202 - The Year of the Crypto ETF with Cathie Wood

what is a couple of basis points of a few trillion dollars because the issue is that the numbers are way bigger than crypto has ever seen before crypto has no idea what money looks like when you're playing with an extra three zeros we think a billion dollars is a lot of money it's not I think uh one of the reasons we now have the big traditional Financial companies involved is they know that yes they know that very well they're quite happy to accommodate it now

hey guys merry Christmas special holiday episode for you uh bullish holiday episode for you of course uh what else would we wouldn't give you anything else on Christmas could you imagine Santa's about to come down the chimney and and and uh educate you on crypto ETFs the Bitcoin ETFs specifically what Cathy Wood's probability is that we're going to get a Bitcoin ETF and what that means we have Kathy Wood from Arkin vest on the episode today and also uh felia Snyder together their two companies are in line for ETF approval it's actually the top

one on the etf's list uh and hopefully that comes down the pike during the first two weeks of January 2024 so you front running this opportunity a little bit a few things we talk about in today's episode number one is trafi excited about the Bitcoin ETF or is it just us we asked that question also number two why the ETF is a bigger deal than maybe a lot of crypto natives think including you Bank list listener number three why Bitcoin ETF buyers are price insensitive number four after the Bitcoin ETF approval will we get any

more how about second ETF approvals number five we finished the episode with asking Kathy Wood whether the FED has just pivoted and what that means for crypto Assets in 2024 David what was significant about today's episode to you in addition to just getting a ton of Education about the the backside the back end the plumbing of how ETFs work and how complicated it is uh it just left me with aot of information about what the path forward for crypto looks like Beyond just Bitcoin and ether right

Olivia has a ton of experience 21 shares has 40 exchange traded products which are like ETFs but only made in Europe so she knows a thing or two about how this story is going to unfold inside of America and kind of like you and me Ryan she has definitely an appreciation for history and how uh American ETF approvals un united states ETF approvals it's kind of a downam of a product of how this country came to be I thought that was a nice little interesting history lesson as well and then overall we just had to get Cathy's sentiment check as to the state of the markets

because the timing between the FED pivot and the Bitcoin approval and the Bitcoin happening which we didn't talk about but it was you know looming in the background of the conversation all of this is coming together and you can kind of hear it in Cathy's voice she's she's pretty excited I would say yeah as our we so here's your crypto Christmas episode bangas Nation Kathy Wood and ailia they'll be right back but before we get to this episode we want to thank the sponsors that made this possible Bank list Nation we're very excited to introduce you to two guests today Kathy Wood you know Kathy she's been on the podcast before she is the CEO and CIO of

Arc invest she founded Arc 2014 to focus solely on disruptive innovation of which crypto of course is one of those disruptive Innovations she's been a crypto Bull from the early days Cathy welcome back to bank list thank you Ryan really happy to be here again well it's great to have you on as well as we enter uh 2024 I think it's going to be an exciting year ahead for disruptive innovation and maybe crypto in particular uh we also have opilia Snider she's the co-founder and president of 21 shares uh 21 shares makes etps those are

exchang traded products they're I guess maybe the bigger brother to ETF she she can explain more uh and uh she she's on a mission to help provide access to uh traditional Finance going Beyond crypto natives providing them access to assets like Bitcoin and ether and uh down the stack ailia welcome to bankless thank you so much for having me you know what we're excited to have both of you guys on this episode because we feel like 2024 is going to be a big year for crypto in general um one of the categories of interest of course that

everyone's talking about is the ETF and I understand Kathy and ailia you guys have kind of a joint partnership um registering an an ETF uh product as as one of the um you like registering participants there I I'm wondering if you could tell us how that partnership came to be and uh what what the product looks like at this point and at what point in the process um we're in with that maybe we'll start with you Kathy like tell us about the partnership sure uh well the partnership started in we didn't know it at the time but in 2018

when I first uh met ailia at an ETF comab uh in happened to be Rome Italy and uh we sat next to each other serendipitously and uh started talking and I realized that ofilia and Hanny her her co-founder had um had within one year because they started I guess it was 2019 uh it was one year they had created a platform that everyone will need to

create if they want to uh launch a a a spot Bitcoin and other kinds of crypto ETFs and etps uh uh so their infrastructure was in place they had great research especially on the research side of the firm but I I was thinking about how passionate ailia was about plumbing and wires and all the things that go into creating an infrastructure to make

things happen and I said ah she has got to I must introduce her to Tom our coo at the time now president and coo Tom Stout because they speak the same language language it's not exactly my language they're both passionate about it uh and we Arc need to learn this because we would like to do more in the crypto world uh as it turns out we felt that they had built such a strong platform and interestingly uh 21 shares

is the largest pure playay crypto ETP provider in the world with roughly $2 billion dollar in assets today uh but they built that platform way back then and uh you know it's very robust and combining that with our research and our uh our client service which uh our Resolute has been with us every step of the way very few uh firms

in our industry have a client service either department or partner who uh has come along with them in the in the the crypto World Bitcoin in particular our distribution partner has had to learn Bitcoin and so we felt that you know that those three legs of this platform infrastructure research and client service we're going to make for a winning combination and that's how we

got together and why we got together well ailia this is a pretty glowing endorsement of you and and what you guys are doing over at 21 shares maybe you can just take that and run with it what is is shed some light on the plumbing because this is something I think us crypto natives are not really familiar with what does it take to produce some of these products and why is it uh positioning you so well into the era of the ETFs so in order to run so actually I think you just need to take like three steps back why do ETFs matter in the first place I think isn't always super

clear to people who are crypto native um quite frankly I would I would count myself in that category um the story actually starts a long time ago which is most people are not actually that comfortable with infrastructure just generally um I had a very funny experience a couple of weeks ago with myself my my head of research and my co-founder um probably together represent I don't know 15 to 20 years of professional experience in crypto um trying to teach

a new member of our team how to use metamask and you're watching this guy who's by the way comes from a tech background works at a crypto company it's his first week on the job learning how to do this and it's not actually that easy and you don't feel good about it even with both of your co-founders and the head of research I mean I've been running my company for five years but I've been using crypto for longer than that same with my co-founder our head of research has never actually had a job outside of crypto um so these are like people who really know what they're doing and it's still uncomfortable I I

love teaching someone by the way ailia how to use metamask and it's like oh and if you make a mistake if you push WR Buton you lose all your money this it's gone it's over sorry sorry my bad and that's okay if you're managing your own money and you're putting you know hundreds or thousands of dollars on them or if you expect for that to be your full-time job um that is not realistic for most people um I my company actually started because my mom came to me in 2014 telling me you know monetary policy

doesn't make any sense and MC spends too much money hedging uh we need a more global system to ensure geopolitical stability have you heard about a thing called Bitcoin I'm like I have no idea what you're talking about um right but she couldn't buy any because she's like what is there's you know I can either do it myself or like there's this thing called coinbase kind of but it's new like I don't want to give these people my money I don't want to open a new bank account that's my mom right who actually understood what was going on in the first place so like the barrier to entry

here is really high for most people still and that's not even counting people who have a fiduciary obligation where I clicked the wrong button and sent your money to the wrong place is not an acceptable answer um it's just never going to be possible for them and that's before you get into there are a lot of structures where people hold their money where those are 401ks or IRAs or some retail might be familiar with but they're also different kinds of fund structures which may or may not be able to hold these types of things let alone actually do their tax reporting and and be consistent within their infrastructure

um crypto is not really meant to play nice with that so you have to build a lot of infrastructure to basically take crypto repackage it in a way that it's going to work within other people's existing Financial infrastructure um and you know that bridge is actually a very real necessity if you want to start getting allocations from Big asset managers or Pension funds or you know people who actually have a who are not just not able to are not comfortable but actually have like structural reasons why they can't access these products directly it's the easiest way to welcome

new people into the industry yeah one way I describe um an ETF is basically to crypto natives when you come at it from that angle is basically it's like an erc20 for trafi you know it's like a a standard that is interoperable and like Works within the traditional Finance system uh but Kathy you were gonna you're gonna build off of what affilia said know that's that's a great great way to describe it especially for your audience uh no I was going to say I I

often have to say after I I've said the plumbing is very complicated um I I usually have ofilia with me to explain why is it complicated what what are some of the complications so so that people really do understand doing this for five years and launching 40 funds uh through thick and thin up markets down markets crisis markets uh you know you've you've held up weathered

the storm and uh battle tested the infrastructure whereas a black rock and you know Invesco and all of the big traditional firms have not had that experience they have not so maybe ailia you can you can tea up some of that what what have they not gone through that you had to weather from an infrastructure point of view that they will face in the future yeah and while you're doing that ailia could you tell us the difference just like from a Layman cuz we're talking about Plumbing what is the

difference between an ETP because we use that term and you have you have some at 21 shares in an ETF so for for Layman's purposes for like the average human's use of these products nothing they follow very similar structures they work the same way operationally the major difference is uh regulatory infrastructure in Europe and in America is slightly different and so they call things slightly different by slightly different names um there are ETFs in Europe but they fall under a specific ific piece of regulation called uset for the most part and uset funds and this is

like way Technical and and not the most sexy or interesting stuff they have specific requirements around diversification what kinds of assets can be in them and crypto is not allowed inside of a use its ETF rapper today so instead they use another wrapper but it's the same one that's used for for gold for silver for other commodity products um so it's just a slightly different Market construction but in terms of what most people think of as an ETF which is that you know creation Redemption coming in and out liquid available to retail available in $20

increments holdable in your IAS and your 401ks and your retirement plans usable by institutions it basically checks all the same boxes it's just a slightly different legal setup um so for the purposes of most people it doesn't make that much of a difference um the the plumbing is funny and it's finicky because crypto is not actually meant to play very nicely with Legacy systems um the day our products first launched and and we decided many years ago to launch when our first product came out it was actually an index

product it wasn't a a spot Bitcoin product which is what everyone expected mostly because we were absolutely convinced that somebody was going to get there first um and we were actually the first people out the gate with a physically backed spot product um anywhere at the time um and so we came to Market with this thing and two days before like we're right in the middle of trying to see this thing trying to get it to start trading um the bch hash war starts you guys remember that the 20 uh 20 late 2018 bch hash War oh heck

basically ground the entire chain to a halt remember that great turns out that has a really fun side effect of making it impossible to transfer assets or price them or quote them which by the way means ETF not going to work right the assets can't move so you you can't move them and you can't price them it constitutes a market disruption EV that that was day minus two like this is going great guys um so we did that and I was in the middle of our launch event pacing outside on the sidewalk trying to figure out how do you

deal with it what like what you're trying to explain to market makers what a hashw is which they have no idea because quite frankly what is that that's not that's not that shouldn't happen realistically and that was the beginning and so you know spend five years figuring out every version of halting block chains issues with bem poool people sending transfers to the wrong places uh you know whitelisting APS who are learning

how to do settlement for the first time oh wait we fat fingered this we flipped to decimal places it no longer matches the order I mean we've seen all of it uh we saw Luna we've seen we we've SE we had a Luna product so how do you run uh like how do you run an ETF through a complete Market meltdown how do you we did a we did the migration from proof of work to proof of stake on ethereum we rolled out the first staking ETFs in the world now many years ago across a number of different chains um or even as simple as how do you manage liquidity liquidity

is just a completely different thing and it's going to be a very big topic um within ETFs right so how do you trade this stuff to make it effective how do you work with market makers to ensure that it is effective and you don't end up with you know issues when there's High vola and you have an organized order book it's actually really hard to do these things because there's still very much a brick wall between most traditional managers and most traditional markets infrastructure and onchain infrastructure and you have to bridge that constantly in order to

actually facilitate the creation of these products yeah so I'm I'm curious maybe you could we could just back up and give people some context on on some of the products you're talking about and so like maybe I'll just check my my kind of understanding of it so so Kathy was making the point that there are all of these kind of like traditional asset managers traditional finance that are entering crypto right and so Black Rock has filed for a Bitcoin ETF everyone knows that vanak has some things like there's a whole list um and um what you're saying is Well like they're going to have to cut their teeth on some very

Crypton native specific issues whether they like it or not because you have to deal with you know hash Wars and and hard forks and like staking and all of these weird crypto native things that they're going to have to learn but 21 shares has essentially uh been doing this for a while and so you have these ET uh ETP types of of products for what a Bitcoin uh ET ETP and then like uh ether and Stak and all the way down the list maybe familiarize the bankless

audience with the types of products that you guys have already brought to Market because we have many listeners that are American and they're just like oh we like from what they understand they can only buy grayscale type products inside of you know traditional finance and they're not familiar with everything that you're talking about could could you just give us some background there yeah of course so we actually run 40 products like this we cover most single asset products yes we have Bitcoin yes we have staked eth yes we have you know Salon staking products but we have

dozens more on top of that uh we run index products so um you know top five assets top 10 assets staking index um we also run and we also run shorts so pretty much anything you want to do in crypto that's going to be in those large cap we probably have a product on uh and we've been doing that for a long time and that's just outside of the US ofilia like where where are the available um so the company's based in Switzerland uh but the products are available all across Europe and we've been doing it

for a while maybe as we get into kind of the ETF uh conversation the process today could you just give some context and why can't we have these products in the US right now like or why don't we have these TP products in the US right now is it literally the SEC just like saying you have to go through the registration process we're not allowing that right now I mean because we could have these I mean Europe has these why don't why why doesn't the US have these right now so that's regulatory decision and I think one of the things so I think

there's a common misconception um America is not usually a leader in terms of you know being at the Forefront of pushing the edge on regulations for financial products like often times especially ETFs a lot of that Innovation comes out of Europe and that's just a known thing and has been that way for a long time and it makes sense right to some extent that the US has a very different Market structure than Europe does um some of that is as simple as

there's less of a social safety net some of it is as complicated as you know the the size of the market the fragmentation of that market and quite frankly the uh retail presence in that market actually changes some of regulators considerations around these things um versus a more intermediated market like the European one and so it really does depend I think Europe has been certainly further ahead on this and you can see that like put ETFs aside um MAA right which is massively important is a huge

step forward now I think you know C crypto has been lukewarm on that I think as far as regulations go but I think we're kind of selling it short so far um just in terms of we we need to see how it's implemented before you know the jury still out on whether or not it's going to be good for the industry or not but I think any Clarity is good for the industry and Europe has been able to provide more of that um over the past five years than America has and that part of that is just the way our legal system works it's it's a little slower

it's a little bit uh more cautious on certain types of things and is a little bit uh funkier in terms of what it takes to get things done it's not necessarily a bad thing um it's just a culmination of legal history in America uh one of my uh and and Kathy's heard this from me before one of the things that makes me completely crazy is that nobody in crypto really appreciates history we don't we don't incorporate that into our conversations right we're so focused on

Reinventing the future we sometimes don't remember why we ended up that way and if you realize America's political and and legal history it makes sense why our regulations work that way right we're not we we were always sort of a hodg podge and the checks and balances do make us move more slowly in certain cases like our focus on um precedent in terms of legal cases is very different between these countries and so the way we set precedent we're much more careful about you know one I would say there's also a mindset difference uh uh just in the last few

days uh the SEC basically has denied uh the need for regulatory Clarity at all coinbase had asked for it and they of course are going to appeal that decision but the SEC is repeating once again no you know the the regulatory structure we have in place is fine for crypto and uh this also happened when derivatives became a question and the SEC and the cftc the uh commodity uh

Futures Trading commission started bucking uh heads against or against this idea that one had control versus the other and ultimately that went to the Supreme Court to to ailia point it took many years and in 2000 there was a decision I think it was 2000 uh there was a decision that gave both of them jur jurisdiction who was very clear about which had jurisdic ition

over what and what they both had to agree on so uh I think the same thing is going to happen here and that coin base will take this to the Supreme Court interesting interesting so we have a we have a date with the Supreme Court is that and I would imagine like all the the uh you know the approval of a Bitcoin ETF like the engagement with congressmen and women on Capitol Hill in some of our regulatory these are all like kind of steps towards that direction Kathy do you have any like sentiment of that's like a near-term

thing or we really just have to wait for that to arrive well it has to go through the court system and I think if I'm not mistaken this is going to be appealed to the Third District Court so we'll have a few steps here but honestly I think uh coinbase the folks at coinbase expect this to go to the Supreme Court and use derivatives as our guide you know if you've got the C cftc and the SEC either competing for power or at each other's throats it's probably going to end up at the Supreme Court and it'll take a few

years that's un necessarily A Bad Thing given the way like the American Judiciary works that focus on precedent over rulemaking which is very much like the way America Works legally it's not necessarily A Bad Thing to end up in that space so you guys are arguing get the clarity that's a feature not a bug of the system in the US to basically kind of Outsource those decisions from a regulatory agency to a to a court system and we ultimately achieve consent sure it's regulatory it's

regulatory court so regulatory as we think about the checks and balances executive judicial and legislative regulatory Gary gendler was appointed by uh Joe Biden I know with Senate ratification but we think of that as executive then you've got judicial the courts and then you've got legislative and they're all engaged right now which is good for a while there we didn't have judicial and judicial you know the the uh crypto world has been winning in the in the court system against the SEC and

legislation this is becoming an election year issue 50 million people in the US I think that's the number own Bitcoin uh or other crypto so uh I am really happy all three are engaged as opposed to you know the the Iron Fist of of a regulatory agency alone and I think feature or bug is a different question right it's just that's just the history of America like whether or not you think the way we've designed government is the right way or not completely different

it's a trade-off right which is the Europeans are going to be more focused on ruem which in some cases makes things faster so m is a great example of that right that's European style rule making the reason no one's quite sure of the implementation yet is because their ruem relies on a concept called annexes and implementation details so there's a bunch of additional work that bureaucrats are doing right now on okay that's great that's what the law is what does the implementation of that law look like as opposed to just writing the laws and then letting precedents set the implementation which is also very different so it just takes more time but

it it's un necessarily a bad thing and I think I I agree with Kathy that the kind of Engagement we're seeing in America today both from our government bodies Our agencies as well as quite frankly institutions is going in a really promising Direction in terms of normalizing crypto Within the American landscape I will say one other thing though there the regulation in other parts of the world has been um a Spur to us here in

the United States whether it's the electorate to say hey wait a minute Innovation is leaving the United States you can't let this happen so I do think the regulatory Arbitrage has been a Spur to our system that if it hadn't occurred we might still be you know where we were two years ago you guys are producing an image of it's kind of all going according to plan more or less maybe not as fast as the crypto industry as crypto natives would have liked to have this you know process of clarity arrive but

it seems to be that this is kind of what we would expect in the grand scheme of things and one thing that I've definitely noticed in the last year or so and ever since really black rock I think filed for their spot Bitcoin ETF early in early this year uh there's a lot of interest in it from not just cryt natives but from institutions and from you know what we've heard as murmurings of you know traditional uh you know Financial investment advisers you know account managers your your typical you know you know uh uh Main Street you know your mom and pop shop investment advisor

right and so Kathy some something I really want to um ask for you is you know on the crypto native side of things on the crypto uh on the inside of the industry of course we want the Bitcoin ETF of course we want that and so we have motivations from our side to push that through we have motivations from like like Black Rock bitwise You Know Arc and 21 chairs all to get that through but the thing that we still really haven't gotten our minds around is is there really how much interest is there on the buy side how much is there from you know the retail like how much

will actually show up ready to go when these products ship and I'm wondering if you can shed any sort of clarity or light on that side of things sure uh so I think there's some there's been an anticipatory move that there is an appetite so that's what one reason the price has been quite firm here and so I will say when a a a bit a spot Bitcoin ETF is approved because I think the probability is well we think it's 95% now if not higher wow yes specifically

in J the January early January window or just we think it's very high ailia you might have a lower odds here I don't know but but all the signals are it could still you know there could be still some details which uh you know which would force the SEC our our Arc 21 shares deadline January I mean yeah January 10th is the forcing function here and is there a scenario where the SEC would come to all of us in in line

and say okay we've just discovered this we didn't know about it uh we would like you to uh or we would like to push all these decisions back up to them I don't know but so far so good I don't think I I know that that the cash versus in kind create and redeem uh is an issue here but um um and we can talk about that later but uh I think a couple of things happened especially something five years

ago in 2018 uh Cambridge Associates which is a consultant two institutions endowments foundations and so forth wrote a paper about Bitcoin and said to the institutional World okay you may agree with all of these leaders who are calling it a Ponzi scheme or an environmental Scourge on on the system uh but uh recognize that the

correlation uh of risk and return uh uh between Bitcoin and all of these other assets is very low so what we probably have here is a new asset class and what institutions do know is that the best way to increase returns per unit of risk is to diversify into a new asset class so this is very important and so uh Cambridge back then said you may not like it and you may really believe all

these people are saying these horrible things about it but this is the way it's behaving and our study and we've put this study out we're updating it now on what should be the institutional allocation in a broad-based portfolio to bitcoin if you want to this is as of last year we're about to publish uh new numbers but as of last year if you wanted to minimize V volatility the optimal uh weight of Bitcoin in your