02.16.2022
By Shanny Basar

Grayscale Investments Aims to Gain Share in US ETFs

02.16.2022 By Shanny Basar

Grayscale Investments, the digital currency asset manager, has launched its first exchange-traded fund and is looking to build market share in the US this year before expanding to other regions.

Dave LaValle, Nasdaq OMX

David LaValle, Grayscale Investments

David LaValle, global head of ETFs at Grayscale Investments, told Markets Media: “In 2022 we would like be positioned as a large US player in ETFs and then look at geographic expansion in Europe and Asia.”

In February 2022 Grayscale Investments listed its first ETF. The equity fund is the first to track the Bloomberg Grayscale Future of Finance Index that the two firms launched in January 2022.

Michael Sonnenshein, chief executive of Grayscale Investments, said in a statement when the ETF launched: “While Grayscale has established itself as a global leader in digital currency investing, the future of finance demands a much broader mandate. We’re proud to announce our first ETF in partnership with Bloomberg as we undertake this strategic expansion of our business.”

The Bloomberg Grayscale Future of Finance Index tracks 22 companies representing three “Future of Finance” pillars – financial foundations such as asset managers and exchanges involved in the enabling the digital economy; technology solutions; and digital asset infrastructure such as companies directly involved in mining, energy management, and activities that power the digital asset ecosystem. The index will be rebalanced every quarter.

LaValle said that through the new ETF (GFOF), investors have the opportunity to receive exposure to the companies that are pivotal to the evolution of the digital economy.

“The digital asset ecosystem is currently like the internet in 1995,” he added. “If investors had bought internet infrastructure providers they could have avoided the dotcom crash.”

LaValle was also involved in the early growth of the ETF market and expects digital asset funds to follow a similar growth trajectory. He joined Grayscale in August 2021 from his prior role as chief executive of Alerian and S-Network Global Indexes, an independent index provider. Previously LaValle was also US Head of SPDR ETF Capital Markets and a member of the senior leadership team at State Street Global Advisors and he was also Nasdaq’s Exchange Traded Product Marketplace.

He noted that in 1993 it was considered exotic for ETFs to provide S&P 500 exposure to retail customers while today many strategies and asset classes are included in ETF wrappers.

The US ETF market’s top three providers account for 78.5% of assets according to  ETFGI, an independent research and consultancy firm. At the end of 2021, BlackRock’s iShares had ETF assets of $2.5 trillion, approximately one third, 34.2%, of market share. In second place Vanguard had $2.1 trillion, a 28.8% market share, followed by State Street’s SPDR ETFs with $1.1 trillion and 15.4% market share.

LaValle argued that Grayscale has a unique perspective as an ETF issuer as a digital currency asset manager, especially around new themes related to the digital economy.

“We have an unconstrained ETF franchise and we are open-minded in the index methodology used to track aspects of the digital economy,” he added. “We will be disruptive and introduce new themes as we operate at the bleeding edge of the new economy.”

In addition LaValle said Grayscale is a global brand and has enough assets under management to be a top 15 manager globally despite only being founded in 2013. Grayscale Investments had more than more than $51bn in assets under management as of December 3, 2021.

Conversion of Grayscale trusts

In addition to launching new equity ETFs, Grayscale is committed to converting all of its 16 investment products, including its flagship Grayscale Bitcoin Trust (GBTC), into ETFs.

The US Securities and Exchange Commission has not approved a spot bitcoin ETF, although the SEC has approved bitcoin future ETFs.

In October 2021 NYSE Arca filed with the SEC to convert Grayscale’s Bitcoin Trust into a spot bitcoin ETF. The trust launched in 2013, received a public quotation in May 2015, and became an SEC reporting company in January 2020. Grayscale said it is the largest bitcoin investment vehicle, holding approximately 3.4% of all bitcoin in circulation.

Michael Sonnenshein, Grayscale Investments

Sonnenshein said in a statement: “In becoming the first crypto SEC reporting investment vehicle, GBTC has helped move the entire digital currency ecosystem forward. As we file to convert GBTC into an ETF, the natural next step in the product’s evolution, we recognize this as an important moment for our investors, our industry partners, and all those who realize the potential of digital currencies to transform our future.”

Lavalle said the SEC has a 240-day comment period and so a decision should be made in early July.

Grayscale also believes that as the SEC has approved a futures-based Bitcoin ETF, the regulator has created an unlevel playing field for spot bitcoin ETFs. The asset manager’s lawyers at Davis Polk have submitted a comment letter to the SEC stating that the SEC is being “arbitrary and capricious,” and is in violation of the Administrative Procedure Act (APA).

Jurisdictions outside the US have approved spot bitcoin ETFs. For example, Fidelity launched a spot bitcoin ETF in Canada in December 2021 and listed a physical bitcoin ETP on the Frankfurt Stock Exchange on 15 February 2022.

The German exchange said in a statement that its crypto ETN offering on Xetra now comprises 40 products from nine providers and has an average monthly order book turnover of around €1bn.

Investors can participate in the performance of cryptocurrencies through crypto ETNs without having to set up crypto wallets or use unregulated crypto trading venues. All crypto ETNs on Xetra are centrally cleared by the exchange’s central counterparty so investors also benefit from significantly reduced risks in the settlement of trades.

LaValle said Grayscale would be open to listing ETFs outside the US.

Trends

Sonnenshein noted five trends in crypto in his investor letter at the start of 2022 – crypto infrastructure development such as exchanges, wallets, and analytics software; the continued proliferation of protocols; expansion of Web3 and the Metaverse; NFT use cases beyond digital art and the development of regulation.

Sonnenshein wrote that while some believe that regulation is counter to the ethos of crypto, Grayscale sees increased regulation as inevitable and beneficial.

“Never in the life cycle of the asset class have we seen regulators and policymakers as engaged and articulate about the crypto ecosystem as they are today,” he added.  “This enables the conversation to shift to how these new technologies – when provided with the appropriate regulatory frameworks – can flourish, keeping crypto companies in the United States, and setting a global standard for crypto regulation.”

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