Craig Salm is Director, Legal at Grayscale Investments, holders of the world's largest bitcoin trust and the trusted authority on digital currency investing. Discussing a broad range of financial services, Craig expands on decentralized exchanges, yield farming, governance, lending platforms, payment gateways and much more.
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What I worry about is that the regulations around thespace will not be either applied or rethought in athoughtful enough manner to allow this asset class toproperly flourish the way that I hope and think it ought to.With new, truly transformative technology,inevitably comes new regulation.But what happens when that technology is advancing so fast that regulationseems unable to keep up?Seemingly,this is the case for cryptocurrencies and blockchain technologies.So I spoke to Craig Salm,head of legal at grayscale investments the largest digitalcurrency asset manager in the world about how the legallandscape is changing. Craig, thank you very much indeed for,taking the time to chat with us today. Thank you for having me.Just to give us an idea of the, like,dynamic nature of the the company you work for,are funds coming in thick and fast?Are you designing new products all the time? Like, what's,what's your current day today? Yep. So we are very muchcreating product structures wherever we see investor demand.So if you look at the life cycle of our product historystarted Bitcoin at the time twenty thirteen,that was the only cryptocurrency that actuallywas relevant. Mhmm. But then following that,we launched Ethereum products,their privacy preserving cryptocurrencies,and now we're getting more into the diversified type of productlaunches because we're seeing that investors while they mayor may not wanna make a targeted bet on a particularcoin, whether that's Bitcoin or something else,they'd rather just get the diversified index like exposure that way,they don't have to pick and choose winners and losers.And I think I'm just getting my head around Defi one point zero,but already there are products more along the line of d fivetwo point zero. Apparently,there's a two point o in d five now,which is Could you let could you explain a little bit aboutthat? Sure. So I think even before we get to defy ishelpful to start off in the simplest example of acryptocurrency, which is Bitcoin.Right. Bitcoin allows you to hold, send, and receive valuein the digital world. Very simple use case. Investors,I could think of it as a digital gold And that narrativereally resonates with our investors,the digital gold narrative.But moving beyond Bitcoin,developers wanted to do even more complicated typetransactions other than just holding sending and receiving.So Ethereum came along and what that did was layeron more complex or conditional based transactions.So whereas Bitcoin lets you send money from a to b,Ethereum less you send money from a to b,if this happens or while that's happening or some other condition.And things like smart contracts or what you will what allow youto do that type of activity,decentralized finance is sort of the third iteration of it.And what that's doing is layering on traditionalfinancial services like exchanging and lending andborrowing and derivatives and insurance and asset managementand all these other financial services that everybody aroundthe world knows and usesbut has not yet been applied to cryptocurrency until d five.So that's d five one point o. D five two point o,I would just describe as doing those things in even moreefficient and interesting ways.And that includes the metaverse. How does that fit into it all?The metaverse is something separate from Defi, I would say.A lot of people actually now are grappling over what exactlythat term means.In some sense, the metaverse has been around for, you know,many, many years as long as we've had social media,sites that we're networking on because we are living in sortof a a metaverse. It's just the digital self. Mhmm. But, recently,there's been a lot of excitement around it becausewe're seeing a lot of these protocols,things like decentraland,which are virtual worlds that run on Ethereum technology.And that's exciting to people because in the, you know, thevirtual worlds we used to know of as of a couple years ago,like Fortnite or,second life,Those are all owned and operated by single companiesthat have control over the economics, the services,the goods that exist in that world. And you can't take your,you know, persona and move it to another world.It has to live there.What the metaverse as we're describing it today layers onthe decentralized technology of, you know,Bitcoin Ethereum Defy within those virtual reality worlds.That you can actually have this existence that you cantransport with you wherever you want to go.People are excited about that because it opens up the worldof what it means to know,live in a virtual reality or or work or play games in a virtual reality.I sort of feel we're almost already in the metaverse withthe way we consume social media today. Right.Twitter. Yeah. You know,if you have a Twitter account and you have a profile pictureand you're one type of person on Twitter,that is your Metiverse persona in a sense. Yeah.Sure.So I wanted to ask particularly about,central bank digital currencies.First of all, I'm,assuming your view is that they are something that will happen,and I I wanted to to find out from you if you think that theycan happily coexistwith let's say, you know, private marketcryptocurrencies.So one of the biggest difference between essentialbank digital currency and a cryptocurrency, like Bitcoin,is that the central bank digital currency is actuallybacked by something. In this case, it's, you know,the US government,the same way the dollar is backed by something.And there's definitely a use for that.I think it's important that American citizens have betteraccess to the financial system,even in the centralized bank world.And sowhether or not that happens, the US is exploring it,other countries around the world are exploring it.It'll be good just to get individuals used to usingdigital currencies,which we think is valuable for the overall digital currency ecosystem.But it's important to know that's very different fromsomething like Bitcoin,which is not backed by any single government or group ofpeople. It's really just based on code,and people's belief that that code does what it's supposed to do.So in that sense, it's more like gold,which is not backed by anything.It's just valuable because people like that it's scarceand transportable and divisible and can be stored been around long enough.But that's very different from Essential Bank digitalcurrency. Looking out how this sort of story unfolds,the way I see it, I mean,cryptocurrencies are such headline grabbing assets,but they're still relatively small in in the grand scheme of things.And,when I think about central banks who are looking to designtheir own digital currencies,they seem in sort of a rush to do it.But I I wanted to ask you why why are central banks in insuch a rush to do it when actually couldn't they justwait to see what the private market does, experiment withthem, make all the mistakes,and then the central banks can come in and create one that'skind of already had the mistakes ironed ironed out andbe the one that works. Yeah.I think what you're identifying is that this space moves very quickly.And I think there's often a concern that whether you're anindividual or an investor or an entire government,you're not staying abreast of what's going on.As much as you need to and you could get left behind,or in the case of a government, some new risk might arise,and you're not protecting your citizens, for instance, And, you know,we're seeing this on the gray scale side because things arechanging so quickly, and investors wanna know. Well,like, Bitcoin, I get it. Ethereum, I get it.Ethereum, I get it. Defy is the new thing.I'm trying to you know, wrap my head around it,and things keep changing very quickly. We talked about,you know, Metiverse.NFTs are a new use case that people are very excited about.So I think it's just a natural response to changing technology,and it's understandable why governments might wanna youknow, move fast to make sure they're staying ahead of it.I see this personally on, you know,the regulatory side of seeing the US government,like the SEC or the CFTC,try to figure out how they should or should not beregulating the space.Should they be going to Congress to change the laws andregulations because they're not sorry.Should the SDC and the CFDC be going to Congress and askingthat they changed the laws because they were written at atime before, you know, cryptocurrency,let alone the internet even existed.So I think it's just a natural response to,governments seeing this innovation and wanna make surethat they're doing what they need to do to stay ahead of Ifcentral banks start to make their own digital currency,do you think they will remain very accommodating in the sensethat they won't mind there being a private market forcoins like Bitcoin, for example,or do you think that once they've got a central bankdigital currency that's kind of working and in use,they will try to somehow edge out the private market or theywon't have the power to do that?I think it depends on where Bitcoin goes. Right now, theterm cryptocurrency is somewhat of a misnomer,at least for Bitcoin,because today it's really used more as a store value -- Right.-- a digital gold. It's not a functioning transfer of is Right.It would it would need to be to be a true currency,it would need to be not only a store value,also a medium of exchange, which it it has and is becoming,but then also a unit of account So people would have to thinkin terms of Bitcoin.You would have to go to Starbucks and think this copycost point zero zero one, whatever, bitcoins.And people aren't doing that today. I don't Just you.Just you, maybe. Yeah. Just me.The mental math is super super easy.And there actually are conversations to break down thedenominations of Bitcoin.So people can more in in that type of unit of account sense.But until that happens,I don't I wouldn't think the US government would do somethinglike ban it or say that you can't use it as a currency forthe sake of this US dollar now Central Bank digital currency.And we've seen US regulatorsexplicitly say they have no intentions of banning it or restrictingit. I think they didn't need to say that.I think it was already implied and that they necessarily even could do that,but still that was a very positive thing for the marketto hear them explicitly say that.Well, let's talk a little bit about, SCC and the CFTC,because obviously, the Bitcoin ETF,it's just been a lot of features ETF is that agenerally a very positive sign,sort of validation for the whole sector? Absolutely. Yep.So the, the, you know,race for Bitcoin to have has been going on since two thousand.Is this something that gray scale yourselves?We are very we are very much involved in So the, you know,the efforts to get the first Bitcoin TF have been going onfor many years.Gray scale first got involved in that in two thousand sixteen.When we were seeking to convert our gray scale Bitcoin trust,ticker symbol, GPTC to an ETF.And the way that process works is there's several differentfilings that you make with the SEC.But back in two thousand sixteen and leading into twothousand seventeen,it became very clear that the SCC was just not ready for thistype of product, whether based on physical Bitcoin,like our products would be, or based on Bitcoin futures,which is actually the ETF that was approved a couple weeks ago.And the reason for these disapprovals was the SEC waslooking at the underlying Bitcoin markets.And seeing that trading takes place all over the world inmarketplaces that are not necessarily as regulated orhave the same types of investor protections as US based markets.And so they, you know,in their disapproval orders explicitly said,we would like to see either, you know,proof that there is not any fraud and manipulation in thosemarkets akin to what we're seeing in other US markets,or you would have to prove to us that a significant amount ofUS or a Bitcoin trading takes place on a regulated US market-- Mhmm. -- such that if there is any fraud and manipulation,we could detect it you know, find who's doing it,prosecute them and and and eliminate it. So those are thetwo methods we we have been working on over the years toget the SCC comfortable.And at least on the grade scale side,we have a very ongoing robust open dialogue with all of ourregulators, you know,that we think that's the way that we should be operating ourbusiness. And so a couple of weeks ago,we were very excited to see that the SC allowed for tradingof the first ETF not in Bitcoin, physical Bitcoin, butBitcoin futures. And that's a very good incremental step,but we don't think it's what the market really wants or deserves.What the market should have is a Bitcoin TF that holdsphysical Bitcoin because that's really the best way to get exposure.Don't have to worry about additional costs from futurescontracts, rolling futures forwards.There's no limits on the amount of AUM the fund can take in. SoThat's really just how we feel based on both guidance we'vegotten from the commission and also just thinking logicallyfor the investor. Mhmm.And so we filed our an additional nineteen before acouple of weeks ago to start that process officially offwith the SCC. But in the meantime,we've been doing everything else to get ready to convertour GPTC into an ETF.So I know some people love to draw parallels between,cryptocurrencies and and gold.And I know when gold created there, first ETF for the actualunderlines or a big boost.And I'm wondering if you think that's similar to what's goingon in Bitcoin now? Or do you think it'sdo you think it's wrong to be drawing similarities betweenthe two? It's I don't think it's wrong,but it's a very different circumstanceAnd before I even answer that question,what I will say is we're often hearing why is there not aBitcoin TF yet. And my response is Well, if you look atgold, for instance, that's an asset that's been around for,you know, tens of thousands of years of human history.And even that process to get the first ETF took many yearsfrom the date of the initial filing.That's for an asset that has been around for a long time.Everyone's Everyone's comfortable with it. Correct.And for Bitcoin,I think it's totally understandable that it's takena few years from the first filing dates to get ourregulators comfortable with this type of product.I think that's totally normal.I think they have a tough job dealing with any new innovationbecause on the one hand,you want to allow it to flourish and you know,have America continue to be the tech hub of the world.But on the other hand,you wanna make sure that you're protecting investors,which is the SEC's core mission. Right.And so I think it's understandable why it's taken so long.And then to answer your question around should we conbe comparing this to the Gold ETF The difference here is thatwith the gold ETF,we didn't have this other investment vehicle that alreadywas offering gold exposure to hundreds of thousands ofinvestors around the US and the world,like we do today with GBTC.So We're constantly doing analysis and running numbers.And if we were to convert GBDC to an ETF today, it wouldbe the number two or three commodity based ETF inboth AUM and volume just behind the Spider Gold Trust and theeye shares Gold Trust.So that's a totally different situation from what you hadwith the gold ETF.And so I think it really remains to be seen how themarket spawns when these ETFs eventually in our case convert,and then the other ones cases get approved to start trading.So excited to see it. Well, now you've got us all so excited. As you say,we're all under invested in crypto assets.We all feel bad now and bad ourselves.But what do you feel stops the momentum it's got now?Is there anything that sort of keeps you up at night andthinks from either a regulatory point of view or,some possibility of like financial crime point of view.Is there anything that you think can sort of undo themomentum that it's that's got behind it now?What I worry about is that the regulations around the spacewill not be either applied or rethought in a thoughtfulenough manner to allow this asset class to properlyflourish the way that I hope and think it all to.Can you give some examples around that? Like,in terms of where regulation is right now, which seems to be,I don't know, you're you're more of an extra nine,but relatively hands off,and then when can they actually step in and start to actually,you know, damage the value of the coin?It's a great question.What I go to is looking to the early days of the internet,you know, late nineties, early two thousands,where there were a lot of new use cases that were enabled bythe invention of the internet.And there certainly were at the time,laws that if you applied them literally,it could have eliminated a lot of these use cases and these big companies.Correct.And the US government under the Clinton administration took ado no harm approach where they said, let's step back.Let's not overregulate this. Let's see what it is.Find out what all the benefits are, then identify the risks.And then rethink if it's worth having new laws that we shouldwrite up to apply to this space. And that's whathappened, and The internet is now, you know,one of the greatest inventions known to mankind.Silicon Valley is in the United States.It's not in another part of the world.And we benefit so much from that.The fact that Google and Apple and meta and Facebook and allthese companies are US based.That really affords us a lot of benefits and advantages And Ihope we can say the same thing about the cryptocurrency spacebecause I think that it is one of the next best inventionsafter the internet.So Well,my hope is that the rules and laws that exist today will notbe unnecessarily applied unless it's something like protectinginvestors from fraud and manipulation and things likethat. And we are seeing that from our regulators. You know,people are committing common bad acts using this technology.Are no different from the types of fraud that could have alwaysbeen applied to people just using all the technology.There's some coins that seem to be shams that are Right.Go after those, prosecute those,but don't go after the companies that are building newthings with this new technology until we find out what the realbenefits are. And just and just to use, like,another specific example,the the current financial regulations were written in thethirties and forties in a world where you needed to have anintermediary to do any type of financial transaction,whether it's selling stock or you know, exchanging assetswith somebody or creating a derivative,it assumes the existence of an intermediary like a broker oran exchange or a bank or some other firm.What cryptocurrencies allow you to do is eliminate thoseintermediaries and do those transactions without the intermediary.Which eliminates a whole host of risks that these laws werewritten to prevent. And so, technically speaking,there might be a use case that is not necessarily in line withthe regulations as they as they exist today,but that to me is a reason to either not enforce them orrewrite them and rethink them.Now back in my day, when I was investing in equities and Iwas, like, trying to stop pick,I would do my bottom up fundamental evaluation or lookat the outlook for a particular company,and that's the one I go for.But if I'm looking across the crypto asset spectrum,how do I know I'm basically asking to pick the winners andlosers So no big, no big decision.But how do you know which ones are gonna work and which oneswon't? It's it's a very difficult question.And that's why you invest in companies like GreyScale. Yeah.No. I I think part of the bar value add is investors come tous not knowing necessarily what coin or basket of coins theywant exposure to.And in part, they're putting their trust in our name brandand the diligence that we're doing on these protocols andthe product structures we're creating So, yeah,that's one of the reasons why they come to us. But,I think there's ten thousand coins and -- Right. -- youknow, ninety five percent of them maybe,probably won't be relevant in the future,but that still leaves one to two hundred coins. If not more,that will actually be very meaningful.And so those are the ones we try to, you know,create product structures around where we see value.So if you were to wind the clocks forward five years andgive some sort of predictions about just the topics that wethink we'll be talking about in this area.What do you think they would be?I thinkwhat it'll be is similar to what we talk about today andwhat's now defined as web two point o.So that's the web where a lot of it is controlled by ahandful of names, Google, Facebook, Amazon, Apple,where a lot of value has accrued to those companies forthe services they provide.Webb three point o, which is taking those use cases and thendecentralizing them is what people are very excited about.So I think we'll be talking about these services today,have the existence of tokens that allow you to govern thesenetworks and make choices around them and engage with them.Or what we'll be thinking about in terms of where is the valuegoing. And it'll be more of a, you know, user defined world,user generated world than the world we have today,which is very much controlled by a handful of centralized single entities.Well, Craig, there's so much more we could cover.I've learned so much from you today,and I just wanna say thank you for taking the time to chatwith us. Likewise. Thanks a lot.Yep.The debate is over as to whether digital currencies willbe a part of our lives or not. They emphatically will be.The question is how and when will they be adopted and whowill win between the private and public markets.Is there room for both?Well, the race is on and the winner is likely to appear inthe next few years. And that's why it's crucial to be learningabout this now.If you'd like to read more on this topic,please go to footsie russell dot com forward slash researchwhere you'll find much more information.
Video recorded on June 3, 2021 at FTSE World Investment Forum
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