the business I am responsible for on a day-to-day basis. What I can share is what’s out there in the public eye around DCG, which is that as a company that invests in private companies that have tokens, that invests in Grayscale products, that incubate businesses, DCG is reportedly selling some positions in some of the Grayscale products that it actually owns as part of its regular portfolio rebalancing. But beyond that, I’m not sure how much more to make of DCG’s recent sale.
BRAD SMITH: Michael I don’t mean to be gloomy here, but for many of the companies in the crypto landscape, the management teams have had to try to figure out how do we get to the other side of this crypto winter? How do you approach it at Grayscale?
MICHAEL SONNENSHEIN: That’s a good question, Brad. We have been very principled and very conscious in building up the greyscale business. I have an amazing management team. I have a phenomenal organization that has continued to focus on all the tasks in front of us as a team and never been distracted by headlines. We’ve been a, you know, lean and mean organization that’s really focused on building the basic infrastructure of the business—so our own broker-dealer, our own registered investment advisor, and really continuing to operationalize Grayscale that will allow it to scale for future growth.
We are an organization that did not get out on its skis. We did not take on influence. We didn’t get, you know, too big as a company. And we’ve been through two crypto winters before, and we’re weathering this crypto winter as well.
BRAD SMITH: And, Mike, one second. Have you also had to reduce staff, restructure costs anywhere?
MICHAEL SONNENSHEIN: We are always cost-conscious. So when we think about our service providers and some of the other organizations that we’re aligned with, we always do things in a way that gives us choices so that we’re never overcommitted as an organization. And I think having that agility has been really, really key to Grayscale’s long-term success.
BRAD SMITH: Michael, we always appreciate getting some time with you. Always appreciate the time, perspective and analysis as well as what the future holds for crypto. Michael Sonnenshein, Grayscale CEO, thanks for the time today, as well as Yahoo Finance’s Jen Schonberger.
MICHAEL SONNENSHEIN: Thanks people.
