SEC threatens to sue Coinbase over crypto lending product

Michael Sonnenshein, Grayscale Investments CEO, talks the role of the SEC when it comes to cryptocurrency.

Video Transcript

AKIKO FUJITA: We’ve got Grayscale CEO Michael Sonnenshein joining us today. And Michael as you heard Jared, a lot to get through to in the crypto space. But I want to start by just talking about the moves that we have seen over the last few days. Obviously don’t want to mix too much of just one move, but Bitcoin was down nearly 10% yesterday on the back of El Salvador’s adoption of the currency. I wonder if you think this is a case of buy the rumor, sell the news. If it’s tied at all, what do you make of the declines that we have seen in the last 24 hours?

MICHAEL SONNENSHEIN: Well, I honestly think for us and certainly for our investors here are Grayscale we don’t focus too squarely on short term movements in price. Instead we’re really looking at some of the recent action in the market, and some of these are really important milestones. Being a country like El Salvador actually make Bitcoin legal tender, I mean that’s an incredible milestone for this community. We’ve long believed that the emerging markets would be a really important place where we’d see Bitcoin adoption. And I think you’re actually going to start to see a knock on effect of other countries also considering this besides El Salvador.

ZACK GUZMAN: Michael, good to be chatting with you today. Jared read through some of those tweets we saw from Brian Armstrong. But there is a couple here that stood out, and I know you’ve worked with the SEC for a while there are a lot of companies looking to get their Bitcoin ETFs approved. But just want to read one piece of it where he was kind of describing meeting with regulators in Washington and how he tried to meet with the SEC and they didn’t want to meet with him. He said, the SEC was the only regulator refused to meet with me, saying we’re not meeting with any crypto companies. This is right after they had become the first crypto company to go public in the US. He followed up with that Gensler had just been confirmed months prior.

So he brushed it off as the SEC still getting its feet under it. Does now I’m not so sure, and my question to you I guess because we’re hearing a lot of the people in the crypto community really attacking the SEC today whether or not you believe that– that kind of this is more pressure to just kind of kneecap the entire crypto industry here or whether you think the SEC is more out to protect maybe the established traditional financial legacies?

MICHAEL SONNENSHEIN: Well, I really do appreciate the question. When I think about Grayscale’s engagement with the SEC which dates all the way back to 2016, we’ve been welcomed with nothing but open arms and open minds. You know crypto as an asset class is certainly a lot larger and very different from a lot of other markets that the SEC and other regulators are responsible for overseeing. And what we’ve found is there is an intense focus on education and wanting to work with industry participants like Grayscale to really make sure they’re staying ahead of trends that are happening within the ecosystem because these assets are evolving quite quickly.

I think Chairman Gensler in particular did give some commentary a couple of weeks ago that has caused a stir within the market, which is to suggest perhaps that some of the SEC’s previous concerns over the Bitcoin market were perhaps resolved and that they were looking forward to reviewing Bitcoin futures based ETFs. And I think one of the important things that we have to focus on here that the SEC is really here to help protect the American investor. And so we are believing that the SEC should improve both futures based ETFs and spot ETFs at the same time and let products like Grayscale Bitcoin Trust and others convert to ETFs, and instead really let investors choose how they want to get Bitcoin exposure.

So we definitely remain very engaged with the staff and the commission overall and believe that this is just, once again, another opportunity to really focus on education and understanding.

ZACK GUZMAN: Yeah, because I’ve heard you be critical of that idea before in the past too that they would only approve the futures tied ETF and you know there are reasons to why that might be problematic. You know when you think about added fees for the consumer out there. Again, if the idea is for the SEC to be protecting the end investor here, retail investor particularly, I mean, if you saw them kind of approve only the one, the Bitcoin ETF tied to futures that carried more fees, would you then I guess kind of move further into the camp of what’s really going on here at the SEC if they’re not– if it doesn’t seem that they’re trying to stick up for the investor?

MICHAEL SONNENSHEIN: I wouldn’t rule anything out from the Grayscale perspective. I think it’s quite clear that when you look at how successful products like Grayscale Bitcoin Trust, Ticker GBTC, then there is obviously a very compelling case not to mention eight years of a very strong track record of operational success of investors getting exposure to Bitcoin in a fund that is physically backed by Bitcoin. The idea of a futures based product we are sure can come to the market and have the ability to function successfully. But of course, that is an unproven model, and as you mentioned could come with more significant costs because of the role that would occur in the underlying futures contracts underpinning the ETF.

AKIKO FUJITA: Michael, I want to get back to those comments you mentioned about El Salvador and how that could be a template in terms of the adoption in the country for some other emerging markets. I mean, you’ve heard the criticism. Some would argue the rollout has been bumpy, the big sell-off we saw yesterday just another sign that you can’t necessarily see the kind of stability you would with a fiat currency. What other countries do you see going after this model, and what is– what does that template look like, if El Salvador’s rollout wasn’t necessarily a smooth one?

MICHAEL SONNENSHEIN: Well, I think the only criticism that’s fair of the Salvador rollout at the moment is just that it happened quickly. But I think that actually quite closely mirrors the momentum that we see within the Bitcoin community. When we think about where adoption rates are taking place, they’re highest in the emerging markets in places like Africa, Southeast Asia, parts of South America. So it would be tough to predict which other countries could possibly think about adopting Bitcoin as legal tender, but certainly we’re seeing a gravitation towards Bitcoin regardless of government action in some of these countries because a lot of these citizens either don’t have access to financial services or perhaps their local currencies have been debased or have been eroded some way because there hasn’t been enough government control over their local currency.

ZACK GUZMAN: And I guess outside of Bitcoin too, I mean, we’ve seen a lot of enthusiasm pop up in you know the other altcoins out there. Of course, you guys also offer trusts tied to those other ones too, it’s come a long way since Bitcoin and Ether. You also have File coin and a few other ones in here as well that give people the opportunity who might not want to go the full route and have to deal with it on their own. It’s an interesting and important on ramp here. But particularly when you see the SEC and maybe Brian Armstrong’s confusion around what is a security and what’s not, Gary Gensler has not necessarily gone farther than just pointing to the Howey test in trying to label what is a security.

So if that’s really at the heart of what the issue here is around Coinbase’s lending piece of the business, does that maybe make you guys take a second look at some of the trust you’re offering, and how do you see maybe that security’s definition shaping up?

MICHAEL SONNENSHEIN: Well, the Grayscale family of products now comprises 15 unique offerings. And so to your point, that includes both products that offer single asset exposure as well as products that offer baskets of exposure. In some cases that’s domestic in nature. And we apply a very, very rigorous framework when we determine what products to launch. And we try to mirror as much as possible and not only what we’re hearing from investors and the areas of the market that they want exposure to, but also trying to identify compelling opportunities to bring to them. That of course certainly includes legal considerations as well as operational considerations to name a few. And certainly seeing and having the relationship we do with regulators allows us to be proactive in our approach and how we bring products to market.