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Grayscale shreds the hype about Bitcoin's power to 'democratize' finance by showing that RIAs really want a dominant Wall Street middleman and are willing to pay hedge-fund-like fees for 'transparency' and an SEC-approved wrapper

The New York City manager landed Schwab, Wealthfront and now the UHNW alts platform, iCapital, to provide a crypto asset that incites exuberant hopes, crippling fears and little between.

Tuesday, September 28, 2021 – 9:50 PM by Oisin Breen
Eileen Duff: Grayscale is adhering to a higher level of scrutiny than many other players.

Brooke's Note: The irony of this article about RIAs gaining Bitcoin access is that it took place during a few days when the cryptocurrency's value fell by 10%. It's down about 20% for September. Be careful what you wish for. That said, the full destiny of Bitcoin has yet to play out as it gets banished from China, adopted by El Salvador and is still the subject to a Tweet a minute from people like Cathie Wood at ARK who say the price, currently at $42,000 is set to sail to $500,000.  You can see why Grayscale's GDLC could use FOMO alone to fuel a grand run that makes the 250-basis-point fee utterly irrelevant. It doesn't mean that that lofty fee isn't also the potential seed of destruction for the open end, golden-egg laying mutual fund. It gives competitors every incentive to develop a better mousetrap and the SEC every reason for sympathy. Not that Grayscale doesn't have a viable plan to own the Bitcoin ETF market, too. It's ready to sell to graying Boomers who fear missing the next surge in Bitcoin's price more than they believe they fear losing 1% of their portfolio to a forseeable asset price implosion.

Grayscale Investments just signed a deal with iCapital that sets the stage for it to further dominate RIA access to Bitcoin and charge hedge fund-like fees, shredding the hype about Bitcoin's power to 'democratize' finance.

Daniel Eyre
Daniel Eyre: Whether Grayscale will be able to sustain any initial momentum remains a big question mark.

Heretofore, the New York City money manager of $46.8 billion in digital currency investments was the Toyota Corolla for RIAs who wanted to become crypto-currency owners.

But its Sept. 13 deal with iCapital puts its utilitarian product in a Ferrari showroom for the ultra-high-net-worth (UHNW) RIA crowd.

The deal makes private direct investments in Grayscale's Digital Large Cap Fund (GDLC) available to the 6,700 high-net-worth advisors using iCapital's alternatives marketplace.

These UHNW advisors already had access to Grayscale funds at Pershing, Schwab, Fidelity or TradePMR. But now they will be reported alongside other alts on iCapital's platform, which will appeal to many, sources say.

Private placement in GDLC and other Grayscale funds, which comes with a minimum six month lock-up, is also typically cheaper, but not always, compared to an over-the-counter purchase. That's because investors buy a fresh stake in the fund at its net-asset-value, against trading at demand-driven premiums on the open market.

Yet what makes the deal remarkable is that Grayscale, which charges an average 250 basis points (bps)* -- putting it in the range of hedge-fund fees -- is proving to Bitcoin advocates that digital currency isn't ipso facto a 'democratizing' force.

The new Grayscsale offices out of New York.

"Digital currency is a complex and evolving landscape, and particularly from a regulatory standpoint, it was important for us to partner with a company that offers transparency, and Grayscale is adhering to a higher level of scrutiny than many other players," explains iCapital managing partner and chief client success officer, Eileen Duff, via email.

Whether Grayscale makes a mockery of the always dubious claims about Bitcoin being in effect a self-contained, frictionless financial system that could serve as a refuge from bank fees, Wall Street toll collection or even the inherent costs in storing value in gold is questionable. It may never have been credible to begin with. 

Yet Grayscale certainly exploits the economic handmaiden of Democracy -- free enterprise. Simple math suggests revenue of $1 billion or more for a company with only about 50 staff -- a recipe for high profits and a reward for matching investors with what they want.

Those staff already enjoy a perk of Ray Dalio types who migrate from New York City to tony surroundings in Connecticut. Grayscale sits on the harbor in Stamford. See: Ray Dalio finally deigns to let RIAs allocate AUM to Bridgewater funds but with a coy approach; he'll use iCapital's software to sell through a virtual mystique boutique

Veneer of safety

What Grayscale and its loyal RIA investors know is that although digital currency purportedly employs blockchain underpinnings to cut out expensive middlemen, the volatility of cryptocurrency is a recipe for investor fear, making it ripe for intermediaries.

Daniel Gonzalez
Daniel Gonzalez: The value proposition Grayscale offers is established.

The Grayscale Digital Large Cap Fund is nothing if not volatile.

It's 52-week price ranges from $9.85 to $73.45, which it hit in intraday trading, Sept. 1. It closed that day at $64.24 and has been steadily losing ground ever since. The fund closed today (Sept 27) at $29.29, down $0.01, or 0.03%.

Grayscale funds do not directly hold cryptocurrencies. Instead they track their price using the TradeBlock XBX index, owned by sister company CoinDesk**. The model means the funds trade at a discount or premium to cryptocurrencies during periods of high volatility.

Yet Grayscale has been able to add a veneer of safety to the digital asset trading process by marketing its funds with 'blessed' by the Securities and Exchange Commission (SEC) approval and a safety-in-numbers product.

Underscoring the point, just three days before it announced the iCapital signing, Grayscale revealed that the SEC had approved its bid to bring three more -- for a total of six -- of its 15 funds in line with the regulator's 12(g) reporting standards, under the Exchange Act of 1934.

In fact, the approvals themselves are a key part of Grayscale's value proposition, as evidenced by the fact that Wealthfront and Schwab chose Grayscale as a chief investor access point to Bitcoin.  See: Wealthfront cedes to four years of investors clamoring for crypto by taking on expensive third-party vendor that Betterment rules out.

"This [SEC] milestone reflects Grayscale’s continued commitment to offering transparent investment vehicles that voluntarily exceed standard reporting requirements, meet a heightened level of disclosure, and are subject to additional regulatory oversight," says Craig Salm, vice president of legal at Grayscale Investments, in a release.

Rise and fall

Grayscale was able to spot that advisors needed a service that slots into their practice without difficulty, says Lex Sokolin, global fintech co-head at New York City blockchain software company ConsenSys, via email.

Matt Apkarian
Matt Apkarian: 2022 looks like it may be the year.

"Packaging any asset in a wrapper the industry understands means the industry can actually adopt it," he explains.

In August, Grayscale funds brought in $5.5 billion in net new assets, 90% of which came from institutional investors, according to the firm.

Yet for all the fund's dominance, experts are split on whether Grayscale is at the beginning or end of its tenure a category-killing first-mover.

"Grayscale has a solid brand and is viewed as simple to engage with for advisors and investors. However, whether it will be able to sustain any initial momentum remains a big question mark," says Daniel Eyre, co-founder and CEO of San Francisco crypto-TAMP Blockchange, via email.

"The ground is moving under everybody’s feet when it comes to crypto asset management solutions, even if the shifts aren’t immediately visible just yet. The conditions are set now for very stiff competition," he adds.

Stiff competition

The stiffest competition to Grayscale is likely to come from legacy fund and brokerage firms like Fidelity Investments. The fund giant is applying to offer lower costcrypto-ETFs that will likely offer greater simplicity and broader access. See: Why Fidelity's Bitcoin ETF application might have a shot.

Lex Sokolin
Lex Sokolin: Packaging any asset in a wrapper the industry understands means the industry can actually adopt it.

So far, however, the SEC has held off of approving Bitcoin as legit as ETF, as applicants proclaim. See: The SEC effectively says 'no,' again, to Bitcoin ETFs with request for public comment, allowing Charles Schwab & Co. to keep its cover and steer clear of crypto for now

Bitcoin ETFs already trade in Canada, with fees ranging from 40-basis-points for CI Financial's BTCX ETF to 100-basis-points for Purpose Bitcoin ETF (BTCC).

That said, should the SEC relent, Grayscale is set for an ETF, where it may command far lower fees but with higher inflows.

"A Bitcoin ETF is not a question of if, but when, and we remain 100% committed to converting Grayscale’s products into ETFs/ETPs as soon as the regulatory environment allows," says a company spokesman, via email.

It is no sparing expense in operating a crypto ETF department despite uncertainty about when, if ever, the SEC will grant approval. Indeed, on Aug. 4, Grayscale announced hiring David LaValle as senior managing director, global head of ETFs, reporting directly to CEO Michael Sonnenshein.

LaValle's career includes stops as US Head of SPDR ETF Capital Markets and he helped develop Nasdaq’s Exchange Traded Product Marketplace.

Rarified audience

Grayscale's deal with iCapital follows swiftly on the heels of Wealthfront's Jul. 29 announcement that it will let retail investors trade two Grayscale mutual funds: The Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE). See: Wealthfront cedes to four years of investors clamoring for crypto by taking on expensive third-party vendor that Betterment rules out.

Yet, the iCapital deal puts Grayscale's crypto products in front of a far more rarified audience, although RIAs using iCapital will be limited at the outset to trading GDLC, which invests in large-cap companies, while tracking the XBX index.

Its risk-reducing diversification was also a huge reason iCapital opted to partner with Grayscale, says Duff. "It's a very clear differentiator ... and maybe more appealing and arguably less volatile," she explains.

Growing appetite

iCapital's platform administers more than $80 billion in client assets over 780 funds, and its growing cachet among HNW and UHNW investors is such that Bridgewater Capital recently deigned to partner with the firm. See: Ray Dalio finally deigns to let RIAs allocate AUM to Bridgewater funds but with a coy approach; he'll use iCapital's software to sell through a virtual mystique boutique.

Gary Gensler
Gary Gensler: I don't think there's long-term viability for five or six thousand private forms of money.

"We see increasing appetite for uncorrelated return potential and crypto is front and center of that appetite, so we expect to see adoption, how much remains to be seen," Duff continues.

Yet Duff declined to answer why iCapital opted to give advisors using its ‘elite’ service access to the same vanilla offer as mainstream vendors.

Ultra-refined or not, it works, says Daniel Gonzalez, an analyst for wealth management at Javelin Strategy, a Pleasanton, Calif,  consultancy.

"It makes sense because [iCapital] is following the money. Grayscale is the largest digital currency asset manager … [iCapital’s] partnering up with a leader. The value proposition Grayscale offers is established SEC reporting, customized allocations, [and] IRA eligibility," he says, via email.

Regulatory value

Yet a Grayscale spokesman declines to call the iCapital deal a coup, describing the firm as an "industry leader" that "stands out." He also confirms that Grayscale's growing bonafides as an SEC reporting company were crucial in sealing the iCapital deal.

Barry Silbert
Barry Silbert stepped down as Grayscale CEO in January.

"[We] voluntarily exceed standard reporting requirements, meet a heightened level of disclosure, and are subject to additional regulatory oversight ... these characteristics have historically drawn institutional investors, including RIAs," he explains.

GDLC, and Grayscale's flagship $28.5 billion in managed assets (AUM) Bitcoin Trust (GBTC) are two of its six SEC-reporting funds.

Among Grayscale's crypto-fund peers, only Osprey Funds filed, Jul. 8, for one of its funds (OBTC) to become an SEC reporting company.

The fund is also highly volatile. It's 52-week price ranges from a high of $60.58, hit on Feb. 17, to a low of $11.91, hit May 19. The fund has seen its share price trade near its low since then. It closed today (Sept. 27) at $13.25, up $0.18, or 1.38%. 

Including costs, Osprey charges 79-basis-points for OBTC, and two other Grayscale competitors, Skybridge, through its Bitcoin Fund, and Pantera Funds' Bitcoin Fund levy a 75 bps management fee, although Pantera adds a 100 bps 'realization fee'.

Each of the major crypto fund vendors also require a minimum capital investment for investors keen to buy in through the cheaper private placement route.

Pantera's Bitcoin fund requires a minimum investment of $100,000, Fidelity's Wise Origin requires $50,000, and Osprey requires a $25,000 investment. Grayscale's minimum buy-ins sit at $25,000, GBTC, GDLC, and its Decentralized Finance (DeFi) Fund aside, which require $50,000.


The six Grayscale funds that report to the SEC, do so under Section 12(g) of the Exchange Act, which, in line with section 13(a), requires registrants to file current, quarterly, and annual reports, limited director and shareholder reports, and proxy voting statements.

Freddy Martino
Freddy Martino: [There's] no change in our [Vanguard's] stance.

Grayscale’s bid to bring its funds in line with higher 12(g) SEC regulatory requirements also tallies with its intention, outlined in an April 2021 blog post, to use the process as a means to get them "oven-ready" to convert into ETFs, according to the firm.

Yet, its July launch of its closed DeFi fund could yet bring regulatory disapproval, according to the Wall Street Journal.

The fund invests in tokens tied to crypto trading and lending services, including UniSwap, which is under investigation by the SEC.

Grayscale also dissolved its XRP fund earlier this year, following an SEC suit against XRP distributor Ripple Labs.

If the SEC eventually sanctions cryptocurrency ETFs, many of the traditional powerhouses that currently partner with Grayscale could quickly become dangerous competitors.

"What we’re hearing from the SEC, and monitoring their tone, 2022 looks like it may be the year," says Cerulli Senior analyst for product development, Matt Apkarian, via email.

That said, the SEC has continued to push back against greenlighting a Bitcoin ETF. Despite initial industry expectation that newly-appointed SEC chair Gary Gensler might fast-track crypto ETFs, he has maintained the regulator's wait-and-see attitude.

Gensler also recently compared the crypto market to the wildcat banking era of 1837 to 1863, before federal banking regulation. See: The SEC effectively says 'no,' again, to Bitcoin ETFs with request for public comment, allowing Charles Schwab & Co. to keep its cover and steer clear of crypto for now.

"I don't think there's long-term viability for five or six thousand private forms of money. It's worthwhile to have an investor-protection regmine," he told the Washington Post, Sept. 21.

Adapt or die

If crypto ETFs hit the shelves, fees will likely plummet, and Grayscale will have to adapt or die, says Eyre.

Tom Jessop
Tom Jessop led a Fidelity delegation that lobbied the SEC to approve crypto ETFs.

"Grayscale’s success [is] the simplicity of engaging with the fund. It’s a safe choice in an asset class that some investors still perceive to have significant risk.

"Parties that don’t adapt to the most important needs of financial advisors, asset managers and investors could find themselves on the outside looking in very quickly," he explains.

"Yet, it’s possible for funds to add more value than ETFs in cases where investors are seeking vehicles for arbitrage," he adds.

Today, equity mutual funds on average levy fees of 50 bps, index ETF fees stand at an average of 18 bps, according to the Investment Company Institute.

Beyond lower costs, ETFs also give investors the ability to avoid long lock-up periods before they can cash out their investments.

Crypto investments held in funds, and potentially in ETFs and SMAs are also more tax efficient, if IRA eligible.

Fund vendors are more capable of hedging investments, securing crypto assets with cold storage (offline) keys, and offering access to trickier to manage investment strategies.

No lottery ticket

Yet, one reason for the SEC's continued rejection of crypto ETFs is its refusal to pick a winner on a first-come, first-served basis, Eyre continues.

"Approving a single ETF application would put the SEC in the position of kingmaker, essentially killing existing products that have tens of billions of dollars tied up in them ... [which] could create a dangerous discount scenario as money aggressively transitions to the more efficient ETF offering," he says.

"[The SEC is] waiting until some critical mass of ETF applications meet their minimum standard so they can approve multiple at once," he adds.

The SEC declined to comment, stating that it "does not comment on the existence or non-existence of confidential filings."

Incumbent risk

Although Grayscale has attracted the most assets in the now $1.89 trillion cryptocurrency market, Tarrytown, New York-based Osprey; 2013-founded, Menlo Park, Calif.-based Pantera and Anthony Scaramucci's New York City-based Skybridge have also begun to attract investors.

Daniil Shapiro
Daniil Shapiro: It’s unclear who will win out in the long term.

"Grayscale is by far the largest cryptocurrency fund manager which signals operational know-how and may lead to investor comfort. [But] it’s unclear who will win out in the long term," says Daniil Shapiro, associate director for product development at Boston consultancy, Cerulli Associates, via email.

"There's tremendous room for cryptocurrency product development including active as the asset class matures," he explains.

That said, the moat provided by incumbency is often underestimated, says Eric Balchunas, senior ETF analyst for Bloomberg intelligence, in a Sept. 17 tweet.

"All you have to do is look at BlackRock, who launched an active future tech ETF a year ago and it only has $21 million, despite outperforming [Ark Invest’s comparable] $ARKK and having massive salesforce," he explains.

Bitcoin accounts for 42%, or $795 billion of the cryptocurrency market, according to Coinmarketcap. The total crypto market cap topped $1 trillion for the first time in January.

Growing numbers

The number of well known asset managers gearing up to launch a crypto ETF also continues to grow.

VanEck, WisdomTree, Ark Invest, Grayscale, Invesco, partnering with Galaxy Digital, and Fidelity Investments, among others, have all filed applications with the SEC. BlackRock has also begun to trade in Bitcoin futures.

In August, JP Morgan Chase also launched an actively managed Bitcoin fund in partnership with NYDIG. The company has allowed investors to trade four Grayscale funds and one Osprey fund, since July. See: NYDIG buys Digital Assets Data.

The Vanguard Group, however, remains a notable crypto skeptic.

"[There's] no change in our stance," says spokesman Freddy Martino, via email. See: Charles Schwab & Co. dials in what it may consider SEC's all-clear signal on Bitcoin, while Vanguard's take includes nothing to turn a red light green.

For the third time, the SEC postponed its ruling on VanEck's application, Sept. 14. The regulator has set a Nov. 14 deadline to approve or reject its Bitcoin ETF application.

Loud advocate

Among the largest domestic asset managers, Fidelity is the earliest convert to crypto currency, and Cboe Global markets will list its Bitcoin ETF on its exchange, should it gain SEC approval.

Abby Johnson,  Fidelity
Fidelity CEO Abby Johnson has charged hard intro crypto. 

Fidelity launched an in-house digital custodian, Fidelity Digital Assets in 2018, a crypto asset manager, Fidelity Digital Funds, and its first Bitcoin fund (Wise Origin Bitcoin Index Fund) in 2020, and crypto analysis software, Sherlock in 2021. See: Fidelity Investments unveils 'Sherlock' -- a dashboard that gives advisors data on 80 digital assets that can be used to justify buying and selling crypto.

The company is also a loud advocate of digital asset-based ETFs. Indeed, on Sept. 8, in a private meeting, Fidelity Digital Assets president Tom Jessop and six other executives pressed the SEC officials to greenlight a Bitcoin ETF.

Fidelity, which plans to add up to 100 staff to Fidelity Digital Assets by the end of the year, also pushed back at the SEC's late July signal that it would be more likely to approve a Bitcoin futures ETF as a first step toward a Bitcoin ETF.

"Futures-based products are not a necessary interim step ... because the Bitcoin market has matured," the company asserted in its SEC presentation.

"An increasingly wide range of investors seeking access to Bitcoin has underscored the market need for a more diversified set of products offering exposure to digital assets to match demand," adds a company spokeswoman, via email.

A futures-based ETF also requires more onerous regulation, as it comes primarily under the purview of the Investment Company Act of 1940; whereas a physical Bitcoin ETF would be a commodity ETF, and exempt from some 40-act rules, according to Apkarian.

Citing "regulatory reasons" for the company's silence, Fidelity declined to break out Wise Origin's AUM. In late May, Wise Origin managed $103 million. Market appreciation of 22% since then will likely have taken Wise Origin's AUM above $126 million.

* GBTC levies an annual fee of 2%, GDLC charges 2.5%, as do 12 of its other funds. Its Ethereum Classic Trust fund levies 3%.

** Grayscale is owned by former investment banker Barry Silbert's Digital Currency Group, which also owns crypto news site CoinDesk. Silbert stepped down as Grayscale CEO in January, replaced by managing director, and former JP Morgan Associate, Micheal Sonneshein.

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