BBW24 – Day 2 – Digital Asset ETFs Uncovered — Pioneering the Next Wave of Investments

I guess starting off one question that I have is do you believe that digital asset ETFs by their nature contradict the decentralized and self- Sovereign principles that are core to bitcoin and other cryptocurrencies if so how can this tension be reconciled with the Bro crypto investment landscape and let's uh okay that's an easy question uh wow that's a lot to unpack there I mean I guess I'll I'll hedge and say yes and no I mean on their and this is been one of the criticisms of ETFs is that if you look at the Satoshi white paper and the desire to to democratize Financial Services of course ETFs are kind of a weird product they they wrap Bitcoin up this decentralized thing into a a product that is digestible for the mainstream Financial system which can't currently buy Bitcoin in its in a whole bunch of product set so uh it it it makes it palatable you can now use it in IRA and and in 401ks and all types of financial services products uh that are that are outside of of defi you could view that as a negative thing and say that it it you know leads to the the uh the actual Bitcoin decentralized Network being used less you could view it as a positive thing and say Well it leads to people getting involved in Bitcoin in a way they never would and one story I have is I was out to dinner with with a friend who's uh known me for a long time has always thought the crypto industry is crazy and was very excited cuz he pulled up his phone and said look I just bought Bitcoin uh you know he's like I caught up with you and it was the Bitcoin ETF so does that lead Tim to then adopt this and read about it more maybe understand it more maybe that's a good thing uh and then I'll close with one other final point that others in the industry have made by having a Bitcoin and ethereum ETF and hopefully soon a salon ETF it forces financial institutions and fiduciaries to take a look at Bitcoin in a way that they never would before because they have a fiduciary responsibility for their investors to look at a Bitcoin ETF versus an oil ETF versus a gold and so it also increases conversation so I'd say it's mixed yeah really comprehensive there Kev and I I would agree as well I was at a place in New York City called pubkey which is known uh widely for a lot of the bit the the bitcoiners uh to uh just get together and and talk about the various various uh components of Bitcoin and there's a wide uh difference of opinion when it comes to having Bitcoin outside of the ETFs for those people that are purists but those that want to have it and realize that it's not the train is not going to stop and there's going to be a lot more opportunities for the broader Marketplace by having Bitcoin ETFs in place having the regulations opens up the door for a lot more people as hadly alluded to because that is really where there's a comfort from the asset managers from the intermediary parts of the marketplace so it's going to lead to much more innovation in the marketplace that we're seeing right now beyond what you're seeing with the the current ETFs in no I think those are both great points I think the US and uh us ETFs and the Hong Kong ETFs uh they require proof of reserves review at least on an annual basis um so maybe we're not going to get see the situation similar that we've seen with gold and silver with fractional uh you know fractionalizing the you know the the gold and I guess paper gold paper silver we're not going to run into that situation with Bitcoin perhaps hopefully I mean one other final thing that occurs to me which is kind of funny to think of is that they're also a trojan horse and you know I believe it's also inevitable that Securities will end up being tokenized on open public blockchains like salana so one day maybe we'll see a Bitcoin ETF that's actually wrapped and delivered by salana blockchain Network yeah uh so I think the story is just starting if it brings in more uh Financial value to these networks and more participation I say it's a good thing awesome all right uh Kevin I have a question for you uh from your perspective as an asset manager what are the key considerations and challenges for advisers when integrating digital asset ETFs in their client portfolios what what I've seen is that many advisers themselves have used bitco coin or other digital assets for their own portfolios but they're hesitant to use it with their broader clients simply because one there's a lot of Education that needs to be uh done for those individual clients two given the volatility that we've seen in the marketplace right now uh it creates a lot of conversations with clients that for likely for a small allocation for most wealth management clients it could create an issue for the from the all business standpoint but I think having that available and you're seeing a lot of the advisers who tend to be more forward thinking it's a big plus for them because having them to be able to talk to clients about it uh if they're comfortable is a real asset Gathering tool yeah and is there I guess a percentage of the portfolio that they would recommend going into these I guess risk assets most most Studies have indicated 1 to 5% uh in that area and what you're seeing is the risk return characteristics are very positive in that but I guess to the same extent what you're seeing is the the performance of various digital asss over the last two or three four years has been significant so maybe it's skewing that a little bit but it's it's very positive in terms of wanting to get that allocation into the portfolios but it's where does the advisor position that and in my opinion it's it's either in an alternative sleeve or certainly for monies that are designated not for the near-term but for those a those assets that are probably five to 10 years and out so that way it takes a lot of the onus off the the adviser and the client to be concerned about what's going on with near-term volatility and you say 1 to 5% what what would you recommend well if if you look at certain studies Arc did a study and they were talking about over 20% for a client's portfolio in in digital assets that's probably a little bit much for most most clients right now but if you're looking to get a meaningful impact it probably is in that 5% range okay um I guess kind of going off your point about the growth and Rise of digital assets uh question for Hadley ref reflecting your time at Fidelity did you foresee digital asset ETFs becoming as significant as they are today and what key factors influen their development in the space yeah so I was part of the very early team at Fidelity which was an amazing experience and so many great people came out of there and I remember pretty distinctly in 2015 I think one of the things that was written up on a board was an ETF and it seemed so far off and so insur insurmountable at the time but it also seemed to make a lot of sense especially because then this was preeth and pre salana we were dealing with Bitcoin which you know you can't argue as a commodity like oil so why wouldn't it be wrapped up in an ETF and then that led us to talk backwards around what are the most important elements of an ETF and one of the most important elements is custody and secure custody which was one of the reasons for uh Fidelity deciding to found Fidelity digital Asset Services so it it was I think part of our early thinking and uh it took a lot longer it took a lawsuit by grayscale let's not forget you know for it to actually get done and kudos to to Grace scale for leading the industry there and and now here we are and it's very exciting to see I think we're just getting started uh I think a salani ETF is next and inevitable and then what I'd like to see is different typ of ETFs that reflect different kinds of things like staking something we do at at marinade Financial uh you know different mixes of ETFs based on certain use cases whether it's top 10 coins or or AI coins or file storage coins and let a th000 flowers bloom um but yeah that was something we we definitely thought of very early on awesome and uh Stephen it uh if you look at where the flows have come in early on particularly with the Bitcoin ETFs it's really going to two major provid it's going to Black Rock and it's going to Fidelity both in my opinion is because of their brand recognition in the marketplace there is a comfort level among investors uh on who they're placing their assets with uh the company I was with uh as well as some others uh offered zero fees for a period of time but uh flows certainly were much more tepid than some of the others in the marketplace but um I do believe that the reputation the client base that certainly Fidelity uh has at this point from a retail investor perspective has also been part and parcel of that of that so you do see the growth of maybe smaller firms outside of Black Rock and Fidelity getting access to I guess offering their clients uh ETFs Bitcoin ETFs uh sure well if you look at bitwise as as an asset manager they're doing a very good job and they' focused on the asset manager uh the advisor Community significantly since their uh in uh Inception so they're doing a very very good job they've raised about $3 billion within their Bitcoin ETF uh ethereum as a whole even i' I've heard a number of folks uh say that they believe that that is uh one of the products that could have a large percentage increase uh it just hasn't taken in the flows as yet right but uh but you got firms like grayscale who migrated from the trust over to the ETF they've done a very good job they've also got a significant amount of clients on the individual business uh through private placements which is also going to be very important for the growth of the market Place yeah and I guess going off that what would you see that would shock more flows whether that's inflows or outflows um would you think that's kind of going to be following the know the greater stock market uh how the other ETFs are doing do you think it's following gold I guess what are your thoughts there if you if you see rates beginning to fall then that would be a plus okay for for the ETFs uh again you're looking at 80% of the flows still coming in from Individual retail so some of the folks are speculating uh at this point in time uh others are looking at it for asset allocation uh if you're looking at Capital markets as an indicator of where it's going to go I think that's going to be less driven by the wealth management part of the marketplace but more so from the hedge funds and also from the individual uh owners gotcha and I guess could you give share some insights on how traditional Finance institutions currently view digital asset ETFs what's required uh for broader adoption the more conservative asset managers sounds like you're pretty Cutting Edge leading um Forward Thinking um I guess what are your thoughts to get more the conservative side of the house on board with the ETFs where where we've seen uh initial interest certainly is within the Raa Community uh one because there's fewer hurdles the they operate independently so they don't have platform requirements that the wirehouses would um I think that and you're seeing pockets of of raas who have adopted uh ETFs in general the traditional ETFs early on and now they're looking at this as just a newer asset class that uh they can put into their portfolio uh where you're beginning to see a lot of interest from the larger investment pools is from the family offices one because they're looking to get lower correlated asset strategies into the portfolio so someone was talking about technology earlier so think about this is just another technology sleeve that that can be offered in there uh so so that's also groups that have the research that is needed to be able to have the confidence to invest in those particular areas as well conservative asset managers uh it's going to be a while right it's it's just right now the volatility just doesn't fit in with what a lot of lot of the conservative asset managers you know it's just a matter of time if their customers are asking for it um perhaps he going to drive them to start offering it in the future demand day it's it's a little bit of the the tail waging the dog right there for sure uh question for Hadley um I guess as a chief commercial officer at marinade how do you see the custody business involving to meet the needs of digital asset ETFs and what are the major challenges facing custodians in this space uh yeah so marinade at marinade we're the the leading staking Marketplace on the salana network so uh unlike anyone else in this space when you stake with marinade you're actually a custody agnostic and we don't run any validator ourselves we take that stake and we distribute it to multiple validators adjusting every Salon Epoch which is about every 24 hours to receive greatest yield and greatest uh security and decentralized of the salana network and so you know unwinding back from that custy uh agnostic piece obviously custodians are a very important part of the ecosystem um to your question around custodians and ETFs uh a former colleague of mine David schwed who's now the the ceso of Robin Ood and was the COO of halborn were a great piece sort of noting that one very big risk of the ETFs as they currently are is custodial centralization so pretty much everyone is with coinbase except vanak which I can't remember who they're with uh someone shouted out and then Fidelity which also of course self- custodies through Fidelity digital Asset Services so as we sort of think at marinade as the inevitability of a salon staking ETF we also then think about we need a democratization of custody Solutions Beyond coinbase and all kudos to coinbase it's not that they're bad it's actually a sign that they've been very successful both in how they run their platform and and how they run their business it's just more indicative of the sort of uh ecosystem we live in and the the maturation and challenges that custodians come to so what I expect to see and what I'm exite excited to see and I think bitgo is making some uh Entre into the space I think I read something today with uh them and maybe 21 shares but I would expect to see more custodians come on board uh and begin to support the E uh ETFs and if I was an ETF uh fiduciary I would probably want to be multic custodial for my ETF it's a risk mitigant I wouldn't want to put all my eggs in one basket or Bitcoin in one basket or uh I would want to support decentralization so uh I think it's again just a sign of how early this industry is how these things need to be built up of course the regulatory environment makes it very complex Banks and you know uh you can read into my XMD Global head at bny however you want but Banks were greatly influenced by sv21 or inhibited in how they could grow their business so those things need to unfold and then uh hopefully we'll live in a multi custodial world and hopefully we'll also have some you know some sense of defi cust which is a whole other conversation but decentralized custody but that I think is further down the line okay and and if I could add to number of the early conversations uh when the ETF just launched earlier this year was around the custody component and it was how how are each of the providers the 11 issuers of the ETFs who are they custody with uh what controls do they have in place uh and were their insurance is now just note for for many people uh coinbase has an Institutional custody as well as a retail custody so they're very very different and what you're going to find is the issuers like 21 shares grayscale Etc are using the institutional uh format so it really is very important but that's something that the uh the home offices the due diligence teams are really really keying on that's where the Comfort level is going to come in so although you've got very very similar products that might have very similar expense ratios there's there's the fine-tuning of where the custody is done and how that's done is what's going to get certain firms onto platform availability yeah and going off that do you think it's from like a risk perspective the reason they don't want to kind of take that custodio responsibility on themselves uh we come like hear not your keys not your Bitcoin right um so I guess from your perspective what is the reason for these large institutions not to take custody rather using a third party Service Anchorage coinbase um any thoughts there it's incred complex to build it's incredibly complex to operate it's a pain in the butt and it's very stressful and you were mentioning decentralization I guess how would decentralize c c I was thinking more in the context of and it was probably not a correct use of the word decentralization I was thinking more in the context of multic custodial so it was more of like an old school way of saying decentralized risk which right now is very centralized in a series of custodians um and you know you can imagine a scenario whereare there could even be multi- between different institutions but that's a little far off yeah the reason why people don't do it is it's really really hard and it's also hard from a regulatory standpoint uh to do gotcha all right question for Kevin I guess what are the key regulatory hurdles that digital asset ETFs face today how can asset managers and advisors navigate these challenges effectively oh we we saw that uh take place when the SEC approved Bitcoin and then uh ethereum as as well that was the massive hurdle to get broader adoption and until that point uh registered investment advisers uh wirehouses uh family offices were very very reluctant to to take on exposure to those simply because of the uh the the uh ex the complexities of holding the the strategies on their own so by doing that it validated the the asset class uh as a as a valid component within