Day: February 12, 2021

Kiffmeister’s #Fintech Daily Digest (02/12/2021)*

~ kiffmeister

What’s the deal with the Grayscale Crypto Investment Trusts? 

I explore some of the market dynamics associated with the Grayscale Bitcoin Trust in a new blog post. Most institutional investors participate in crypto-asset markets through investment funds like Grayscale Investment’s closed-end trusts. As publicly traded trusts that report to the U.S. Securities and Exchange Commission, they relieve investors of concerns about storage, custody and security of their holdings. Grayscale is the dominant crypto fund manager with over $37 billion assets under management.

And in more recent news, Grayscale Investments has reportedly filed to register a new cryptocurrency trust for decentralized finance platform Yearn Finance (YFI)!

Purpose Investments Cleared to Launch First Bitcoin ETF in North America

The Ontario Securities Commission has reportedly cleared the launch of the Purpose Bitcoin ETF, making it the first to gain regulatory approval in North America. 

Intent On Ban, India To Give Transition Time To Crypto Investors

India will go ahead with a complete ban on investment in cryptocurrencies, while providing existing investors a transition period to exit their holdings. its usage in all forms will be banned through the new law that will be introduced in Parliament, a senior Finance Ministry official said on condition of anonymity. The official, however, said the ban won’t be enforced overnight and cryptocurrency investors will be given a transition period of three-to-six months after the implementation of the new law to liquidate their investments.

Nouriel Roubini: bitcoin is not a hedge against tail risk

Nouriel Roubini predicted that “since the fundamental value of bitcoin is zero and would be negative if a proper carbon tax was applied to its massive polluting energy-hogging production… the current bubble will eventually end in another bust. He concluded by saying that “risky, volatile bitcoin doesn’t belong in the portfolios of serious institutional investors. Many of its retail backers are suckers being manipulated by an army of self-serving insiders and snake oil salesmen. Tesla’s Elon Musk and MicroStrategy’s Michael Saylor may be betting the house on bitcoin. That doesn’t mean you should.”

Nouriel Roubini: ‘Tether is a criminal enterprise,’ SEC should probe Elon Musk’s bitcoin tweets

Roubini also thinks Tether is issuing fake money. And that nothing short of an audit will prove the $30 billion in USDT the BVI-registered company has spewed out into the crypto markets thus far are even 74% backed. Tether is a “criminal enterprise,” he bluntly told reporters on Coindesk TV. In a 10-minute interview, Roubini predicted Tether’s looming demise, called for the SEC to look into Elon Musk’s bitcoin tweets, and claimed that central bank digital currencies will spell the end for crypto. 

Nigeria’s SEC Puts Plans to Regulate Crypto on Hold in Light of Central Bank Ban

Nigeria’s Securities and Exchange Commission (SEC) has put plans to regulate cryptocurrencies on hold in light of the central bank’s decision to ban them.  

Regulators and banks are now testing a ‘digital currency’ system in South Africa

The South African Intergovernmental Fintech Working Group (IFWG) launched ‘Project Khokha 2’ to explore the use of tokenised money, blockchains and digital currency in South Africa. This comes after the group’s first Project Khokha test which looked at using blockchain technology to speed up payment systems in the country. As part of Project Khokha 2, the IFWG said it will further investigate the use of Distributed Ledger Technology (DLT) in the country’s financial sector.  

The Central Bank of Saudi Arabia announced the launch of its instant payments system

The Central Bank of Saudi Arabia launched its new instant payments system on February 21, after the successful completion of the pilot with a number of Saudi banks. The system will enable financial institutions, companies and individuals to complete transfers 24/7 between different banks instantly. 

NPS Bill to modernize Fiji’s financial system

Fiji’s National Payment System Bill was reportedly passed, paving the way for reforms being introduced by the Reserve Bank, including real-time payments. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

What’s the deal with the Grayscale Crypto Investment Trusts?

~ kiffmeister ~ 5 Comments

Most institutional investors participate in crypto-asset markets through investment funds like Grayscale Investment’s closed-end trusts. As publicly traded trusts that report to the U.S. Securities and Exchange Commission, they relieve investors of concerns about storage, custody and security of their holdings. Grayscale is the dominant crypto fund manager with over $37 billion assets under management. This blog explores some of the market dynamics associated with the Grayscale Bitcoin Trust (GBTC).

For example, Grayscale Bitcoin Trust (GBTC) has accumulated more than 3% of total Bitcoin supply, and an even higher proportion of liquid supply.  (Glassnode analysis found that only 22% of outstanding Bitcoin are considered liquid, i.e., currently in constant circulation and available for trading.)  Grayscale also runs eight other single-asset crypto trusts and recently incorporated twelve more such trusts although they have yet to launch. However in this post we’ll focus on GBTC.

Although accredited investors can buy GBTC directly from Grayscale at NAV, many institutional investors cannot take this route because GBTC shares have a six-month lock up period. (According to SEC Rule 144, restricted securities issued by an SEC reporting company like GBTC are subject to a minimum holding period of 6 months.) Hence, these investors are forced to buy the shares at a premium over the native asset value (NAV) in the secondary market, and these premia can be significant:

Source: https://ycharts.com/companies/GBTC/discount_or_premium_to_nav

Price premia over NAV occasionally appear on exchange-traded funds (ETFs) but they rarely exceed about 3%. When they do, authorized participants step in to arbitrage the gap away by creating or redeeming shares of the ETF.

However, some have pointed to a scheme by which the premium could be arbitraged. It involves buying GBTC directly from Grayscale at NAV and shorting free-trading GBTC. Six months later, the two positions net out leaving a risk-free profit. This glosses over risks like not being able to borrow and fund GBTC for up to six months. JP Morgan analysts have estimated the cost of this premium monetization trade at 10-15% per annum. The GBTC long position could also be hedged with BTC futures contracts. However, the fact that the premium continues to exist, implies that such arbitrage is not consistently taking place.

That same JP Morgan analysis concluded that the introduction of a U.S. Bitcoin ETF would be positive for Bitcoin over the longer term but could be short-term negative. It would erode GBTC’s effective monopoly status and could cause a cascade of GBTC outflows and a collapse of its premium. This could have negative near-term implications for Bitcoin given the flow and signaling important of GBTC. And some think that the chances of the SEC giving the green light to a Bitcoin ETF is looking good.

There are  two active Bitcoin ETF filings with the SEC: VanEck Bitcoin Trust (submitted in December) and Valkyrie Bitcoin Funding (January 22). In the past, there have been many unsuccessful attempts, all of which were rejected by the SEC on the grounds that the underlying crypto-assets are too subject to market manipulation and liquidity is insufficient. However, some are heartened that SEC Director of the Division of Investment Management Dalia Blass, who oversaw the rejections, is stepping down, and Gary Gensler, President Biden’s nomination as SEC Chairman, is known as very crypto savvy.

Meanwhile, Grayscale competitors are sprouting up. Osprey Bitcoin Trust launched with a 0.49% management fee (versus GBTC’s 2%). BlockFi and Bitwise have followed suit with similar offerings. However, the business models of Grayscale and all such funds hang on whether the SEC will continue to push back on crypto-asset ETFs.