Grayscale®

Safety, Security, and Transparency

benjaminviagas — Fri, 18 Nov 2022 22:18:54 +0000

Due to recent events, investors are understandably inquiring deeper into their crypto investments. Custody of the digital assets underlying Grayscale’s digital asset products is unaffected, and our products’ digital assets remain safe and secure. We take transparency seriously, and have a long history of working constructively with regulators to create and strengthen full and fair risk disclosures for our digital asset products. In that spirit, we affirm the following, as of November 18, 2022:

The holdings of Grayscale’s digital asset products are safe and secure. Balances are reflected in historical public filings and have been evaluated by our third-party auditors.

Each of Grayscale’s digital asset products is set up as a separate legal entity: a statutory trust for single asset products, and limited liability company for diversified products.

All digital assets that underlie Grayscale’s digital asset products are held by Coinbase Custody Trust Company, LLC (Coinbase Custody) as custodian for each product. A letter that verifies the number of digital assets held by Coinbase Custody for each of Grayscale’s digital asset products can be found below.

The organizational documents governing each of Grayscale’s digital asset products, as well as the custodian agreement with Coinbase Custody, prohibit the digital assets underlying the products from being lent, borrowed, or otherwise encumbered.

Let’s dig a little deeper:

Product Structure

Each Grayscale digital asset product is structured as a separate legal entity – a statutory trust for each single asset product, and a limited liability company for each diversified digital asset product – sponsored or managed by Grayscale Investments, but ultimately owned by the product’s shareholders. For example, this means that Grayscale Bitcoin Trust (OTCQX: GBTC) holds bitcoin — and only bitcoin — and each share is backed by a proportional amount of the trust’s holdings, approximately 0.00091502 BTC per share of GBTC, as of November 18, 2022. To be perfectly clear: these digital assets are owned by GBTC and GBTC alone.

Grayscale’s nine largest digital asset products are SEC reporting companies that file publicly available Forms 10-K, 10-Q, and 8-K. With each Form 10-K and 10-Q, Grayscale’s CEO and CFO certify that such reports meet the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and fairly present, in all material respects, the financial condition and results of operations of each product, among other certifications, as required by the Sarbanes-Oxley Act of 2002. Annual financial statements for these products are audited according to U.S. generally accepted accounting principles (GAAP). These products’ public filings are available at the links below:

Additionally, we provide GAAP audited financial statements in compliance with the highest reporting standards prescribed by OTC Markets, the Alternative Reporting Standards, for five of our newer publicly traded digital asset products:

We also directly provide investors with GAAP audited financial statements pursuant to each product’s governing documents for our three newest private placement-only products, which are not currently publicly traded.

(Grayscale may attempt to have the shares of new products quoted on a secondary market. Although the shares of certain Grayscale products have been approved for trading on a secondary market, such as OTCQX, investors in a new product should not assume that the shares will ever obtain such an approval because of questions the SEC and/or FINRA may have regarding the status of the product’s underlying digital assets under the federal securities laws.)

Custody

All digital assets that underlie Grayscale’s digital asset products are custodied with Coinbase Custody. As background, Coinbase Custody is a wholly-owned subsidiary of Coinbase Global, Inc. (NASDAQ: COIN), and is licensed to custody client digital assets as a New York-chartered limited purpose trust company. Coinbase Custody has been regulated by the New York State Department of Financial Services since 2018, the same regulator that oversees some of the United States’ biggest banks. Coinbase Custody also services as a fiduciary, which means that it is required to always act in its clients’ best interest under the New York Banking Law.

Coinbase Custody frequently performs on-chain validation as part of their custodian operations. Due to security concerns, we do not make such on-chain wallet information and confirmation data publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.

Coinbase Custody is also obligated under the terms of the custodian agreement in place with each Grayscale product to fulfill a number of critical operational practices that ensure that the digital assets underlying each Grayscale product are safe.

Coinbase shared more information about our relationship for Grayscale’s investors and indicated the exact quantity of digital assets underlying each of our digital asset products in the letter below.

Sanctity of Assets

Grayscale and Coinbase Custody are prohibited from borrowing, lending, rehypothecating, or otherwise encumbering the products’ underlying assets pursuant to the terms of the trust agreement or limited liability company agreement governing each digital asset product. No other entity, including DCG, Genesis, nor any other Grayscale affiliate, has any control over the digital assets underlying the Grayscale products. Each of our products carries identical prohibitions to those outlined in GBTC’s trust agreement :

As custodian, Coinbase Custody is also prohibited from engaging in such activity, as outlined in the products’ corresponding custody agreements. Keeping with GBTC’s custody agreement, as an example:

Crypto captivated many investors not only for the investment opportunity, but because of a shared belief that decentralization matters, financial inclusion matters, and self-sovereign digital money matters. There is a whole community of talented individuals and developers who continue to work together to achieve this vision. As always, Grayscale remains committed to providing investors with access to this ecosystem through a suite of accessible, secure, and future-forward investment products.

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5 Questions with Louis Hsu

Grayscale — Tue, 15 Nov 2022 21:47:28 +0000

Building Grayscale’s ETF practice is a key focus for the future of our business. As Vice President, ETFs, Louis Hsu is a leader on our team building new exchange-traded products and ensuring Grayscale and our partners are ready to act in the event GBTC is approved to convert to a spot Bitcoin ETF*. In a brief conversation, he shared his career journey from tradfi in San Francisco to crypto on the east coast.

*We use the generic term “ETF” to refer to exchange-traded investment vehicles, including those that are required to register under the Investment Company Act of 1940, as amended (the “‘40 Act”), as well as other exchange-traded products that are not subject to the registration requirements of the ‘40 Act.

1. What has your career been like, and what brought you to Grayscale?

Louis Hsu: My career has always been anchored in investing, but it hasn’t been linear. I started out researching active hedge fund strategies, I’ve spent the majority of my career as a portfolio manager, managing index/passive equity ETFs and multi-asset funds. More recently, I pivoted my career to manage the personal assets of startup founders and venture capital partners at a more boutique institution.

In the summer of 2021, a headhunter reached out to me for a job to lead portfolio management efforts at a crypto firm. While I was not looking to move, this signaled to me that crypto was potentially driving towards mass adoption, and it was at least worth an initial conversation. Interviews with the crypto firm were going well, but when I found out that Grayscale—the most established crypto asset manager in the world—happened to also be hiring for a similar role, I proactively reached out to a few employees on LinkedIn including our CEO, Michael.

To my surprise, Michael responded to me the day after I had reached out! The next thing you know, I was interviewing (remotely) with our COO, Hugh Ross, and shortly thereafter with Grayscale’s Global Head of ETFs, Dave LaValle. Even with such a great team, it was still a huge leap of faith for me, my wife and our two kids to move from the Bay Area to the New York metro area when I accepted Grayscale’s job offer. Looking back, it was well worth it!

2. What piqued your interest in crypto and why Grayscale?

Louis Hsu: Curiosity drew me in. Although I knew a few people throwing money into Bitcoin in the early days around 2012 when it was under $100 (I wish I did!), I first paid serious attention to crypto in 2017 when Bitcoin was rocketing towards $20,000. Regardless of the price of Bitcoin or any other crypto, once I saw the potential of blockchain technology to disrupt and reshape all facets of financial services as we know it, I was hooked.

3. Keeping this next question simple: why Grayscale?

Louis Hsu: Quite simply, Grayscale is the largest digital asset manager in the world, and I couldn’t pass up the opportunity to build a world-class ETF business with one foot in traditional finance, and the other foot in digital assets. Also, it was clear to me during the interview process that the people at Grayscale aren’t just extremely talented, but also humble and down to earth. Working at Grayscale is a lot of fun, and I love the entrepreneurial spirit that we all have here!

4. As a portfolio manager, how do you think about valuing crypto, especially Bitcoin?

Louis Hsu: This is a fascinating topic that really depends on your point of view! While there’s no universally accepted way of modeling Bitcoin’s value, in my opinion, here are three of the most interesting valuation frameworks I have seen discussed:

Network Effects: under Metcalfe’s Law, Bitcoin’s value as a network (like the internet) grows exponentially rather than linearly with each additional user.
Digital Gold: Bitcoin is viewed as a store-of-value commodity that competes against gold’s market cap of roughly $10 trillion.
Fiat Default Insurance: Bitcoin is perceived as a “fiat debasement hedge” where it’s considered default insurance against a basket of say G20 nations’ money supply multiplied by their respective liabilities.

5. How do you support the growth of your teammates, and what do you wish you knew at the start of your career?

Louis Hsu: I try to help my teammates figure out what they’re passionate about, and guide them to develop the necessary skills to progress to the next level. Moreover, I encourage teammates to ask a lot of questions as it’s good sign of someone trying to understand something rather than just going through the motions. It’s also okay to make mistakes, but learning from them is important. Over the years, I’ve learned that a successful career is a journey, not a destination, and I wish I’d understood this sooner. A career can span 40 plus years, so it’s important to keep a long-term view. It’s okay if your first, second, or even third job isn’t your dream job: what matters is your attitude towards work and that you master the skills for the job at hand before you move on.

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Market Byte: The Short Squeeze

Grayscale — Tue, 01 Nov 2022 20:30:37 +0000

Last week was the largest short liquidation event in history for Bitcoin and Ethereum, with more than $1.6 billion in short positions closing between October 24 to 31 according to data from Cryptoquant. The liquidations came as markets found strength with BTC and ETH, over the same period gaining 8% and 19%, respectively, after a prolonged period of muted volatility. Let’s discuss what made the market move, including fundamentals, macro, and the derivatives market, and where we might be headed — could this be a bear market rally, or might we be out of the woods?

Source: Grayscale Research, Cryptoquant from 1/1/2019 to 10/31/2022

Market

One indicator that typically precedes an explosive move in either direction is high implied volatility. Implied volatility is a forward looking metric that shows investor expectations for price volatility over a period of time. In the crypto space, this measure is typically calculated by looking at the demand for various dated options.

Historically, when implied volatility hits a low point, prices tend to move violently in either direction, as evidenced by the following chart from Glassnode:

Source: Glassnode, data as of 3/2021 to 10/2022

Past performance is not indicative of future results.

ETH Fundamentals – Decreased Sell Pressure

From a fundamental perspective, ETH’s slowing supply growth post-merge has been a partial driver to outperformance relative to BTC. As we have covered in prior newsletters and market bytes, the ETH Merge resulted in decreased issuance of ~14,000 ETH per day, or ~5M fewer ETH issued per year,¹ , since ETH miners no longer receive a base reward of 2 ETH per block mined. Due to the decrease in supply growth, as of 10/26/22, ETH’s inflation rate is currently at .007% a year, compared to 3.6% per year historically.²

Source: ultrasound.money, as of 10/26/22

In the past, ETH miners have had to sell ETH to cover operating expenses of their facilities, which meant daily sell pressure on the price of ETH. Without the constraint of miner sell pressure, ETH’s price is now potentially more exposed to larger positive movements.

BTC Fundamentals – Moving Off Exchanges

While BTC did not experience a dramatic change in supply flows like ETH, on-chain data reveals that:

Exchange BTC balances continue to decrease (positive)
Long-term holder supply of BTC is at an alltime high (positive)
Miner cost of production is hovering near BTC price (negative)

Decreasing exchange balances and increasing long-term holders³ are both signs indicative that buyers are moving BTC into their own wallets, which suggests that buyers may expect an extended period of increased prices. Increases in long-term holders have historically marked an accumulation phase since holders are moving off venues (i.e. exchanges) that would allow them to sell.

Source: Glassnode, Grayscale Research. Past performance is not indicative of future results. Data as of 7/2010 to 10/2022

One caveat to the increase in long-term holder supply is the threat of miner stress and insolvency. Currently, BTC miners hold ~78K BTC, which is ~$1.5bn worth. Given that bitcoin’s cost of production is around its current price levels, many miners are on the brink of not being able to make required payments, putting them at risk of default. Any upward movement in BTC price could incentivize miners to sell, which partially mutes buy pressure. There may be opportunities for sophisticated investors to provide liquidity to the ecosystem while benefiting from distressed prices—Grayscale recently launched a new offering intended to provide investors with exposure to the Bitcoin mining ecosystem, Grayscale Digital Infrastructure Opportunities LLC (GDIO)⁴. If you’re interested, please reach out to the Grayscale Team.

Source: Glassnode, data from 1/2018 to 10/2022, shows the aggregate amount of BTC held by various BTC miner pools

Macro

As we stated in our recent newsletter, conversations about the implications of a strengthening dollar on foreign economies continue to dominate the macroeconomic narrative. While the consensus seems like the current environment remains rough, some speculate that the Federal Reserve (Fed) might reverse their stance on interest rate hikes because of decreasing US Treasury liquidity.

Source: Bloomberg

Based on recent US data that showed higher house prices and lower consumer confidence, along with some Fed officials beginning to voice concerns about the pace of the hikes, investors seemed to hold onto the hope that there could be a pivot with the S&P 500 index climbing 4.74% and the Nasdaq index rising 5.22% from 10/21/22 to 10/25/22, alongside a rise in crypto asset prices over the same period.

Looking forward

Is the bull market back? Despite the recent rise, the macro environment still may not point to a Fed pivot just yet. Compared to the previous bear cycle in 2018, volumes of crypto assets remain much higher than they once were. Despite low price volatility, BTC and ETH total futures volume hovered at ~$50bn on average per day in September and October, with estimates that the total daily activity of crypto is estimated to be ~$100bn, or one-fifth the figure of US equities. Given such a sustained amount of volume in the throes of a bear market, crypto seems to be here to stay.

1. https://etherscan.io/chart/blocks

2. https://ultrasound.money/

3. Defined as wallets that hold coins longer than 155 days

4. Grayscale’s Digital Infrastructure Opportunities LLC is only available to Accredited Investors.

Some links are for articles which may sit behind a paywall and may require a subscription to access them in full

Grayscale Digital Infrastructure Opportunities LLC (“GDIO”) is an operating business and is not a registered investment company under the Investment Company Act, and Grayscale believes that GDIO is not required to register under such act. Consequently, investors do not have the regulatory protections provided to investors in investment companies. Further, GDIO is not a registered investment adviser or broker-dealer. GDIO does not provide investment, legal or tax advice.

GDIO will not hold or trade in commodity interests regulated by the CEA, as administered by the CFTC. Furthermore, Grayscale believes that GDIO is not a commodity pool for purposes of the CEA, and that Grayscale is not subject to regulation by the CFTC as a commodity pool operator or a commodity trading adviser in connection with the operations of GDIO. Consequently, investors will not have the regulatory protections provided to investors in CEA-regulated instruments or commodity pools.

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2022 Midterm Elections

Grayscale — Tue, 01 Nov 2022 12:00:00 +0000

Ahead of the 2022 midterm elections, new survey results indicate that many Americans are taking into consideration the state of the economy and where crypto fits in. How will these views impact their votes? We asked The Harris Poll to survey over 2,000 likely voters to find out.

The results illustrate that 60% of Americans surveyed believe the economy is on the “wrong track,” and 25% directly confirm that inflation and the current economic climate have made them more interested in crypto. As the total market cap of cryptocurrencies has increased from $389B on election day in 2020 to over $1T today, we’ve seen discussions about crypto in congress, attention from regulators, an executive order dedicated to digital assets, and advocacy from industry peers. Voters and lawmakers alike have been hearing about crypto, and it seems they’ve taken the opportunity to learn about the asset class.

Despite political divisions, the survey found broad familiarity with crypto across party lines and a majority of both Republicans and Democrats who agree that crypto represents the future of finance. There is an even stronger consensus among surveyed voters on the desire for greater regulatory clarity, as well as the importance of lawmakers staying informed about crypto. Explore our infographic to learn more:

MEDIA CONTACT

Members of the media are welcome to reach out to press@grayscale.com for more information, including access to survey data.

METHODOLOGY

This survey was conducted online within the United States between October 6-11, 2022, among 2,029 adults (aged 18 and over) by The Harris Poll on behalf of Grayscale Investments via its Harris On Demand omnibus product.

Data were weighted where necessary by age, gender, race/ethnicity, region, education, marital status, household size, household income, employment, and propensity to be online, to bring them in line with their actual proportions in the population.

Respondents for this survey were selected from among those who have agreed to participate in The Harris Poll surveys. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within + 2.8 percentage points using a 95% confidence level. This credible interval will be wider among subsets of the surveyed population of interest.

All sample surveys and polls, whether or not they use probability sampling, are subject to other multiple sources of error which are most often not possible to quantify or estimate, including, but not limited to coverage error, error associated with nonresponse, error associated with question wording and response options, and post-survey weighting and adjustments.

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GBTC Q&A: Legal Updates

Grayscale — Tue, 25 Oct 2022 18:04:54 +0000

For the more than 850,000 GBTC investors, converting to a spot Bitcoin ETF* would unlock roughly $4.5b of value as of October 11, 2022. This conversion would simultaneously subject GBTC to heightened regulatory standards and enhance investor protections. The SEC’s reluctance to further bring Bitcoin into the regulatory perimeter through spot Bitcoin ETFs has prevented U.S. investors from gaining the safe Bitcoin investment exposure they both want and deserve.

Our Chief Legal Officer, Craig Salm, leads Grayscale’s legal team working to pull together our arguments. Below, he answers some common questions about recent developments.

1. If Grayscale initiated the lawsuit in June 2022, what is the legal document that was recently filed?

The SEC’s decision to deny our application to convert GBTC to a spot Bitcoin ETF was delivered in June 2022. This was a disappointing outcome, but our team was prepared for all possible scenarios. On the same day, our Senior Legal Strategist, former U.S. Solicitor General, and partner at Munger, Tolles & Olson, Donald B. Verrilli, Jr., filed a petition for review to initiate the litigation process.

Since then, our legal team has been hard at work behind the scenes preparing for the litigation. The opening brief, submitted October 11, 2022, was the first substantive document submitted to the court to explain the legal basis of Grayscale’s arguments for the case.

2. What does Grayscale’s opening brief say?

To summarize, the brief outlines how the SEC’s disparate treatment of spot Bitcoin ETFs was arbitrary, discriminatory, and in excess of statutory authority under the Administrative Procedures Act and Securities Exchange Act of 1934.

First, the brief explains how the Commission has arbitrarily treated spot bitcoin ETFs differently from bitcoin futures ETFs, resulting in discriminatory treatment, even though both derive their pricing from the same underlying spot bitcoin markets. This conclusion is supported by quantitative market analysis, evidenced by this study.

Second, the brief homes in on a test the SEC has applied in the Bitcoin ETF context, and only the Bitcoin ETF context: the “significant market test”. The test seeks to identify a regulated market of significant size related to the ETF’s underlying bitcoin assets for which the listing exchange has surveillance sharing agreements. The ostensible premise of the test is that fraudulent or manipulative activity in the ETF would be detected from this surveillance of the underlying markets. However, this test has been applied arbitrarily: relaxed for bitcoin futures ETFs, but impossibly strict for spot bitcoin ETFs.

Third, the significant market test itself is deeply flawed and unmoored from the text of the Exchange Act, which requires the SEC to assess whether an exchange’s rules are designed to prevent fraud and manipulation—not to assess whether an exchange has entered into one particular kind of arrangement that may prevent fraud and manipulation. Any such test that would lead to the strange result of passing in the futures context but failing in the bitcoin context could not be sound.

Fourth, the Commission has not adequately explained why this test should be considered the only valid test for Bitcoin ETPs to satisfy the Exchange Act standards. It would be difficult to do so – the test was not required in the context of other commodity-based ETPs such as spot gold ETPs. Why should that test – a test that essentially rewards futures for being subject to two kinds of risk (futures markets risk and underlying spot market risk, which futures are based on), while penalizing spot for only one of those risks (spot market risk) – be the exclusive focus of the analysis for Bitcoin ETPs?

Fifth, regardless of the test, our proposal to convert GBTC to a spot bitcoin ETF satisfies the requirements of the Exchange Act because it is designed to prevent fraud and manipulation, while protecting investors and the public interest.

Ultimately, all of this is at the expense of US investors. “Although Bitcoin may be a relatively new asset, the legal issue here is straightforward,” the brief explains.

3. What’s an amicus brief?

“Amicus curiae” is Latin for “friend of the court.” These are individuals and organizations who are not directly participating in the case as parties, but wish to provide some guidance to the court based on their unique perspectives and expertise.

Amicus briefs can present arguments, facts or theories to the court’s attention that the parties have not already addressed. They can also supplement a party’s arguments, or highlight potential legal, economic or social implications of a particular outcome. Amicus briefs can also be helpful in cases involving highly technical or specialized areas of law, or complex statutory and regulatory regimes.

Well-argued briefs from industry peers, academics, and other respected authorities provide important, unique perspectives for a court to consider.

These documents were submitted following the 11,500+ GBTC comment letters that the investment community shared with the SEC from 2021-2022 during the conversion application process. We continue to be encouraged by the outpouring of public support we’ve received on this matter.

4. Who has filed amicus briefs to support Grayscale’s case?

In Grayscale’s case, five amicus briefs were filed on Tuesday, October 18, 2022, by amici representing a variety of diverse perspectives across the traditional finance sector; crypto trade associations, think tanks and advocacy groups; academics and former regulatory officials; and other key stakeholders.

The amicus briefs can be viewed here:

Amicus brief filed by The Chamber of Commerce of the United States of America.
Amicus brief filed by The Blockchain Association, joined by crypto trade associations, think tanks and advocacy groups.
Amicus brief filed by Investors Choice Advocacy Network, joined by economic and law professors, and former SEC, CFTC and OCC officials.
Amicus brief filed by Coinbase, Inc.
Amicus brief filed by NYSE Arca.

5. What are the next steps in the legal proceedings?

The appellate phase of the litigation process includes initial filings, briefings, oral arguments, and a final court decision. We’re currently in the briefing phase, which will last through the end of the year. At that point, we will have a better idea of where everybody stands going into oral arguments.

APPELLATE PHASE TIMELINE

June 29, 2022

The SEC denies Grayscale’s application to convert GBTC to an ETF.

June 29, 2022

Grayscale initiates litigation, filing Petition For Review

August 17, 2022

Court files Briefing Schedule

October 11, 2022

Grayscale files Opening Brief

October 18, 2022

Amicus briefs for Grayscale are filed

December 9, 2022

SEC Brief due date

January 13, 2023

Grayscale Reply Brief due date

February 3, 2023

Final Briefs due date

We’re committed to keeping GBTC investors informed throughout this process. For additional information, visit: https://grayscale.com/gbtc-lawsuit/

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Changing Climates in Crypto

Grayscale — Fri, 21 Oct 2022 16:45:44 +0000

Expectations were high for the Merge, the Ethereum blockchain’s long-planned transition from Proof of Work (PoW) to Proof of Stake (PoS) in September 2022. A few weeks later, it seems it may have already exceeded those expectations in one regard: sustainability. The Ethereum Foundation had estimated that removing the need for processing-intensive mining operations would cut the Ethereum network’s energy consumption by 99.5%. By at least one estimate by the Crypto Carbon Ratings Institute, actual consumption has dropped from a peak rate of 22,900,320 kwH/Year to just 2,600, savings of over 99.9%.

According to Matt Maximo from Grayscale’s research team, Ethereum’s energy efficiency has been part of the conversation from the very beginning. “Back in 2015, there wasn’t really a Proof of Stake consensus mechanism that worked yet,” he says. “The plan was to use a proven consensus mechanism that has worked really well for Bitcoin while we figure out how to do it.”

While the transition carried tradeoffs in decentralization, among other risks, Maximo explains that the choice was supported by the successful debuts of other PoS projects like Cardano, Avalanche, and Solana, as well as the scale of the energy savings. “You could run the equivalent of an entire Proof of Work mining farm, thousands of computers, on a single Raspberry Pi,” he says. And further improvements might be possible through innovation in areas such as light nodes.

It runs contrary to typical narratives around impact and sustainability in crypto, and it turns out that the Merge isn’t an anomaly in that regard. Blockchain sustainability is not an oxymoron. The ambitions of founders and other market participants align with broader market trends in environmental, social, and governance (ESG) investing to drive innovation (and maybe even do some good).

Brooke Stoddard, Director, Investor Relations at Grayscale believes that in an increasingly crowded and scrutinized ESG investing landscape, the potential for further impact-oriented innovation could help the digital asset sector stand out. “Crypto is a new technology. The longer the industry is around, it’s naturally going to evolve in response to attention from regulators, investors, and the general public,” he says.

Brooke Stoddard speaks at the 2022 BNY Wealth Management Conference

Source: Grayscale

“As millennials enter their prime earning years and take on more senior decision-making positions, ESG is certainly of increasing importance,” he says. “Even more than for individuals, this has been a sticking point for investment banks and other institutions which often have very public and very broad ESG mandates and commitments.” He points to recent research from Bank of America which notes that transitioning to Proof of Stake could help digital assets associated with Ethereum to attract interest from institutions previously restricted from owning Proof of Work tokens.

Provenance

Of course, portfolios are far from the only place people express their values. A poll commissioned by Google found that 82% of shoppers want to buy products from brands that align with their values, but 72% think that brands overstate their commitment to sustainability.

“If you’re shopping on a brand’s website and they make a sustainability claim, you shouldn’t just have to take their word for it,” says Jessi Baker, founder and CEO of Provenance. As an early Ethereum developer and self-proclaimed “ecommerce-first shopper,” she’s using blockchain to help brands build trust with discerning consumers.

Source: Provenance

It starts with verification by a third-party authority through Provenance’s software. Whether a product is vegan, fair trade, organic, cruelty-free, or anything else a company might want to demonstrate, Provenance enables verification from the supply chain to reach the point of purchase. “A blockchain is a really great facility for that because you’ve got this immutable record. No one can screw around with it. It’s open source. It’s independently brokered between the verifier and the brand that’s making the claim and the shopper looking to know the facts,” says Baker.

With 200+ brands and retailers signed on and investors including Grayscale’s parent company DCG, Provenance aims to build beyond credibility and transparency. Future plans include a cross-brand loyalty token to incentivize deeper engagement. “At the moment we rely on shoppers just wanting to shop with their values, to buy organic cotton versus not,” Baker explains. “There’s no incentive to do so other than just being a good person. That’s enough for some people but it’s not enough for everyone.”

Anode and the React Network

Meanwhile, using tokenomics to incentivize sustainability is central to the React Network, a project of Anode Labs. Cofounders Jason Badeaux and Dallas Griffin aim to build “intelligent flexibility to decarbonize power grids” by linking energy producers and consumers. Token rewards will help coordinate and incentivize small adjustments through connected smart thermostats, battery storage systems, and other digital energy-saving devices. “There’s a negative bias against crypto energy use. But we believe we can actually accelerate the rate of deployment of renewables in our power grid and reduce the emissions that it produces,” says Griffin.

Source: Anode Labs

While the utility of such a project may be most apparent during periods of high stress, such as the 2021 blackouts in Texas, Badeaux also predicts that the React Network could help grids benefit from greater efficiency during everyday power consumption. “Small adjustments end up being large in the aggregate and that can make a huge difference,” he says. “It’s just people taking up a more active role in the energy economy and our goal is to make that exceedingly easy.”

Their ideas have been well-received by energy investors and crypto investors alike, including Grayscale’s parent company DCG, and the Anode team is gearing up for a public launch by the end of the year. “We obviously very much believe in the power of this approach via the economic incentive of what crypto can do and the different techniques from a climate perspective. We think this is the only way that a business like this could be effectively built,” says Badeaux.

Griffin, a Louisiana native, describes the region as “ground zero for climate change in the US” and cites his firsthand experiences with coastal erosion and extreme weather as evidence of “the seriousness of the problems” that Anode is trying to solve. Jessi Baker was inspired to create Provenance by her frustrations with greenwashing as an online shopper. “As people globally figure out more use cases for crypto, the growing potential for long-run benefits makes the underlying asset or the crypto asset class attractive today,” says Brooke Stoddard from Grayscale Investor Relations.

“As the world gets more decentralized, in the sense that people are working remotely, in different countries and different time zones, building something with a token could start to look like an attractive option for founders compared to traditional funding,” says Matt Maximo from Grayscale Research. Ultimately, it’s important to remember that blockchain is a tool, albeit a powerful one. Whatever it’s used to build is going to reflect the values of the people who build it.

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FAQ: Our New Broker-Dealer

benjaminviagas — Wed, 05 Oct 2022 21:36:12 +0000

"The more things change, the more they stay the same."

- Jean-Baptiste Alphonse Karr

Starting in October 2022, Grayscale Investments, LLC’s (“Grayscale” or “Firm”) affiliated broker-dealer (“broker-dealer”) will take on some but not all of the responsibilities that were historically handled by Genesis Global Trading. This is the culmination of a long process. The affiliated broker-dealer has been SEC-registered and a member of FINRA since November 2021.

While this is an exciting achievement for our team and provides benefits in terms of efficiency and administration, it does not in itself represent a fundamental shift in our business. Here are some answers to common questions we’ve received so far:

What's the role of a broker-dealer for Grayscale?

In addition to managing our family of investment products, Grayscale is constantly developing new content to help educate investors about the merits of digital asset investing. Over time, we have built a team capable of serving as an authorized participant for our products and providing even more robust marketing and compliance functions. Having a dedicated broker-dealer makes it more straightforward to follow this path, all while continuing to respect existing rules and regulations for financial products.

How does this change Grayscale’s relationship with Genesis?

As many investors know, Grayscale has had a longstanding and positive working relationship with Genesis Global Trading, an affiliate company of Grayscale that is also under common ownership by Digital Currency Group. Although Genesis will no longer act as the authorized participant on Grayscale products, they will continue to be a liquidity provider for Grayscale. This allows our team to operate more autonomously and continue to create more efficiencies within the Grayscale business.

What is a liquidity provider?

When new investment comes into a given Grayscale product, our team is responsible for ensuring that that investment is fulfilled, by sourcing and selling tokens and securities. Working with a liquidity provider like Genesis enables us to tap into various digital asset or protocol markets to ensure that investments are fulfilled in a timely manner.

How does this support Grayscale’s future plans?

We’re not ready to share additional specifics, but our goal is to streamline, modernize, and enhance clients’ investment experience. We will continue to responsibly grow and scale against the backdrop of the rapidly evolving digital economy. This is just the beginning.

The post FAQ: Our New Broker-Dealer appeared first on Grayscale®.

5 Questions with Allison Westmacott

Grayscale — Fri, 16 Sep 2022 16:05:26 +0000

If Grayscale is a bridge between crypto and traditional finance, Allison Westmacott is like a bridge inspector, ensuring the span is sound and up to code. As Vice President, Legal & Compliance, Allison Westmacott works to ensure that Grayscale’s communications, actions, and offerings meet or exceed legal and regulatory requirements. (Fun fact: she and her team have read and approved every word on this website.) Recently, she took time to share insights from her career and her time with us

If her insights inspire you, explore open positions at this link.

1. What brought you to Grayscale? Walk us through your career.

After I graduated college, I briefly became a legal assistant; I’m not sure if it was the slower pace or that I wasn’t interested in the type of law being practiced, but it just wasn’t a fit for me. Around the same time, there was a lot of talk about additional regulation in the financial services industry and the hiring of compliance professionals. I quickly realized that this could be what I was looking for, and I started working at a comprehensive wealth management firm. Without going too far into the weeds, this was a great opportunity to really grow as a compliance professional in such a highly regulated industry.

From there, I went to Horizon Kinetics, where I became a true compliance generalist, working with a variety of investment products and supporting compliance functions across the entire organization. This is also where I first learned about Grayscale and all the interesting things that were happening in the crypto space. I had great mentors at Horizon who supported my learning and growth and wanted to see me continue to progress in my career. When the opportunity arose for me to join Grayscale, everyone at Horizon was really supportive, which made the transition that much easier and natural!

2. Your role has given you experience providing difficult feedback to colleagues. How do you approach this constructively?

I once heard compliance described as “the world’s longest four-letter word.” Compliance can evoke negative reactions in some, but it has always been important to me to make sure that my colleagues have the exact opposite reaction and understand compliance officers and the positive contributions we make to the business in general and to their role in particular. I believe the best compliance programs are the ones that are respected by employees and where the employees feel respected in return, and I have always strived to build those sorts of genuine and reciprocal relationships.

While a huge part of my job is explaining the implications of non-compliance and let’s be honest, sometimes saying “no”, I make sure that I am firm but clear in my reasoning and that I am always available to discuss any questions or concerns anyone may have. I know it sounds simple but generally it’s not what you say, it’s how you say it.

3. How do you think investors can most effectively mitigate risks when they’re exploring investment opportunities?

Read everything! The disclosures and fine print in investment materials can seem tedious, but they really are there to provide the extra information needed to help make financial decisions. It’s also important to make sure you know what your financial goals are and how much risk you can and are willing to take on. And if you’re not sure, never feel uncomfortable asking questions! If you have a particular question, chances are that someone else has had it before and there’s a professional out there who can help you find the answer. Staying informed is critical when choosing whether to proceed with an investment or not.

4. What’s a unique consideration when working at the intersection of crypto and traditional finance?

The pace of change! In traditional finance, a rule or regulation may not be updated for many years but in the crypto sector, the landscape is constantly changing. As a consequence, we have to keep up with what is happening not only on Wall St. but also in policy discussions in state capitols, Washington D.C. and jurisdictions around the world.

I know some may disagree with me here, but I think that digital asset managers and traditional asset managers are becoming more similar over time. Ultimately, we both care about investors and that doesn’t change if the industry you’re in is more traditional or digital asset-based – though I appreciate that now I get to wear a sweatshirt and jeans along with my compliance hat.

5. What advice do you have for someone looking to start a similar career?

Generally, compliance extends across an entire organization and because of this, you will most likely collaborate with individuals at all levels. Learn as much as you can about the industry and the specific rules and regulations for any specialized compliance functions you are involved with. At the end of day, you were hired to help protect the organization, its employees, and its investors so never be afraid to ask questions or seek more information.

The post 5 Questions with Allison Westmacott appeared first on Grayscale®.

Market Byte: The Merge

benjaminviagas — Wed, 14 Sep 2022 20:32:10 +0000

By Matt Maximo and Michael Zhao

Background on the Merge

Ethereum transitioned to Proof of Stake (PoS) on the morning of September 15, 2022 at approximately 2:43 am, marking a significant milestone in an eight year long effort to increase the efficiency and scalability of the network. The Merge is a historic event for Ethereum, effectively upgrading the network’s combustion engine to a modern electric motor.

For years, the Merge has been repeatedly delayed as developers worked through the technical and social challenges facing an upgrade of this magnitude. The Ethereum network today boasts a market cap of nearly $200 billion1 with more than $23.7 billion2 in token value locked on the network, leaving very little room for error. In the words of the Ethereum Foundation:

“Imagine Ethereum is a spaceship that isn't quite ready for an interstellar voyage. With the [Merge], the community has built a new engine and a hardened hull. After significant testing, it's time to hot-swap the new engine for the old mid-flight.”

What Investors Should Know

The new Proof of Stake engine powering Ethereum differs from the old Proof of Work engine by selecting who has the right to confirm the next block (rather than through competition amongst miners). In the new PoS consensus mechanism, validators must stake in increments of 32 ETH (~$51,000³) to become eligible to confirm blocks for rewards. Users can participate in earning yield by staking Ether with validators, with no minimum.

While the inflation rate was previously fixed at 2 ETH per block or 3.8%⁴, it will now vary depending on the number of validators on the network. Immediately following the Merge, the block reward dropped to approximately 0.23 ETH⁵ per block, resulting in more than 100 ETH⁶ removed from the supply in 10 minutes.

Prior to the Merge, staking yield was approximately 5%, consisting solely of the 0.23 ETH block reward. Staking yield is expected to increase now that validators are responsible for verifying transactions and earning the transaction fees for doing so.

A common misconception surrounding the Merge is that transaction fees on Ethereum have been reduced. The parameters for how transaction fees are calculated has not significantly changed, and therefore fees will continue to be a product of network congestion.

Why the Merge Matters

While it’s still early, we are beginning to see some optimistic shifts in the economics of the network for ETH holders. In addition, the supply of ETH could potentially become deflationary due to the fee burn from EIP-1559, implemented a year ago in August 2021.

For example, in the past seven days (pre-Merge), the network burnt approximately 10.5%⁷ of the block reward (or approximately 0.2 ETH per block). While the inflation rate of the network has since decreased, the burn mechanism remains the same. The significant reduction in block reward increases the likelihood of the ETH burn being larger than the block reward, resulting in a net decrease in ETH token issuance.

What's Next for Ethereum

The Merge brings some welcome upgrades to inflation, staking yield, and energy efficiency of the network; however there is still more work to be done. While staking yield has become more attractive, staked ETH will remain locked until the Shanghai Upgrade, expected several months from now. It also sets the stage for the next major scalability upgrade — sharding — which is expected to significantly improve the transaction throughput and scale of the network.

Glossary

Proof of Work (PoW) – a consensus mechanism in which miners expend computational resources to compete to validate transactions and are rewarded coins in proportion to the amount of computational resources expended.
Proof of Stake (PoS) – a consensus mechanism in which validators (known as miners in Proof of Work) risk or “stake” coins in order to be randomly selected to validate transactions and are rewarded coins in proportion to the amount of coins staked.
Validator / Validating – the stakeholder in a proof of stake network that confirms blocks on the blockchain in exchange for rewards.
Staker / Staking – users who lock up tokens with a validator to participate in confirming blocks in exchange for a share of rewards.
Block Reward – the payment to the user validating transactions on a blockchain consisting of transaction fees and newly minted tokens.
Blocks – subunits of a blockchain containing transactions.
Staking Rewards / Yield – the earnings generated via block rewards for contributing to confirming blocks on the blockchain.
EIP 1559 – A transaction pricing mechanism that includes fixed-per-block network fee that is burned and dynamically expands/contracts block sizes to deal with transient congestion.

Source: Coinmarketcap as of September 15, 2022 at 2:35 am EST
Source: Defillama as of September 15, 2022 at 2:35 am EST
Source: Coinmarketcap as of September 15, 2022 at 2:40 am EST
Source: Coin Metrics as of September 14, 2022 midnight close
Source: Beacon Scan as of September 14, 2022 midnight close
Ultrasound.money as of September 15, 2022 at 3:13 am EST
Watch the Burn as of September 15, 2022 at 2:35 am EST

The post Market Byte: The Merge appeared first on Grayscale®.

5 Questions with Dorothy Brill

Grayscale — Fri, 19 Aug 2022 21:48:54 +0000

Dorothy Brill leads Human Resources at Grayscale, guiding a company that’s grown rapidly during her tenure. But as she explains through the latest entry in our 5 Questions series, her responsibilities comprise not just finding and retaining talent, but building a lasting culture.

If her insights inspire you, explore open positions at this link.

1. What has your career been like, and what brought you to Grayscale?

My career has been an adventure. Non-linear for sure. Armed with a history degree, I turned down a few entry level job offers and instead moved to Colorado to figure out what I should do. I had never been west of the Mississippi so it felt very brave at the time. I became a better skier but realized you can’t figure out what you want to do by thinking about it. I moved to NYC and began working at a boutique investment bank in institutional sales and ran a client conference in Sun Valley Idaho. I was becoming well-traveled, but the journey wasn’t over. I then decided to switch careers, becoming a high school history teacher and coach, making less money than I had paid in my federal income taxes the year before while feeling more fulfilled.

Next, I went to Cornell for an MBA with the idea to become a Head of School, but that changed after studying GE in a business strategy class. I was impressed by the emphasis that Jack Welch placed on Human Resources (HR), not only as a necessity but as a strategic advantage. This was my a-ha moment. It connected what might have otherwise seemed like a disconnected set of experiences. I committed to HR through the rest of my time at Cornell, culminating with actually joining GE’s HR program on graduation. I have held roles in HR leadership ever since.

I’m lucky – my career has not been motivated by money, nor has it been motivated by some perfectly laid out plan. My career has been full of learning, partnering, and discovering what I’m best at. Taking a varied path through your career gives you a uniquely valuable professional outlook – just look at Dave LaValle! It’s about building yourself, and what I discovered was that I love helping others build themselves too. Grayscale is the next chapter, where I feel like a pioneer again, helping build something special with an amazing cohort.

2. As an HR leader, you have a unique perspective on the fabric of a workplace. What distinguishes Grayscale?

I’ve been at other financial institutions and recently two alternative investment firms that were all very different. Grayscale moves faster, and is more open and transparent than anywhere I’ve been. Furthermore, it’s incredibly entrepreneurial for an investment firm. I love the drive to succeed coupled with an incredible level of professionalism. Everyone understands that we are remaking an industry, and at the same time, the workplace is so casual and down to earth.

Early on, I was speaking with a job candidate who asked me, “what’s the catch? It sounds too good to be true, are people really so nice and is it really such a great place to work?” I’ve been here for a while now and I still haven’t found the catch!

3. As an HR leader, you have a unique perspective on the fabric of a workplace. What distinguishes Grayscale?

At Grayscale we’ve built a team that understands that the principles of collaboration and diversity are paramount. We want feedback and input from anyone because we know it helps enhance the decision-making process. Beyond gender, ethnic, and cultural diversity, everyone at Grayscale has unique thoughts and ideas. We want to maintain an environment where this doesn’t just live in people’s heads, so we seek different perspectives, we use our voices, we listen to each other and ultimately we establish shared responsibility for shaping our business and culture.

4. How can HR leaders encourage employees to carry a healthy and supportive culture?

Employees make the culture and have responsibility for helping keep it healthy. HR leaders need to listen and help build bridges at times. The diversity we seek means, of course, there will always be a diversity of reactions and opinions. Not every decision or every tenet will make every employee happy. But creating a good culture starts with ensuring as a baseline that everyone is comfortable and believes they have a voice. HR can help clarify why decisions are made. Even if one person’s point of view in the end doesn’t prevail, a supportive culture embraces every member and accounts for disappointment. It’s an act of balance. It’s life.

5. What advice do you have for someone looking to start their career in crypto today?

First off, if you already know you want to get into crypto, you can start by looking at open positions on Grayscale’s job board! If you’re still wondering if it might be right for you, here’s what I’ve seen: You have to have imagination, a pioneering spirit, and be incredibly adaptable. At Grayscale, we need imaginative colleagues to see the future we’re building together. A pioneering spirit means you’re willing to take risks, can venture into new spaces without guarantees, and will act quickly in the face of danger. Crypto markets can be volatile and we aim to steer and protect the enterprise from the unexpected. Finally, only a very adaptable person will be comfortable in a rapidly evolving industry. If you like a safe, predictable routine, then working in crypto is probably not for you. Instead if you see changes as opportunities, enjoy wearing a lot of different hats, and can constantly pivot, invent, and reinvent… then you will love the adventure!

The post 5 Questions with Dorothy Brill appeared first on Grayscale®.