Silvergate's Troubles Hurting Crypto | Bloomberg Crypto 03/07/2023
We are live from Bloomberg World Headquarters in New York. I'm Sonali Basak stepping in for Matt Miller. And we're also live from our studios in Washington, D.C. I'm Kaley Lines. Welcome to Bloomberg Crypto.
A look at the people, transactions and technology shaping the world of decentralized finance. And today, it's grayscale versus the FCC. A court fight is underway after a regulator clamp down on gray scales. BTC ETF conversion has the odds of a victory change during the day's worth of arguments. And we're putting the spotlight on another ongoing legal fight.
Ripple CEO Brad Garling House talks his beef with Gary Gensler and the debate over what is a security. Plus, Kelly, we're looking at how investors are digesting the unraveling of silver gate as regulatory scrutiny intensifies. And Nick Carter of Castle Island Ventures is explaining why he thinks the Biden administration is quietly trying to ban crypto. All right. So all of that is ahead. But first, let's get a snapshot of the market, the best way to do that on your Bloomberg terminal seat. Art, why Pete go. And what you will find is the major
digital currencies, bitcoin and ether are under some pressure today may be falling in tandem with other risk assets after we heard Chairman Paul speaking on Capitol Hill. Right now, Bitcoin down about half of 1 percent were trading at twenty two thousand three hundred or so while ether is trading at fifteen sixty one. One outlier, though, is SRP. Of course, this is central to that one S.E.C.
lawsuit we were talking about. We'll have more on that in just a moment. But SRP is up about one point eight percent on the day. And of course, the other lawsuit very
much in focus today relates to grayscale versus the FCC and oral arguments perhaps favoring more toward the grayscale end of the spectrum that maybe was previously anticipated. And you see that reflected in the performance of the grayscale Bitcoin Trust, which, of course, is what is in question in the attempt to convert it into an ETF. It right now was up eight point four percent on the day and importantly shown all its discount to its net asset value is shrinking. It was 46 percent last week. We are south of 40 percent now.
Yeah, absolutely. As low as thirty five percent today. And that's after those opening arguments and grace scales lawsuit against the S.E.C. Traders are now betting on a higher probability of grayscale actually winning going into the case. Bloomberg intelligence thought the S.E.C. was 60 percent favored, but now they think grayscale is 70 percent likely to win. Bloomberg Katie Greifeld joins us now
with the latest. Katie, you know, how much is this save grayscale here? That discount was pretty significant. There were calls to lower fees if they're able to close this discount just by getting closer to this ETF conversion and do all its problems go away. This is some needed good news for grayscale like you mentioned that discount. It has been so stubborn for so long. It's been in place for two years back when Bitcoin was still in a bull market.
So I think there is a lot of surprise that it seems to be going as well for grayscale as it is. I mean, as Kelly walked through the fact that BTC is actually rallying today, value of bitcoin itself lower says a lot. And it seems like this argument that basically that the SS FTSE is being arbitrary and its distinction between the spot market and the futures market seems to be winning some sway with the judges. Bloomberg Intelligence out with a note saying that at least two of the judges seemed to say that they weren't satisfied with how the S.E.C. was distinguishing.
They seem to think is the operative word here. Do you think that there is a chance that traders might be getting ahead of themselves here? What is the road ahead? Because these are just the opening arguments. Just the opening arguments. I think that's a good point, that
there's still potentially a long road ahead here. I mean, Bloomberg intelligence did note that they're not expecting a ruling until the second quarter, the third quarter. So there is a lot of wood to chop here. It wouldn't be the first time the traders cut a little bit excited about something and went too hard in on something. But just judging from today, the
temperature seems to be a bit of a surprise and a bit of a surprise in favor of gray scale. But in theory, Katie, this goes well beyond gray scale. What are the implications here for the wider industry, for the wider industry? I mean, think about when you think of the interconnectedness of this industry, the lawsuit that we saw from Alameda yesterday aimed at race scale about alleged, of course, alleged that gray scale charges, quote, exorbitant management fees. He also accused them of improperly preventing redemptions. Of course, gray scale has said that suit
is misguided, but it really goes to show that this is a sin that systematically important trust that we're talking about. It's the biggest digital asset trust that there is. And clearly it has a lot of investors who would really like their money back. They would like redemptions and gray skills case throughout this is that they've been in support of ETF conversion. They've been working towards that. So, again, it's early, but it seems to
be going well for gray scale. So it's to the indication here, should they prevail against the S.E.C. in this case, it also makes it more likely that they are put to prevail in the Alameda lawsuit or the Osprey lawsuit, for that matter, in these other. Yes, it's really hard to say exactly what this means for some of the pending lawsuits and there's many that have been aimed at grayscale at this point over the fact that you do have that very stubborn discount, persistent and deep. I will say for grayscale, it's interesting if it is converted to an ETF, a lot of the focus seems to be on the management fees.
Currently, GDC charges 2 percent annually if you look at the ETF world. That is an extremely high fee. Even the futures based ETF search are high by ETF standards, but there is ninety five basis point. So if Deep Sea wants to convert to an ETF, whether that led to them having to lower fees, whether it led to widescale redemptions, that might not necessarily be good news for grayscale. I'm looking at the LME, the lawsuit.
One of the things they say is over a billion dollars in fee income over the last two years alone and the discount would mean about two hundred fifty million dollars for Alameda, which of course is going through that bankruptcy process. Is there any chance here that, you know, despite them fighting this lawsuit, that they would now that there's so much bigger, lower fees? Or is that an absolute no go from what we know? Grayscale. I mean, we should ask grayscale that, but it seems like the all the focus that great skill has had has been on this lawsuit, preparing for this lawsuit. Of course, this has been in the works since June when they initially sued the S.E.C. over that decision to deny the conversion at the time. So we'll see. I mean, there's a lot of pressure on them both in the form of lawsuits and just investors being vocal that the fees are extremely high.
They're in line with other trust products such as this. But when you compare compare it to an ETF, which is what they're trying to be, 2 percent is pretty much unheard of hedge fund fees. Kate Grenville, thank you so much for your time. Coming up next, from cryptos, legal fights to silver gates mounting troubles. We're going to discuss it all with Nick Carter of Castle Island Ventures. But there also are more legal fights to
talk about. Repeal CEO Brad Garling. How sad. Some sharp criticism for Gary Gensler. So we'll have more on that beef and litigation ahead. And to access all of the latest data and news on crypto. Check out our wiki. Go on the Bloomberg terminal.
This is Bloomberg. Have a clear rulebook, clear rules of the road regulation. That's clear. We have one goal at the FCC is for them to come into compliance. What we see is, you know, quite a lot of turmoil and we see fraud. We see a lack of transparency.
We see run risk regulation through enforcement. This is not a healthy way to regulate an industry. The law is the law. And they need to come in and properly
follow the laws. The US really is already behind driving innovation outside. We don't want it to be like 5G or semiconductors that went off shore. It's actually a matter of national security. We will end up inevitably with sensible regulation. This is the awkward adolescence and the mounting troubles that silver gate may add to that regulatory debate.
At first, silver gate was just like any other regional bank and its push into crypto. It looked like a huge success by creating a payment rail called the Silver Gate Exchange Network. It allowed for almost instant dollar and euro transfers among the biggest crypto players. And the so-called Seven Network helped
facilitate trading across major exchanges and hundreds of billions were transferred yearly. Silver Gate also started offering everything from Bitcoin back loans to High Flyers, like MicroStrategy while being a banking partner to firms like Coinbase and stable coin issuers circle, both of which have reduced exposure to Silver Gate as it has faced trouble in recent months. The problem now is twofold. One is a matter of its own finances facing pressure as cryptos slumped. Silver gave built a critical thread through the crypto industry through the Seven Network, and saw its shares shoot up to two hundred twenty two dollars at its peak. But its stock was already under some pressure by October of 2022 as transfers slowed and the much bigger issue then became FTSE ex, a significant client. So another problem for the bank became a
regulatory one. While Silver Gate initially said that RTX accounted for less than 10 percent of the firm's deposit base, regulators, lawmakers, short sellers, they all soon began circling. Bloomberg has reported that Silver Gate is allegedly the firm that opened accounts for FTSE ex founder Sandbank and freed under a different name, which helped him avoid stricter due diligence. The bank has not been accused of wrongdoing, but it is the subject of an investigation by the U.S. Justice Department. And what's more is that silver gate began to hit more dial, finding dire financial troubles by the end of last year. It had to sell securities at a loss and
took an impairment charge tied to one point seven billion dollars worth of securities, while also reporting a one billion dollar loss in the fourth quarter. It suspended a preferred dividend payment in January. And then by March, it raised a much bigger warning that it had to delay its annual filing as it analyzes those regulatory inquiries and investigations. It had said that portfolio losses and other issues could impede the ability to operate as a going concern. You can see just how much the banks deposit base have taken a hit around the time that FTSE issues came to surface and the pressure has only mounted since then. That latest warning had sent the stock
into a 60 percent spiral, hitting almost five dollars a share, and the stock is only sold off further as companies like Coinbase Mike Novogratz s Galaxy Digital Circle and Stable Coin Issuer PAC SOS at all announced a pullback from Silver. Silver Great now is in search of a path forward, but remember, it's also federally insured depository institution and they had taken advances from the Federal Home Loan Bank, underscoring cryptos potential ties to the U.S. banking system. And that has gotten regulators so very
concerned. It's a watchdog's worst fear. And if things keep on going south, the banking system in the United States may close off to more crypto more drastically. All rich and all, I thank you so much for that. Let's continue this conversation now. Joining us is Nick Carter. He is founding partner of Castle Island Ventures.
And he recently wrote a piece detailing what he says is the Biden administration's coordinated ongoing effort across virtually every U.S. financial regulator to deny crypto firms access to banking services. Nick, to quote your piece, you say the U.S.
government is using the banking sector to organize a sophisticated, widespread crackdown against the crypto industry. How does Silver Gate fit into that? Thanks for having me on. Yeah. Silver Great is at the center of the storm. They have been investigated given their ties to RTX Almeida.
They're now facing enormous regulatory pressure and as a consequence, their clients are deserting them. Of course, the bank run and the withdrawals of the deposits don't help, but it's certainly the case. The regulators have piled on and made life much more difficult for this bank. So they got themselves into trouble. But the Biden administration's crackdown
on banks through bank regulation certainly doesn't help their predicament here. Can you walk me through your you're thinking about that intention, though, because there is an argument to be made on the other side that they're just trying to regulate the industry more carefully to prevent any kind of systemic risk or risk to consumers? Well, there's a difference between sound and sensible regulation and trying to effectively choke off the industry's access to banking. You know, crypto activity in the U.S. that's legal.
I don't see any reason why these crypto firms shouldn't have access to banks, but because of the bank regulators actions here and we see this on a cross agency basis, it's ubiquitous crypto firms, especially early stage startups. The ones that we talked to, they're having a really hard time getting access to new banks, especially accounts where they'd be making transactions on behalf of clients exchange style accounts. And that's just inhibiting the ability of the market to operate properly. And it drives a wedge between smaller companies and the larger incumbents that have the ability to retain those bank ties. So it's bad for competitiveness overall. I don't see an argument why a perfectly legal industry should be choked off from access to the banking system. I'm kind of curious also about the
importance of the Fiat rails here. Because when you take a look, it's really interesting, the uptick of euro denominated transfers when you look at what is posted by data provider Keiko. Is there a chance that Europe actually, given the regulatory regime that is being created, starts to play a much bigger role than the United States? And what kind of roadmap could that create? The center of gravity for the crypto industry globally is still the United States.
However, they could possibly squander that advantage entirely. The regulatory wins here are extremely hostile. Europe, on the other hand, has passed the micro regulation, which is sweeping new regulation covering crypto activities in Europe. Virtually every sector and certain European states have proven themselves pretty amenable to hosting crypto firms. So they are moving here.
And I believe pilot is a reaction to the to the US's intransigence and demonstrating that there are other jurisdictions where crypto firms could domicile themselves. The US should be awake to that and be wary of the fact that other jurisdictions are competing for the vibrant crypto sector. So, yeah, I think U.S. policymakers should be extremely concerned about that.
You know, speaking of concerns here, the problems with Silver Gate is kind of one of the biggest problems we're seeing among the FDIC insured bank. What is the case study here? What is a word of caution to be taken by the struggles that Silver Gate is facing? Well, their main issue was that they were very exposed to the crypto sector. And so they had extreme concentration in the deposits and of course, the outflows and employees a very correlated. The problem is that larger banks have a disincentive to servicing the crypto space because it only brings some trouble and additional overhead and costs.
So you get as a consequence of that, you get these smaller regional banks that put their hand up and say we will be the service provider for crypto firms. But the consequence of that is that they're very exposed to it and outflows and the vicissitudes of the crypto space. So while banks are discouraged from doing business with crypto, you'll get the silver gates of the world that will suffer with the eddies of the crypto markets. The issue is structural. I would say. Nick, obviously all of us will keep one
eye on silver gate, but our other ISE today likely is on SCC versus grayscale or grayscale versus SDC in the oral arguments that took place based on the tone we saw or heard from the judges. What is your assessment about the prospects for a spot ETF? While I thought the oral arguments were strongly in favor of grayscale, I thought the judges received them positively. My read prior to the case was that it would be unlikely grass to prevail in that lawsuit. And it looks like at least two of the three judges sounded very sympathetic to grayscale and question the FTSE arguments, which I found clownish pretty harshly. However, all that said, as Katie said on
the prior segment, it will be months until there is a resolution in the case in Grace Hill. Winning the case doesn't strictly mean that we get a spot ETF approval. It just means that the FCC could go back to the drawing board and find another reason to deny the application for the ETF or the FCC could even withdraw those futures ETF which currently exist.
So it's not strictly. It doesn't guarantee that we get a conversion to the ETF even if Grace Hill prevails. And of course, we have to wait and see if that even happened. Nick, we have to leave it there. But thank you so much for joining us. Always great to get your take. That was Nick Carter of Castle Island Ventures. And for more crypto conversation, be
sure to check out our Bloomberg crypto podcast, which dives deeper than the daily market buzz to explore the stories and the people shaping the ever evolving digital landscape. Look for that every weekday wherever you get your podcasts. This is. This is liver crypto on Kailey Leinz in Washington with Sonali Basak in New York. Well, Ripple has been locked in a legal battle with the S.E.C. for more than two years, with the regulator alleging the company failed to register its SRP token as a security repeal. CEO Brad Garling House.
Join me here in Washington last week and said he expects a decision in that lawsuit soon. Plus, he had some sharp criticism for Gary Gensler. I certainly felt very blindsided. You know, I think when you go in and we have done this around the world, by the way, you know, I'd say a significant percentage of my time is meeting with regulators on a global basis. And all of those have been constructive except for here in United States. Consider this.
The only country on the planet that thinks SRP is a security is the United States. We've had a thriving business outside the United States where a U.S. taxpayer regulated here in the US. And we have a U.S. regulator who I think for power and for
politics is fighting these fights about what is the security, not because it's good policy or good for the United States leadership in these technologies, but because it's good for the power and politics for the FCC. OK, so let's put the SRP security question aside. Let's talk about SRP and its utility in facilitating cross-border payments. What's demand looking like for recall right now in that regard? ISE the two parts to that question. One is the reason why we use SRP is it's extremely fast and it's extremely efficient and frankly low cost on a per transaction basis.
So it's ideal for payments. And that isn't to say that other block chains and other tokens don't have other great use cases, just that when you're talking about payments, SRP is uniquely positioned to kind solve that problem. Demand for us outside the United States has been outstanding business 20 22, despite having a ton of headwinds from the SCC as well as the global crypto winter, if you want to call it that. Twitter was a record year for repo, without question. So demand is very high.
And I think it's because we're solving a clear problem. We have a clear customer. That customer likes the solution we're building and we continue to see demand from that. I think the whole industry needs to particular this time, step back a little bit and say, what problem are we solving? How is how are these technologies uniquely positioned to do that and really focus on utility? There is utility. There's also investment and behavior in which it's just buying an asset because you think SRP is going to go up in value.
Why in that case, should it not be treated as an investment contract? Well, I call that speculation correct, which is different than an investment contract, actually. People are speculating in the same way that people speculate on diamonds. They speculate on oil. They speculate on pork bellies. Those are securities.
Just because something actually fluctuates in price and people seek to generate a profit from trading, it doesn't make it a security. And so, again, this is where the law is actually super important. And I think the S.E.C., in trying to prove their case, has failed on virtually all of the Howey factors. This is the Supreme Court case from, I
think 46 or something that identified here the factors to determine whether it's a whether or not something is a security, just because it if someone seeks a profit, does not make it a security. Fair enough. Okay. So you've raised a few times that the U.S. seems behind in many aspects. I wonder how behind the U.S.
also is when it comes to a digital dollar or just the CDC conversation? Because I know Ripoll does a lot of work around that as well. Where does the U.S. stack up? And I don't know if I can call it a race, but in this global movement toward that? Well, I think it's probably fair to call it a race, because I think some of the activity you're seeing globally around central bank digital currencies is fear of missing out Venmo. And I think the ripple does work with a number of central banks around the world that we publicly announce some of them. And we're in the phase of kind of testing, experimenting. They're issuing their central bank
issued digital currencies on the SRP ledger. I think these are interesting use cases. I'm not sure yet how to think about the utility for the United States. Should the United States issue a central bank digital currency? I don't. I mean, today at an event here in Washington, Senator Loomis was talking maybe Senator Gillibrand was talking about she doesn't see that applying to consumers, but only from a central bank. The central bank.
I think it depends upon how we define these stable coins. Probably will be the first step, I think, in Congress to get some regular regulatory and legislative clarity, which I think is a good thing. That was repeal CEO Brad Garling, house speaking with me last week. That wraps it up for Bloomberg Quicktake this week. But coming up next week, we'll be talking to the big digital chief strategy officer. And period boring at the Chamber of Digital Commerce. This is Bloomberg.