How Could Spot Bitcoin ETF Approvals Impact the Crypto Market?

Bitcoin saw a massive rally in the last 24 hours amid investor optimism over spot Bitcoin ETF approval. This comes as Galaxy Digital CEO Mike Novogratz recently said on C NBC that he thinks the Bitcoin ETF could be approved as early as this year. Joining us. Now to discuss is the head of firm Galaxy Digital Alex Lord. Welcome to the show. Thanks for having me. Great to be here. A lot of ETF excitement going on here in Washington and elsewhere as displayed in the markets. What do you make of this rally? Do you think we're going to see an approval this year? I do think we'll see an approval this year. I think there's a very high likelihood. I mean, we can't know for sure. Obviously, analysts are predicting that like even by January is a high likelihood. I think the rally is, there's a lot of pent up anticipation. There were a lot of people that were not positioned well for the rally. I think in general, there were also some interesting idiosyncratic market factors that helped cause explosiveness in the market yesterday, particularly a large portion of the options market and the dealers being short gamma, which causes them to need to buy spot Bitcoin as price moves higher, which I think contributed to that real explosiveness you saw. But broadly, I think a lot of people realize this is a great time for an ETF the issuers that are applying for it are mature and ready. The market structure has improved and matured significantly and investors want it a lot of analysts and market watchers really think that the approval or the hope, the hope for an approval of a Bitcoin ETF will be the next catalyst, catalyst for a bull run. Do you agree with that? And what else are you watching? Yeah, I think, you know, we did an analysis we actually published today that suggested and this is very based on very conservative assumptions that we could see about 15 billion in initial inflows in the first year two generic ETF products, right? Regardless of which they are how many and that goes up to 26 and then 38 billion of inflows in years two and three. That's I think actually pretty conservative estimate. But um I I honestly think from a catalyst standpoint that is obviously huge. There's a thing about this, there's a giant segment of investors, particularly in the wealth management sector. It's 47 trillion of A U in the US alone that really don't have access to give their clients exposure to Bitcoin, right? They they manage maybe um accounts for hundreds of clients portfolios. They, they can't, they, they're on perhaps a bank or broker dealer platform. They can't access, say the trust products that exist or the cash based futures are not suitable for their fees or roll costs or decay or whatever and they don't really have access. So I think that alone represents a huge total addressable market for Bitcoin. I would just point out also on the calendar, you have the having the Bitcoin having in April coming up next year. You know, I think in absolute terms, like the actual supply reduction is pretty small at this point. But as a narrative event which last time, of course in May 2020 coincided with historic levels of monetary easing really could make Bitcoin shine in that environment as well. Besides the ETF approval, any other regulatory catalysts or what needs to happen from a regulatory perspective to help the trad five players feel more at ease operating in the cryptos sphere. Well, I think there's obviously there's a bunch of stuff for the broader crypto complex, right? There's stuff from the sec, there's stuff from fincen, there's proposed rule makings, there's legislation in Congress, I think when it comes to Bitcoin, in particular, some of the main thing I think on people's minds today is its use in illicit finance following the attacks by Hamas and Israel and some reporting. I think in my view, incorrect reporting that they got a lot of money from Bitcoin I think a lot more education has to happen to explain not only what the real facts are about their use of Bitcoin, you know, but also so just real strong viable policy options that can help prevent the use of illicit illicit use of cryptocurrencies like Bitcoin. No one wants to see that happen, but that is top of mind right now in Washington. Yeah, it's interesting you bring that up. We had Senators Lemus and Gillibrand on the show earlier. Speaking about illicit finance and crypto being used for illicit finance. What kind of misconceptions or maybe unpack the misconceptions a little more for us? And why do you think that that's so sticky when it comes to the crypto conversation? I mean, it's a potent narrative, right? I mean, no one wants no one wants terrorists or anyone else bad to use to have money in general to fund their operations. So it's pretty easy to, to bring that narrative up. There's no doubt that bad actors use cryptocurrencies like they also may use cash or other instruments. I think in general, the the criticism of Bitcoin as a great currency for illicit finance is very misguided. Bitcoin is the most traceable currency ever created. When you talk to the professionals who do forensics in the Cryptocurrency space. They tell you that the numbers are much less than some have argued. They are in terms of the amount that's used elicit finance, tiny percentage of also transactional volume on these networks, probably smaller than traditional cash instruments, right. So I think there's, there's a misconception both on the actual empirical data but also on the theory behind it, right. Most investigators you talk to will tell you that it's very, it adds a lot to the investigative potential for an investigation when criminals or, you know, bad actors use cryptocurrencies because of the permanent traceable record of the public Blockchain. Do you think we're going to get crypto legislation this year? That's a good question. I don't know. I would say, I think it's just given the calendar. I mean, in particular, we're pretty close to the end of the year, right. There's questions about, right. We have a potential government shutdown again looming ahead of us. We don't at the moment have an elected speaker of the house. So I would say most likely not particularly the comprehensive types of legislation we've seen whether it's sort of a comprehensive regulatory pact or like maybe Stablecoin legislation. Those are pretty big deals. I just don't see that getting done. I think there are some items that are smaller that could get added to something and could become law like the Proof Act, which I think we're going to talk about. Now, you bring up the fact that we don't have a speaker of the house. We learned recently that Tom Emmer is Republican nominee. Of course, he's crypto friendly. We've had him on coin desk T VA bunch. Do you think that that might help accelerate legislation? Um I think Representative Emer is a great advocate for the Cryptocurrency industry and just financial innovation in general. I also um he's also one of the most knowledgeable of the technology and the financial, the impacts that it can have positive impacts it can have for financial services in capital markets in the United States. It can only help, I think um in general, I mean, we just have to wait and see. I I don't think it's gonna like again, just the calendar is very constrained at the moment for the rest of this year, but it can only help if he's elected. All right, you brought up the Texas Proof of Reserves bill. You've been following that quite closely, talk to us about what's going on there. Yes. So actually this is the Proof Act that was just introduced in the US Senate by Senators Tillis and Hickenlooper last week, Texas has already passed, I believe a Proof of Reserves law which is great. So the Proof Act mandates that any entity that custody crypto assets on behalf of a of a customer, right? So that would include clearly like crypto exchanges custodians that they submit on a monthly basis, a cryptographic attestation of assets held under custody combined with a formal audit of their liabilities and it I think would add significant consumer safety and transparency to the industry and it would directly address I think some of the blow ups from last year in ways that some of the comprehensive legislation sort of get at. But like this is much more direct and I, and I really, in particular, really applaud Senator Hickenlooper and Tillis for coming together and acting here because this is something that is an industry best practice. But this bill would really put standards around how to do that and bring that safety to Americans around the country. All right, we've got to talk about the IRS. We have to talk about taxes, CDT V all day. They recently proposed a rule to define crypto brokers and how their customers should pay taxes. You noted back in August that the IRS broker rule proposal puts defy in a tough spot. Talk to me about what you mean. Yeah. So the broker rule was part of the 2021 infrastructure bill debate. You may remember in like August or so of 2021 and it got added and it expanded the definition of a broker to include potentially crypto asset related entities. And then the IRS now has proposed rule making around that new authority. I would say generally this requires that um certain types of crypto asset entities be considered what's called a facilitative service. So this is a an entity that helps other individuals, trade, facilitate the trading of assets. Um And they'll be required to submit both to their users, but also to the IRS tax reporting on their users basically profit and loss. Um which is what say, like, you know, traditional brokers do, right? I think the issue is to do that reporting. Um You have to know your customers, right? You have to be able to know who they are, you have to trace them and, and most of defi doesn't have or even can't have by the way, it's designed this type of reporting. And I think it is possible that as you'll see different classes again, it depends on the specifics of how these defi platforms operate. I think if you launch something like Satoshi Nakamoto, no web front end, uh non upgradable smart contracts, no fees. No dow. I think that's probably not a facilitative service, but most of DFI today doesn't look like that. And so I think it has the potential to create effectively a great American firewall where some projects that either can't or decide not to comply, become only move offshore in some way versus others start adding KYC to their web front ends or even potentially at the smart contract level. I really encourage people to go look at the proposed rule making from IRS because they go into great detail about different types of examples of defi applications that would or would not be a facilitative service. It's quite detailed. So it's not a lack of clarity. That's the issue here. It's, it's perhaps the potential sweeping nature of it and the imposition of, of reporting requirements that perhaps large parts of the industry of the on chain industry can't actually comply with. All right. Got to wrap. But quickly before we go, we've mentioned a lot of different areas of this industry that is looking for more regulatory clarity. We talked about defy, we talked about stablecoins, we talked about illicit finance in your opinion. Just before we wrap here. What's the most important topic you think regulators should be focusing on? I really like the pro a thrust on consumer safety. I think this is in ensuring the solvency and transparency of the platforms that people actually use in the United States. Um does more to prevent the types of blow ups we saw like FTX than almost any other proposals I've seen. Um So I hope people can get behind that. Alex. Thanks so much for joining us on this special um special episode on CO TV. Yeah. Thank you so much. That was Galaxy Digital Head of F Wide Research, Alex Thorne.