Richard Galvin, the co-founder and chief executive of crypto fund manager Digital Asset Capital Management, says he is confident a bitcoin ETF will be launched this year – even though he made similar calls in 2019 and 2020 and was proven wrong.
“There are many benefits from a regulatory perspective of having an ETF,” he says.
“You’re bringing trading on to your regular exchanges where people have normal broker relationships with KYC (know-your-customer) and AML (anti-money laundering) relationships.
“And, you can have disclosure documents with risk disclosures and those sorts of things as well. It seems quite straightforward to me, but obviously the regulators have taken a different view.”
Galvin, a former JPMorgan investment banker, says the US Securities and Exchange Commission has been against the listing of a bitcoin ETF for a very long time but there is a good chance that will change this year with a change of SEC leadership.
Bitcoin went from an interesting asset to one that’s got a very tangible macro use case and was being adopted by some of the smartest people in the room.
— Richard Galvin, Digital Asset Capital Management
Former Goldman Sachs banker Gary Gensler was this week named by President-elect Joe Biden as the new chairman of the SEC. Gensler is a former chairman of the Commodity Futures Trading Commission (2009-2014), which has been a leader in recognising the importance of Bitcoin in financial markets.
The CFTC allowed the creation of the first bitcoin futures contracts on the Chicago Mercantile Exchange in December 2017. While it is true Gensler was not in charge of the CFTC at the time, he is said to privately support bitcoin as a legitimate asset class.
A bitcoin ETF listed in New York would require the SEC to abandon its default position that Bitcoin markets are inherently open to “fraud and manipulation”.
This line of thinking, which was not out of step with regulators elsewhere, was behind the SEC’s decision in 2017 to ban the listing of a bitcoin ETF managed by Cameron and Tyler Winklevoss, founders of crypto exchange Gemini.
But Galvin says that in 2021 the regulators will look at the growth of the Grayscale Bitcoin Trust, which is a closed-end fund, and recognise that retail investors can safely buy and sell bitcoin.
The Grayscale Bitcoin Trust is now the largest owner of bitcoin in the world. Apart from investors being able to buy units in the trust, owners of bitcoin can vend bitcoin into the trust.
There is an arbitrage incentive for selling bitcoin to Grayscale because six months after buying the bitcoin the vendor is issued with Grayscale shares, which trade at about a 20 per cent premium to the Bitcoin price.
The listing of a bitcoin ETF in New York could result in the Grayscale Bitcoin Trust losing its premium to bitcoin.
Another listing this year that will give bitcoin added credibility is the largest US-based crypto-currency exchange, Coinbase Global. It could list with a valuation of between $US30 billion and $US60 billion.
Local implications
Australia’s regulators and the ASX will be closely watching developments in the US in relation to the possible listing a bitcoin ETF.
Chanticleer is aware of at least one bitcoin fund manager keen to list a bitcoin ETF in Australia.
It is safe to assume the ASX and the Australian Securities and Investments Commission will be turning their minds to the question of what exactly is the appropriate regulatory framework for Bitcoin and how that might be applied to ETFs and companies.
The ASX issued cryptocurrency guidelines in 2019 and these essentially put a ban on all crypto-currency companies.
Galvin says bitcoin is winning institutional acceptance by people such as Paul Tudor Jones and Stanley Druckenmiller because of its growing share of financial assets and its potential to disrupt the entire financial services sector.
He says the growth in the number of entities offering bitcoin custody products is a sign of the evolving sophistication of bitcoin’s regulatory framework.
“Bitcoin went from an interesting asset to one that’s got a very tangible macro use case and was being adopted by some of the smartest people in the room,” Galvin says.
“The second thing that I think was a real game-changer for us was this adoption of these decentralised finance apps, which really gave ethereum purpose, which is the second-biggest blockchain asset.
“It is a little known fact ethereum actually significantly outperformed bitcoin last year. For example, ethereum was up about 400 per cent last year and bitcoin was about 300 per cent.
“You saw not only bitcoin get adopted as a digital gold and find its place in the world macro stack, you saw ethereum find its use case in these decentralised applications where people are just building mind-blowing, innovative financial products that are attracting large-scale users,” he says.
“The amount of capital that was deployed from the start of 2020 to the end of 2020 in these decentralised finance apps rose from $US692 million to $US24 billion.”
Extraordinary returns
Galvin runs three separate digital asset funds registered in the British Virgin Islands with between $US75 million and $US100 million in assets under management.
These funds had an extraordinary year in 2020 on the back of an equally extraordinary year in 2019.
Galvin’s Digital Asset Fund, which was 2019’s second-best performing long-only fund, gained 420 per cent in 2020 bringing its two-year return to more than 800 per cent.
His DAF Liquid Venture Fund, which was 2019’s best-performing crypto VC fund, closed out the year with a 500 per cent return taking its two-year gain to 900 per cent.
His DAF Greeks Fund, which is a market-neutral fund investing in digital derivatives, achieved its target return of more than 25 per cent.
Galvin says he is amazed at the number of Australian entrepreneurs carving out a presence in the decentralised finance market, also known as DeFi.
DeFi projects with Australian connections included Synthetix, mStable, Thorchain, dHedge and RenVM. Success in this field is measured in terms of “total value locked”, which refers to the size of lending books and liquidity available on exchanges.
For example, the total locked value on Synthetix is $US1.7 billion.
Galvin understands why regulators such as the Bank for International Settlements, the central bankers’ central bank, is concerned about the impact of cryptocurrencies on financial stability.
“It’s a much harder space to regulate because you’re basically dealing with code that is online and accessible to anyone,” he says.
“And remember, when these DeFi applications launch it’s a piece of code and you can’t shut it down. No one can switch them off.
“I guess what the regulators need to do, what they’re trying to get their head around is how do you manage the compliance issues that come with that.
Galvin says the other big issue that needs to be considered by central banks, regulators and the entire finance industry is the potential massive disruption to intermediation of money.
He says cryptocurrencies and decentralised finance could make entire parts of the financing value chain completely redundant.
Disclosure: The author’s self-managed super fund owns shares in Grayscale Bitcoin Trust.
