The Plumbing Behind GBTC's ETF Bid

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As bitcoin ETF mania hit full force two weeks ago, the Grayscale Bitcoin Trust filed to convert itself into an ETF and bring its nearly $40 billion in assets under management with it. Ben Slavin, the global head of ETFs for BNY’s Asset Services division, spoke with ETF.com on the plumbing behind the process.

This interview has been edited for clarity and brevity.

ETF.com: Walk me through BNY Mellon's involvement with the Grayscale Bitcoin Trust, especially when it’s petitioning the SEC to convert it into an ETF.

Slavin: At the end of the quarter, BNY Mellon took on certain services for the Grayscale Bitcoin Trust, specifically accounting and administration. That’s really another step that Grayscale took on its evolution toward turning GBTC into an ETF.

The thinking with our involvement at BNY is around being ready for that moment by, again, providing the services to the trust now, and then being able to add specific ETF services that are necessary, once the SEC provides its approval and Grayscale is ready to convert.

ETF.com: Go more in depth into the plumbing that BNY Mellon is putting behind this conversion. The first large-scale mutual fund converted to an ETF earlier this year with Dimensional Fund Advisors, and I assume there's an extra layer of complexity when you're dealing with cryptocurrencies and the accounting measures for that. What's being put in place ahead of time to make this as smooth as possible?

Slavin: Plumbing is incredibly important here. And BNY Mellon is well-positioned in this space, as we've been the leader and the dominant player in the physical commodities exchange-traded product (ETP) space, since its conception.

We're very familiar at the bank with providing the necessary asset services or infrastructure to support products like physical gold, silver, palladium, platinum and also futures-based products inside the ’33 Act structure.

The difference here is that, instead of gold, we're talking about bitcoin or some other digital asset down the road. So really, the structure, the mechanics, the infrastructure are all quite similar, and something we're familiar with.

Here, the challenge really is around being able to get the necessary pricing for a bitcoin, to be able to do things such as strike a net asset value, which, again, we're currently doing for Grayscale; or really being able to custody a bitcoin, which obviously is different than custodying a bar of gold or a bar of silver because of the nature of the underlying asset. But the operating process is quite familiar to the bank.

ETF.com: What’s the plan to make sure that works within the ETF wrapper, especially for an asset that trades 24/7 with aggressive price swings? This seems like a much more difficult asset to strike an NAV.

Slavin: There are many ETFs that are currently listed in the U.S. market that have securities that are underlying them that don’t trade during U.S. market hours. A great example would be an ETF that holds Asian equities or bonds. But the product still trades in the U.S. during our own trading hours, and an NAV is struck.

Typically, the pricing in those ETFs are really around the future expectation today of where Asia is going to open tomorrow. Then, it catches up. And the NAV that—for most products—is struck once a day at the U.S. market close, is effectively a snapshot in time that’s used for a variety of things, such as performance measurement and other valuations to mark the fund to market on a daily basis.

But ultimately, it's a snap in time. And the product will continue to trade. So if the underlying markets move, as they would in bitcoin, after 4 p.m., when the ETF opens, it’ll catch up. That's exactly what we've been seeing, not only with the U.S. products, but certainly with the other [crypto] products that BNY supports, currently listed on the TSX in Canada as an example.

ETF.com: How are you determining the NAV when there are multiple crypto exchanges, and they could have different prices at any given point for bitcoin?

Slavin: In that case, we receive that instruction ultimately from the clients, who are ultimately working with us to select a preferred pricing source. But again, all of those pricing sources, or the methodology to price the fund, not only has to be accommodated and available to the bank to be able to perform our services, but also has to be disclosed and needs to be approved by the SEC.

We're talking about U.S. ETFs, with the appropriate U.S. accounting standards, for example, for GAAP purposes, to be able to properly maintain the books and records of the ETF.

ETF.com: Going back a little bit more broadly, we've been talking as though it’s a certainty the Grayscale Bitcoin Trust will be granted approval to convert by the SEC. But what gives BNY Mellon and your client Grayscale so much confidence that the SEC will allow this to go through? These are two very new concepts—having cryptocurrency underlie an ETF, and a mutual-fund--to ETF conversion. And the SEC seems willing to take its time to determine whether cryptocurrency poses risk to investors in these vehicles.

Slavin: The approval and subsequent launch of the mutual fund and the futures-based ETF is really part of the journey that we're on with these types of products that hold digital assets. We've seen an incredible amount of demand—in fact, record-setting demand—for these products. And we've seen demand not just in the U.S. but around the world.

We’re involved in providing servicing to products outside the U.S., again, including the Canadian ETFs I had mentioned earlier. There's also a growing market in Europe. We see close to $17 billion globally in AUM around the world, excluding Grayscale, which is approximately another $40 billion on top. We've seen very strong flows into those products this year, about $6.5 billion to date, and growing.

We've certainly seen the demand. But a spot bitcoin product is really the final destination. That’s the product that many in the market are demanding or seeking to have issued for the purposes of making that investment. We've seen that play out around the world with other assets.

In cases where there's a spot product available, that historically has taken the lion's share of the assets. The closest parallel we can see at the moment in digital assets is looking north to Canada, where we see the physically backed product taking the vast majority of the market share. We're seeing similar behavior in Europe, albeit their structure is a bit different.

Certainly, it isn’t clear yet when the SEC is going to get comfortable with the product, whether it be Grayscale or other issuers who are all vying to launch or issue these products, when that's going to happen.

But it’s very clear—based on the comments made by both Chairman [Gary] Gensler and the SEC publicly—that there are some additional steps that they’re looking to take prior to launching this product. All of those have been out there for quite a while—such things as the appropriate market surveillance and other regulatory infrastructure that they feel is necessary to be able to approve these types of products.

With their approval on the futures product, it seemed clear that there were two elements of a regulatory scheme that made them comfortable. One was the 1940 Act itself, as the products that were approved obviously fall under that wrapper. That regulatory scheme is well-traveled, is well-known, affords investor protection. The SEC itself proves to be able to use either as a wrapper here.

Second, the fact that the asset itself is on a regulated exchange, that has all of the other investor protections, market surveillance, and other qualities that gave the SEC comfort. Even though the futures themselves are not regulated by the SEC explicitly, their cousin or sibling agency, the CFTC, gave the SEC comfort here. There were a few layers here that really came into play that are not yet the case if you apply the same logic to a spot or a physical Bitcoin ETF.

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