Name: Balancing The Ledger: DOJ Crypto Probe, Digital Currency Group Explained, and Why A Bad Day For Bitcoin is a Good Day For Investors
Uploaded: 2018-05-25
Duration: 10 min 1 s
Description: Grayscale Investments managing director Michael Sonnenshein joins The Ledger team to talk regulation and digital asset management.

[ BLANK_AUDIO ] Welcome to Balancing the Ledger, where tech and finances intersect. I'm Jen Wieczner. And I'm Robert Hackett. And today we're joined by Michael Sun and Shine, managing director of Grayscale Investments. Thank you so much Michael for being here. Thank you for having me. So big news this morning, the Department of Justice has launched an investigation into trade manipulation on exchanges, looking at whether there's been manipulative trading in Bitcoin and Ethereum. Does this come as a surprise to you? It actually isn't surprising at all. I think from our seats in the industry, we're looking for regulation and regulatory clarity The SEC and a variety of other regulatory bodies have certainly been doing what they can over the past couple of months. And probably about the last year, to find and extrapolate outright scams, right? And kind of conserve investor protection. Looking at the most recent DOJ probe. That is actually a really validating move on the part of a regulatory body. If you look back on some of the comments that the SEC has previously made. They're really concerned about there not being surveillance sharing amongst the spot exchanges for assets like BitCoin, and so having them do an investigation that looks out for things like anomalous [ UNKNOWN ] trading and spoofing is actually going to hopefully weed out some bad apples in the ecosystem, so we're happy to see these kinds of regulation and regulatory oversight come into the fold. The Wiggleboss twins of Facebook fame, they are now at Gemini. They've got a cryptocurrency exchange. They've hired NASDAQ to scrutinize their exchange, make sure that there's no funny business going on, but they've actually proposed having the industry all collaborate together and form a sort of self- regulating entity. What do you think about this plan? So, I think it would certainly be a point of validation, not just for Gemini but all of the digital currency exchanges. The question then becomes what is going to be the regulatory body that is going to sit on top of That framework to ensure that all the exchanges are in fact compliant with that. I think anyone looking to propose an SRO, would actually be a fantastic thing for all the digital currency exchanges. And as far as gray scale goes, are you guys willing to work with regulators. Is that something they're looking for? Sure. So we often spend time in DC. One of the things that I think is super important not only at the Grayscale level but at Digital Currency Group, at Genesis, all of our businesses, we all support Coin Center. We think that they are doing some of the best work to educate lobbyists and regulators and anybody in DC that's really in a position to help create a regulatory Body or regulatory oversight of the industry. And so anytime that we have an opportunity to help educate and be a resource, we're always going to do so. So Grayscale is a subsidiary of Digital Currency Group. Which is a big, sprawling beast. It's got it's fingers in a lot of different pies in the cryptocurrency world. Tell us a little bit about that company, how it works, what it does. Sure, so Digital Currency Group is a C corp. It's a model that our founder and CEO, Barry Silbert created, really hopefully to emulate the format of an IAC of Berkshire Hathaway of SoftBank. DCG today has basically three buckets of assets. Bucket one is venture capital, DCG is the largest VC in the industry. It's made investments now in about 120 Some digital currency related business in over 30 countries around the world. Doesn't mean D C D is the largest check writer, but it certainly means it has the largest portfolio and really gets fantastic data and insights as a result of those investments. The second bucket of assets is digital currency group. Has a large balance sheet that holds digital currency. And there are some convictions that Digital Currency Group believes in. And so it maintains certain balances in different coins, and does that as part of its treasury management system. And in the third bucket of assets are the subsidiaries that DCG owns. The first is a business called CoinDesk, which I'm sure you guys know. They just threw the fantastic Consensus event. Yep, we were there. And Blockchain Week here in New York. As was everybody who matters. Exactly. 8500 people. And so CoinDesk has been part of the DCG family since 2016. Our regulated broker dealer in trading business is Genesis, so they've been again trading since 2013. And then, the third subsidiary is Grayscale Investments, which is our asset management subsidiary and the business that I help lead for Digital Currency Group. Now we've seen substantial price declines in many of these digital assets. Like you own 1 % of Bitcoin and Zcash as well, several others What has this price decline meant for you? I mean prices are down on this new investigation. Justice department news substantially this morning too. Sure, so the Grayscale family now constitutes eight products: seven single currencys vehicles, and then one diversified offering. And what we've seen throughout, I guess, the year to date, we probably raised about $ 200 million in new assets so far this year. Most of those asset inflows into the eight products are coming from institutional investors. And there's a lot of talk about institutional involvement and institutional interest in the space but we're actually seeing and experiencing it. I'd say the sweet spot of investors that are wanting to leverage Grayscale's products for digital currency exposure are hedge funds and they're hedge funds of varying investment mandates but usually have a size of about one to ten billion dollars. Of AUM. And so each of these funds, to the best of my knowledge, probably has a target allocation that they're looking for with respect to digital currency. And they use days like today in order to leg into their trade. So if they wake up in the morning, and Bitcoin has declined 5, 6, maybe 7 % and it's having a volatile trading session, They can definitely use that as a time to leg into that trade and get further toward that allocation they're ultimately looking to fulfill .>> And that 200 million that's come in just this year, where is most of that going in terms of the cryptocurrencies that you guys own? So I would say we stil have the strongest interest in Bitcoin and our Bitcoin Investment Trust product. I would say however though that the launch of our first diversified product is starting to gain a lot of traction. That product is called Digital Large Cap Fund and it coveres 70 % of the digital currency universe. It's a rules based methodology and every quarter we rebalance the holdings of the fund. The reason why this is resonating with investors is because we started to hear two things from the investment community. > One was, I think I missed Bitcoin or I think a theorum and I'm not sure where I'm not sure where to put money. And so investors said, if you can give me a singular invest that gave me broad market exposure, well that would be something that would be really attractive to me. The other thing that we are starting to hear from investors is that they got digital currency. They understood why they wanted to have exposure to it, but they never really wanted to do the homework to figure out where within the digital currency asset class they should be deploying and not deploying money. And so the Digital Large Cap Fund gives them that broad diversified exposure. And we're really excited about the uptake that it's had so far. And we're seeing some other companies come out with products like this. CIRCLE recently launched a product called " Buy the Market" that lets you buy a bunch of coins spread across by market cap. Sure. And we're also seeing a bunch of banks kind of getting interested and involved in, for instance, Goldman Sacks is looking at spinning up a Bitcoin trading desk. Do you view this as an opportunity or a threat? I view it really as an opportunity. So there is so much food left on the table and so many seats left around the table that the more firms that come and are offering products and services that allow people to access digital currency as a class, the better. Goldman Sachs being able to get into the digital currency space is a fantastic step forward. That's not a conversation that we were having a few months ago. And actually, it reminds me of 2015 which was about a year into when I've gotten into space. No bank, no insurance company, no global corporate company have made an investment in the digital currency firm. And it was when Goldman Sachs co- invested with Digital Currency Group into Circle that it then started to provide enough air cover to start seeing Visa and MasterCard and every other bank, insurance company, broker dealer etc. JP Morgan. Yeah, JP Morgan, to be able to put money to work in the digital currency space without it being a reputational risk for For them. And so if I look at my crystal ball I would say that Goldman Sachs beginning to get in to the trading space is going to have a similar snow ball effect. And you're gonna have to see other firms beginning to participate in a similar way. Care to share any price targets for us? No price targets but I will say that as we look at assets like Bitcoin, and look at the unbelievable adversity it's faced over the last 10 years. Every day that BitCoin doesnt go away. Everyday that the coin overcomes a new challenge, for me makes me feel that BitCoin will either do one of two things. It will either survive and become all these amazing things that we think it can be which will cause its price to be a lot higher than here. The native currency of the internet. Maybe as Jack Darcy said- Maybe. Maybe. Or it is possible something else may come along that will displace it an BitCoin goes to zero. It likely will have one of these binary outcomes. That being said, you have to think about BitCoin, again, as an open source protocol. So if you launch RobertCoin, and I don't think you're gonna do an ICO anytime soon, but- I did, I did one, Pets. coin. Okay. Thanks for letting me know about the [ INAUDIBLE ] sale. As you look at that, in any currency that comes along that allows for another feature, another attribute that maybe BitCoin doesn't have, as an open- source protocol, it's able to accommodate, to integrate, to add that aspect into it. And so I hope and continue to believe that as new features are added into BitCoin and other digital currencies, They can continue to thrive and grow and not be displaced. Well, it'll be interesting to see what happens. I guess that's all we have time for today. But thank you so much for being here, Michael. Thank you for having me. I'm Jen Wieczner. I'm Robert Hackett. Come to fortune. com for more Balancing the Ledger. We'll see you next time. [ SOUND ]

Grayscale Investments managing director Michael Sonnenshein joins The Ledger team to talk regulation and digital asset management.