Grayscale CEO Michael Sonnenshein talks suing the SEC, crypto winter, recession, the U.S. dollar, and more

Grayscale CEO Michael Sonnenshein joins Yahoo Finance's Editor-in-Chief Andy Serwer at Yahoo Finance's 2022 All Markets Summit.

Video Transcript

ANDY SERWER: Welcome back to Yahoo Finance's All Markets Summit sponsored in part by Grayscale. It's been a volatile year for stocks. And crypto is no exception. I'm here with Grayscale's CEO Michael Sonnenshein. Michael, great to see you.

MICHAEL SONNENSHEIN: Thanks for having me. Great to be here.

ANDY SERWER: So a lot to talk about. But why don't we start off with talking about your lawsuit that you filed against the Securities and Exchange Commission? And get us up to speed on the whole legal dispute there.

MICHAEL SONNENSHEIN: Sure, so Grayscale operates today the largest bitcoin fund in the world, Grayscale Bitcoin Trust, ticker GBTC. It has been trading publicly since 2015. And we have long held conviction that this should be an ETF. We want to work towards having it become an ETF and work proactively with regulators.

We had filed an application to convert it to an ETF. And that was rejected by the SEC this summer. The same day the SEC rejected that application, we filed a lawsuit challenging that decision.

And we really feel that this lawsuit is not anti-- it's not just about Bitcoin. This is about putting forward straightforward common-sense, legal arguments that really ensure that investors are protected and that the SEC is acting within their mandate.

And so since that time, our legal team has been behind the scenes working furiously on the case. And just this last week, we filed the opening brief for the lawsuit.

Some new arguments outlined in there. And probably the most significant of them is this idea of a significant market test.

The SEC created the significant market test really out of nowhere. We've never seen them do this before for any other product, any other commodity that we've ever seen. And it applied it very, very stringently to spot Bitcoin ETFs, like GBTC, but very leniently to Bitcoin futures ETFs. Hence why we have several of them on the market.

So the SEC is really acting outside of its authority under the Exchange Act. And that's really one of the strongest arguments. But again, this is not just about Bitcoin. This is about straightforward, common-sense arguments when it comes to the SEC.

ANDY SERWER: Michael, can you put yourself in the shoes of the SEC, though, and understand their argument? I mean, first of all, they're looking to protect investors. But why are they taking this position against your ETF, do you think?

MICHAEL SONNENSHEIN: Andy, I can't understand why. As I said, this product is trading every single day-- hundreds of millions of dollars. Over 850,000 investors in the US own shares of GBTC. All 50 states represented.

You have bills passing across the floor of Congress, both sides of the aisle supporting it. You have companies moving outside the US because our regulatory landscape isn't catching up fast enough with the innovation taking place here.

Why our regulator would not take the opportunity to bring Bitcoin, to bring investor protections closer into the regulatory perimeter, I just don't understand. It's exactly what they're here to do.

ANDY SERWER: I want to get back to that a little bit in a second. But first of all, maybe you can remind us or tell us a little bit more about Grayscale. I mean, you have these ETFs. What else?

MICHAEL SONNENSHEIN: So the Grayscale family of products today has now 17 digital currency investment products. So really, our mission has been about lowering the barrier to entry for investors to access crypto.

So we have a whole family of publicly traded securities that investors can buy and sell crypto exposure in their brokerage accounts, retirement accounts, you name it. We also launched an ETF earlier this year, the Grayscale Future of Finance ETF, which was our first foray into an equities offering. And I think as we move through this crypto winter, we're starting to explore some really new offerings and new wrappers and new ways of giving investors access to the digital economy more broadly.

ANDY SERWER: You mentioned the crypto winter. I'm glad you brought it up because now I want to ask you more about that.

MICHAEL SONNENSHEIN: Sure.

ANDY SERWER: I think Bitcoin is down, what, 70% year to date. Why is that? And is it really the case that it goes down then goes back up to new heights every single time? Or maybe this time is different.

MICHAEL SONNENSHEIN: So this is a crypto winter. And we call it a crypto winter because we're talking about sustained lower prices across the crypto ecosystem. We've been here before. And unfortunately, Andy, I'm going to tell you and anyone tuning in, we're probably going to be here again at some point, right? And that's the kind of cycles that the crypto asset class has.

We see it go on to take out new all-time highs, comes to some level of correction, starts to form a new base. And during these times, it's really a time to build when you see this retraction.

What we're hearing from investors is actually not that they're shying away from the asset class. Quite the contrary. I think you and I now for years have been talking about diversification within this asset class.

People have that core Bitcoin, core Ethereum position. But they're now looking at things like infrastructure, for example, right? How do they marry that crypto exposure they have in tokens with the underlying infrastructure that powers these protocols?

So we just recently launched a new offering, the Grayscale Digital Infrastructure Opportunities Fund. And that really gives investors the opportunity to invest in Bitcoin mining, for example, right? An industry that maybe took on too much leverage. And we're really giving them a distressed opportunity.

So this crypto winter-- too soon and too tough to predict how long it will last. But investors are not shying away from the industry and, if anything, looking for new opportunities.

ANDY SERWER: But there is all kinds of risk. I mean, hackers have stolen, what, $3 billion of Bitcoin and crypto coins this year. How do we protect against that?

MICHAEL SONNENSHEIN: It really is a question of who you're working with as you think about crypto exposure, right? If you think back to the early days of the internet, many companies were building products and services. And the regulatory environment hadn't caught up with it yet.

You didn't see the emergence yet of some of the Web 2.0 applications that we today couldn't live without, things like Amazon, things like AWS, Google, you name it. And I think we're in that kind of a phase when it comes to crypto, where we're learning lessons as an industry.

There are certainly going to be missteps. But as an industry, we get stronger. We become more resilient. And we start to weed out bad apples over time.

ANDY SERWER: What is Bitcoin for? And maybe this gets to the SEC situation. Is it an investment? Is it a currency? And is it losing market share to Ethereum in things like NFTs?

MICHAEL SONNENSHEIN: It's a great question. So Bitcoin depends on where in the world you fall, right? Over the past couple of months, if not over the last year, you've seen all kinds of volatility across a variety of asset classes. Massive movements in fiat currencies all over the world, sometimes to unprecedented levels of volatility that we've just really never seen before.

I think here in the US and in other developed economies, you're seeing Bitcoin being used more as a store of value or as an investment. I don't see necessarily yet how or why we're using Bitcoin day to day in our everyday transactions, buying a cup of coffee, things like that.

But if you wake up in other parts of the world today and the currency that your government issues, that you use to buy that cup of coffee, lost 20% of its value last night, well, something like Bitcoin, something that's nongovernment backed, something that's nongovernment issued actually becomes something really attractive. And so as you're seeing these different macro factors continue to change the landscape, I think depending where you are in the world, Bitcoin will mean different things to different folks.

ANDY SERWER: Is Ethereum getting more market share than Bitcoin at its expense?

MICHAEL SONNENSHEIN: Well, no, not necessarily. I think there are today, last count, over 17,000 different digital assets out there. And so something that we're certainly committed to at Grayscale is continuing to make sense of that universe for investors.

ANDY SERWER: Right.

MICHAEL SONNENSHEIN: Where do you even start when there are so many options available to you? And there is a world today and a future state where multiple digital currencies will co-exist with one another, or digital assets. They'll have different use cases, different addressable markets, and different prices.

And Bitcoin is going to coincide with things like Ethereum. And it's going to coexist. And it's OK that they coexist and have different use cases in different markets.

ANDY SERWER: What about coexisting, though, with fiat currency? I mean, what do you see 20, 30, 40 years down the road? Are we going to have fiat currency and cryptocurrency coexisting?

MICHAEL SONNENSHEIN: Well, I think we're certainly seeing new use cases emerging out of this asset class every day. We are certainly moving towards the tokenization of a lot of new kind of ideas and a lot of things today that may have frictions or may be not the most efficient types of settlements or oversight of ownership or perhaps authenticity. That's one of the things that NFTs as a technology are helping us to understand.

So I think from an investor standpoint, we are certainly moving into that realm where a pie chart that an investor has, which is diversified across equities and fixed income and commodities, certainly is going to have a slice that goes towards crypto or digital assets more broadly. How diversified that'll be depends on who the investor is and how they actually start to think about crypto affecting the other things they invest in.

ANDY SERWER: I mean, is crypto really better than the US dollar?

MICHAEL SONNENSHEIN: [CHUCKLES] That is a loaded question, Andy.

ANDY SERWER: Right.

MICHAEL SONNENSHEIN: Well, I think that the US dollar has certainly maintained its dominance as the global reserve currency. No question about it. Arguably, Bitcoin is one of, if not the most, incredible invention that we've seen over the last, call it, two decades or so.

It was literally invented out of thin air and has now been used by hundreds of millions of people around the world. And any time anything challenges it, it somehow becomes even stronger and more resilient.

So I think it's too early to say. And there's also not necessarily a winner between those two, right? The fiat world, the crypto world, these are two worlds that can and will likely coexist.

ANDY SERWER: Yeah, when you get ransomware attacks, they want to get paid in Bitcoin, though, right? I mean, how do you get rid of that stigma?

MICHAEL SONNENSHEIN: Not really. I mean--

ANDY SERWER: That's not true?

MICHAEL SONNENSHEIN: --I kind of think that stigma is dying, Andy. It really is. You've got to understand that because the Bitcoin blockchain is immutable and traceable, unlike, you know, exchanging physical dollars for someone doing something nefarious, Bitcoin would be a really bad mechanism to use if you didn't want to get caught doing something. So I don't think that is as nearly as prevalent as it once was, and for that very reason.

ANDY SERWER: And how do you look at some of the experiments that some of these countries have undertaken with crypto? I mean, like El Salvador, maybe a mixed picture there.

MICHAEL SONNENSHEIN: I mean, it's one of those places in the world, right, where a lot of these economies have been either dollar based. Or they're not doing a terribly great job managing their own currency.

A lot of people have moved into leveraging mobile technology. So they're living their lives on their phones. It doesn't have to be a brand new iPhone or a brand new Android. But they're moving into a state where the connectedness of cell technology is bringing them together. And their banking either hasn't caught up or isn't allowing them to have access to those types of services.

And so Bitcoin and these types of technologies are actually allowing people to enter the conversation, create savings, pass money to the next generation, things that just the traditional banking system may not be catching up to in certain parts of the world.

ANDY SERWER: I mean, is it possible then that because we're in a place in the world where we rely on the dollar and Fiat and legacy systems are so prevalent, that we don't see the change coming in the rest of the world?

MICHAEL SONNENSHEIN: I think that's one of the unique things about being at Grayscale. [CHUCKLES] Being at our parent-- part of our parent company, Digital Currency Group, we have investments in over 40 countries around the world.

And so we don't sit in a room all day and tell each other that Bitcoin is happening. We actually have companies that are building products and services in every corner of the globe and seeing how volumes are changing, see what customer adoption looks like, seeing how often people transact. And the numbers tell a really compelling story.

ANDY SERWER: And we've talked about this before, Michael. But what about the correlation between just, say, plain vanilla equities and crypto? And we'll-- let me answer-- let me have you answer that. And we can get to other correlations.

MICHAEL SONNENSHEIN: So it's a great question because the narrative on this has flipped very recently. When you look at where and how crypto has historically been categorized, it actually has followed tech stocks and a lot of the momentum trades that we've historically seen in the equities market.

Some of those assets are down 70 to 80-plus percent year to date. And what's interesting is that even though crypto has fallen precipitously, in Bitcoin in particular, it's actually now been trading very tightly in this band. And so the volatility that you're seeing in crypto has come down tremendously.

So a lot of folks are now looking at that narrative and saying, well, is that going to hold up? When crypto does wake up from this crypto winter, is it going to continue to follow those types of trades and be that kind of momentum? Or is the macro environment really reshaping the way people might think about crypto's role in a portfolio?

ANDY SERWER: What about the economy then, Michael? I mean, a lot of talk of recession. And there's a crypto winter. Correlated? Coincidence? What do you think?

MICHAEL SONNENSHEIN: Probably more coincidental than not. I mean, it's early days, right? Because you do have some folks calling for a recession and other folks not so much, just saying that this is just a relatively momentary blip in the grand scheme of things. And eventually, we might see things move to all-time highs in the not-too-distant future.

I think crypto does this. It's done this multiple times. And unfortunately, it'll probably do it again. We've seen drawdowns of 50, 60-plus percent before. And again, what hasn't killed crypto has made it stronger.

ANDY SERWER: How has your business-- as a CEO looking out and seeing growth, customer relationships, are you seeing a slowdown maybe that would have to do with overall economic activity rather than adoption of crypto?

MICHAEL SONNENSHEIN: Well, certainly investors are continuing to average down on their positions, right? I think a lot of investors realize that any time you see this type of pullback and your conviction on something hasn't fundamentally changed, that's something you should be taking advantage of, right?

And so investors are not shying away from that perspective. Investors are now, also I'd say, as informed as they've ever been on the asset class itself. And so they're always looking for new opportunities to either diversify their exposure. And we're starting to see that they're developing interesting narratives around different sub themes or subcategories of crypto, much the same way they do around the equity space.

ANDY SERWER: And final question, Michael. Talk about the demographics of people who are buying crypto and maybe how that's changing and some trends you've seen recently.

MICHAEL SONNENSHEIN: So the stigma that crypto is only for young males--

ANDY SERWER: Rose?

MICHAEL SONNENSHEIN: --it's over. It's over. What we've seen is that crypto has continued to pervade men and women. We've seen it actually creep up into older and older demographics.

They realize the staying power of the asset class. And as a result of that, the momentum has been there. And I think it will continue to move into other demographics, as well.

ANDY SERWER: Michael Sonnenshein, CEO of Grayscale, thank you so much for joining us.

MICHAEL SONNENSHEIN: Thank you.