WBD023 Audio Transcription

Bitcoin Institutional Investment with Michael Sonnenshein from Grayscale

Interview date: Friday 29th June

Note: the following is a transcription of my interview with Michael Sonnenshein. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, we discuss the interest from institutional investors, the impact of the bear market on sentiment and how Grayscale handles custody for $1.5bn in assets under management.

“The taboo nature of the asset class has been shrugged off…Goldman Sachs invested with Digital Currency Group in Circle and as soon as they did that it provided enough cover for pretty much every other bank or financial institution to get involved in the space.”

— Michael Sonnenshein

Interview Transcription

Peter McCormack: Hi, Michael.  Welcome to London.  You're here for the Blockchain Alternative Investment Conference, so what are you here for and who are you speaking to?

Michael Sonnenshein: Thank you for having me.  Yeah, in London for just a couple of days.  Certainly, I was here to participate in and speak at the Blockchain Alternative Investment Conference, but I think our point of view, and as I travel and speak at these types of events, it's always on providing context for institutional involvement in the space.

Peter McCormack: That's an area everyone's interested in right now because, as we've had a price crash, people think the institutional investors are going to save us?

Michael Sonnenshein: Everyone does seem to think that and I think we have to bifurcate the institutional universe.  I think some people think of institutions as solely being endowments and pensions and sovereign wealth funds, but that also includes family offices and hedge funds and all other types of entity investors.  I think my team, Grayscale Investments in New York, were experiencing institutional adoption of our products pretty materially.  Year to date, we have raised now over $225 million in new assets this year and almost all of that is coming from institutional investors, primarily hedge funds.

Peter McCormack: Wow.  Just for context for those who don't know, can you explain who Grayscale are and what your background is?  I notice on your LinkedIn you've gone up through the ranks at Grayscale, you're now Managing Director, but also you have a background in banking.  So, if you can give people some context, give them your background?

Michael Sonnenshein: I'm a banker by trade, by background.  So, after my undergrad, spent time at Bank of America and then got into wealth management at Barclays as well as at JP Morgan, primarily covering middle market hedge funds and family offices and really, it was running the gamut from equities to sovereign CDS and everything in between.  When I was getting my Master's degree, I was ready for a new challenge, wanted to do something different; thought I would actually go work for a hedge fund and had a good offer to go work for a hedge fund, and then had the fortunate opportunity to meet our founder and CEO, Barry Silbert. 

Barry at the time was running a company called SecondMarket.  SecondMarket, for those of you who don't know, is a platform that was providing liquidity to assets like Facebook and Twitter and LinkedIn before these companies went public.  However, Barry had personally got very excited about digital currency, starting in 2012.  He and Tim Draper were probably two of the very first angel investors to start putting money to work in the space.  Barry had such an interest in digital currency and Bitcoin specifically that he convinced the SecondMarket board to allocate some of the company's resources into the digital currency arena.  That laid the groundwork for what eventually became Grayscale, starting our asset management business. 

But if you fast forward to the end of 2015, we sold SecondMarket, because there was so much brand confusion going on.  SecondMarket was servicing private companies and on the other side of the SecondMarket house, we had started trading digital currencies and then started incubating our asset management business.  So, SecondMarket was purchased by NASDAQ and post the SecondMarket sale, we started a new firm called Digital Currency Group.  So, Digital Currency Group is a holding company, it's a C corp and it sits on top of all the activities that we do today. 

When we brought Digital Currency Group together, it was really the combination of those businesses that were started under the SecondMarket umbrella as well as Barry's personal angel portfolio.  That includes investments and the seed rounds of companies like Coinbase and Ripple and BitPay and Xapo and some of the best companies that are building the infrastructure for the space. 

When DCG formed, we did a small capital raise and so were fortunate to call investors like OMERS, Western Union, Mastercard, the New York Life Insurance Company, Transamerica, a couple of more traditional VCs like Bain and RRE and FirstMark.  But the idea was to do a capital raise primarily really from strategic and corporate investors.  So, if you look at DCG today, it basically has three parts that make up the DCG umbrella: number one is venture capital, so DCG is far and away the most active, the most prolific VC in our industry.  It's invested now in 130 Bitcoin and blockchain-related businesses in 30 countries around the world.

Peter McCormack: I've seen them on the DCG website.

Michael Sonnenshein: Yeah, you can always keep track of them at www.DCG.co.  Second, is our balance sheet; so the balance sheet at DCG has a heavy allocation towards digital currencies in addition to cash and everything else you'd find on a balance sheet.  So, there are several conviction currencies for DCG, which include Bitcoin, Ethereum Classic, Zcash and then two newer currencies: one is called MANA, it's the currency from the Decentraland project, and another one is called ZenCash, which is a privacy focus coin. 

Then the third bucket of assets are the subsidiaries, so Digital Currency Group is parent to three subsidiary businesses.  The first is a company called CoinDesk, which we acquired.  CoinDesk is a news, research and events platform, great group of journalists at www.coindesk.com who are always writing about the space.  The second subsidiary is Genesis which is an SEC and FINRA-registered broker-dealer.  Then the third business, which is the business that I run for us, is called Grayscale Investments. 

So, Grayscale is an asset manager that is purely focused on digital currency.  The models that we look at are things like iShares and WisdomTree, where we'd like to build a whole family of products that facilitate access to digital currencies.  Today, the Grayscale family has eight products under its umbrella.  Seven of those products are single asset vehicles, so we have a product for Bitcoin, for Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, XRP and Zcash.  Then the eighth product we have is our first diversified offering which is called the Digital Large Cap Fund. 

Peter McCormack: Wow, great, so there's a lot going on.  A first question that brings to mind for me is volatility of price; how does that affect the businesses; is it damaging?

Michael Sonnenshein: I wouldn't say it's damaging.  If we look at the end of 2017, the Genesis trading desk had such a tremendous November and December last year for breaking through volumes that they were trading on an OTC basis every single day.  The Grayscale business would be hard to measure at that time last year, because one of our vehicles, our main vehicle, the Bitcoin vehicle, was not open for subscriptions at the time; we reopened in December last year.  That really hasn't stopped us. 

Again, the first part of this year, we're now in mid-June raising over $225 million so far this year, I think investors are very eager to allocate to the space and they see the convenience and cost-effectiveness of expressing a view on digital currency through one of the Grayscale products.

Peter McCormack: That $225 million, that's this year, but what is the total you now have under management?

Michael Sonnenshein: We now have about $1.5 billion.  It makes Grayscale the largest digital currency asset manager globally.

Peter McCormack: Equally, would that have been $3 billion at the end of January?

Michael Sonnenshein: Over $3 billion.

Peter McCormack: I guess the impact on your team is the fact that it's accruing 2% to 3% commission, right?

Michael Sonnenshein: Yeah, so we take our fees on all of the products by accruing them in the underlying coins.

Peter McCormack: I guess for you guys the fee has changed quite significantly from January to now?

Michael Sonnenshein: It has, but I think we're still as excited as ever and I think a lot of what's driving our momentum and our sentiment is seeing that institutional interest and how much money we've raised so far this year.

Peter McCormack: You're not seeing with the institutions any reluctance to invest because of what's happened over the last few months?

Michael Sonnenshein: If anything, the opposite.  I think a lot of investors are looking at this very opportunistically, being able to average down or leg into their trade over a series of time.

Peter McCormack: How do you interpret the current price levels?

Michael Sonnenshein: We'll be the first to say that Bitcoin, all these assets will likely have a binary outcome, which is why people should not be investing more in this asset class than they can afford to risk.  Either it becomes all these wonderful, amazing things that we think it can be or it won't.  The reason why we are of the belief that we think it will is because there are so many amazing use cases and so many that we haven't even discovered yet. 

All that being said, because digital assets like Bitcoin are open-source protocols, as other things present themselves as a challenge to Bitcoin or any of the other open-source projects, we think that they stand to be able to not only incorporate some of those new elements that are challenging them, but actually foster even more innovation because they're able to adapt and morph over time.

Peter McCormack: You mention there excellent use cases.  What are the use cases that you've seen that excite you?

Michael Sonnenshein: I think for Bitcoin specifically, it's definitely resonating with investors as a digital gold, the digital store of value.  For us, looking at Bitcoin as a digital gold, it's really because it exhibits and has all the same attributes as gold does, whereas Bitcoin is superior to gold because it's actually finite; we think gold is a finite asset, but somehow we keep unearthing more of it every day. 

In addition to that, I think that Bitcoin is superior to gold in that it's far more divisible, far more portable and it has a lot more utility.  We're seeing that across merchant adoption and awareness and acceptance.  As we look at global remittances and payments, that's another area where actual utility of Bitcoin exceeds that of gold, which other than maybe having some cultural value and looking pretty, doesn't really have much in the way of industrial applications.

Peter McCormack: Okay, so I understand that argument, but you also have investment trusts for Bitcoin Cash, Litecoin, Zcash; so you have a number of different forms of digital currency.  Is this a hedge?

Michael Sonnenshein: No, so I think for us looking at the incumbent asset management industry, for us it's always looking at what are the best players in the industry doing.  If we look at a business like WisdomTree, for example, which has a whole family of products for investing in the emerging markets, they have products for China, for Russia, for India, for Japan, etc, and it's because they want to make sure that when investors think of emerging markets, they think of WisdomTree and that there's certainly a product on that menu for them to use. 

I think similarly for the Grayscale team, we certainly have products and coins around which we have higher conviction, but our platform, the Grayscale family as a whole, would be missing elements if it didn't offer people the ability to express a view on those other assets, like Litecoin and XRP and some of the other coins that we think are important to have on our line-up.

Peter McCormack: Therefore, I think ZenCash is an interesting one, because if you looked at your current investment trust that you offer, you tend to offer top 10, 15 assets and ZenCash doesn't sit within that suite.  Why does ZenCash interest you guys and why did you offer it?

Michael Sonnenshein: We'd long been believers in the idea of financial privacy.  We think that in the wake of Facebook and Equifax and all these other hacks, that there is a growing need for privacy, and in particular, financial privacy, almost to the point where individuals and institutions don't even know that as time goes on, they're actually going to be paying a premium for financial privacy. 

So, we've long been believers in Zcash and we're very close with the founder, Zooko and the Zcash team, Digital Currency Group's investor.  We think that Zcash is a phenomenal protocol, particularly around a digital store of value that has a privacy focus or a digital payment with a privacy focus.  More recently though, we've gotten turned on to ZenCash as well, not to necessarily diversify away from Zcash, but because it can actually complement it. 

So, whereas Zcash is primarily used for digital store of value or payments, the ZenCash protocol exhibits many of the same qualities, but actually has applications around private messaging, private file storage, private internet access, etc.  So, we're excited not only by the team but by the protocol itself, and often do sometimes go against that of other investors in choosing these assets that may not be in the top five or top ten, but the fundamentals underpinning them are really important; and when they exhibit the right qualities, we're happy to get behind them.

Peter McCormack:  Okay.  But you've not offered Monero and you've also not offered Dash; I'm assuming you will have taken a look at them.  Is there any reason, and specifically Monero, any specific reason as a privacy coin you've not considered it?

Michael Sonnenshein: For us, I think we've gotten pretty good at bringing these products to market and being able to wrap a digital currency inside of a security and make it available in that much more traditional financial instrument form.  That being said, there are two major gating items to us putting a given token into one of the Grayscale products.  I think number one is looking at the underlying market for the coin.  So, if the market isn't going to be accessible or liquid, or we won't be able to get to a place where we have in our possession a reference rate that is robust and highly representative; that makes it really difficult for us to put a product around it.

Peter McCormack: What is a reference rate, for those who don't know?

Michael Sonnenshein: A reference rate meaning an index or some kind of pricing rate so that every day, we can fairly value the assets and provide investors with transparent pricing and valuation.  That's an issue when there isn't a robust enough marketplace. 

I think number two has to do with custody.  If there isn't a custodial solution, because we use third-party custodians for all of our products, that meets our criteria and lets us sleep soundly at night, well then that also is a major gating item to launching a product around it, because our investor's assets are more important to us. 

Then I think the third thing is that we, as a regulated business, are also transacting primarily through Genesis, our sister firm, which is a regulated SEC and FINRA-regulated broker-dealer. If they're not able to trade in a given token, that also presents a problem for us to structure something around a given token.  But even sometimes, when we can get past all the aforementioned challenges, if investors aren't demanding a certain product from us, that pushes it further down the list of priorities for us.

Peter McCormack: That's interesting because I wouldn't have imagined though that investors would be demanding ZenCash, but then I haven't taken a look at ZenCash probably for about a year.  I had a look today after obviously I'd seen your announcement, and actually in some ways it seems like a very well-organised protocol.

Michael Sonnenshein: It is and again, we're not always just listening to what investors want, we have our eyes and our ears open for investor demand and investor interest; but we are also keen to discover protocols that we're very excited about.  So, it's important to remember the history of Grayscale and our product launches.  From the end of 2013 until April 2017, we solely had a Bitcoin product; we were a one-trick pony.  I think it's important because for us, we knew that whatever product number two was or product number three was, when investors did so well with us around product number one, we had to be very, very selective about what two and three were going to be in that line-up, because we thought a lot of our first go-around investors would come to us when we launched product two and three. 

So, product two was Ethereum Classic, which a lot of the digital currency community had left for dead.  After the DAO hack, after Ethereum Classic emerged, we really started digging in and looking at some of the underlying principles in Ethereum Classic.  It actually reminded us a lot of the principles that underpinned Bitcoin; and dissimilar from Bitcoin, it just had very different use cases.  We're often ones to launch products around protocols that we have interest in and we can wrap our minds around, not always what investors want.

Peter McCormack: It's quite interesting then and you're probably very happy with the Coinbase announcement for Ethereum Classic; it validates a lot of your conviction.

Michael Sonnenshein: It does.  At Coinbase it's not a heavy lift for them.  This was something that they already were dealing somewhat with in the background after the DAO hack.  So, it took them some time to get it figured out, but definitely a positive development for the Ethereum Classic community.

Peter McCormack: Then outside of the currencies you've created your products for, the only protocol really is Ethereum and Ethereum Classic.  You haven't yet moved into EOS, Cardano, Tron; you haven't looked at any of the other protocols.  Is there any particular reason?

Michael Sonnenshein: I think a lot of that again comes down to custodial solutions.  Without going into it protocol by protocol, when there isn't sufficient investor demand and there isn't sound custodial options available, it really makes it a non-starter for us.  But we're always looking to create new products.  ZenCash will be Grayscale's ninth product, but I would say on our list of products, there's probably 20, 30 products that we'd like to bring market over time.

Peter McCormack:  Right, okay.  Do you see any impact on the market when you do release a product; are you leveraging influence now?  The next Coinbase announcement is kind of a big deal, are you starting to see that the next Grayscale Trust is an influence on the market? 

Michael Sonnenshein: I believe that we do.  It depends on what token it may be and where it is in its lifecycle.  But I was told last week at the Yahoo event in San Francisco when I announced that ZenCash would be our ninth product, it saw about a 20% rise in the price of ZenCash that same day.  Perhaps on some of the more thinly-traded protocols like that, yeah it can have a material effect on price.

Peter McCormack: You mentioned custody.  I'm going to come back to that because I think having $1.5 to $3 billion of digital assets …

Michael Sonnenshein: It's a big burden.

Peter McCormack: Yeah, it must be scary but I'm going to come back to that.  So, your products are investment trusts.  Can you explain what they are and how they work for people who don't understand?

Michael Sonnenshein: Sure.  So, the seven single currency products we have are solely and passively invested in the coin for which they're named; so our Bitcoin Investment Trust, our Ethereum Class Investment Trust, etc.  If you're an accredited investor, you can come to Grayscale and purchase shares of any one of those trusts on any day at a transparently-struck 4.00pm net asset value price, much the same way you might buy a mutual fund. 

If you're an investor looking to allocate to the space, you don't want to figure out where to buy, how to hold, how to safekeep digital currencies, you can use the Grayscale products to express a view on digital currency.  So, each of these products is solely and passively invested in the coin; so, there's no cash, no leverage, no trading, nothing at all.  It's basically just the same exposure as you'd have in digital currency directly, but through owning it in a security.

The eighth product, the Digital Large Cap Fund, is actually a Cayman LLC and that structure's optimised because the product will change; it rebalances every quarter.  So, the Digital Large Cap Fund will always seek to have, as its holdings, the tokens which constitute the upper 70% of the digital currency market.  At the moment, that is Bitcoin, Bitcoin Cash, Ethereum, Litecoin and Ripple but we will see at 30 June, our next rebalancing, what that is.

Peter McCormack: You may have to consider EOS.

Michael Sonnenshein: We may have to consider a lot of assets; we have to see what qualifies and disqualifies.  There are definitely rules, it's a rules-based methodology but once again, if there are certain custodial or other operational issues that prevent us from adding a coin or that we're not comfortable with, then that's obviously going to be superseding that.  So, each of these products is available on a daily basis and investors who are buying them have to hold onto them for one year.  We are not a great place for folks who are interested in buying and selling very rapidly; this is a place for people who are looking to allocate capital to the space and have at least a one-year outlook for it.

On the other side of the year, investors get liquidity in the shares that they bought from us by selling them out onto the stock market.  Two of our products are already out on the stock market: that's our Bitcoin Investment Trust, it trades under the symbol GBTC; and our Ethereum Classic we just started trading last month under the symbol ETCG.  When each of the other six products get to their first birthdays, we wi ll also seek to establish a public quotation for them so that investors can start rolling out their shares into the public market after they've each hit their one-year hold period.

Peter McCormack: Did I see that Merrill Lynch have banned their advisors from selling your products?

Michael Sonnenshein: I don't want to speak to exactly what their policy is at the moment, but I believe on a solicited basis, I've seen articles that they are banning that. 

Peter McCormack: Do you think this is a fear of the unknown?  I know you guys are good at educating the market.

Michael Sonnenshein: More likely than not, a fear of the unknown.  We spend a lot of time with banks trying to educate them; financial advisors, hedge funds, etc.  But a lot of people are still not over that initial 101, 201 learning curve that they need to get comfortable with investing in digital assets.

Peter McCormack: Where do you think the gap is, where's the fear coming from; is it just volatility?

Michael Sonnenshein: A lot of it is volatility, but the volatility is dampened quite a bit.  We are fortunate; we get to talk to some of the smartest investors in the world and those that have actually dug in, done their homework on digital currency, always come out of the other side of that analysis amazed, excited, wanting to put capital to work.  I tend to find those who don't do their homework and don't dig in are the ones who are the naysayers.

Peter McCormack: So, the investment trusts are essentially a one-year lock up.

Michael Sonnenshein: Yeah.

Peter McCormack: The types of investors you have are institutional.  It feels like essentially, the fee they pay is for you to pretty much handle custody for them.

Michael Sonnenshein: Correct, yeah.  So, it's high net worth individuals, it's family offices, it's hedge funds, all those types of investors.

Peter McCormack: Probably the kind of people who just don't understand the space, a little bit scared of custody, a little bit scared of handling themselves, so they're happy to pay the fee for you to take that complication for them.

Michael Sonnenshein: Correct, or it's also institutions who by and large can't self-custody their own assets.

Peter McCormack: Right, okay.

Michael Sonnenshein: If they have a prime brokerage relationship for their stocks, their bonds, etc, they can't buy digital currency and then clear it through Goldman Sachs or through Merrill Lynch or somebody like that.  So, the ability for them to gain exposure through a security fits squarely within their mandate, the same way they might use the gold ETF, GLD, to express a view on gold, they can use any of the Grayscale products to express a view on any one of those digital currencies.

Peter McCormack: How do your products differ from an ETF?

Michael Sonnenshein: So, they are not ETFs in that they're not registered and they do not sit on a national exchange.  There's also no redemption mechanism, like there is in ETFs.  But in many other respects, they offer investors the ability to gain exposure to an asset that otherwise has frictions through the purchase of a security.  So, in many ways they feel like it but they're not ETFs.

Peter McCormack: You guys were looking at an ETF at one point, right?

Michael Sonnenshein: Yeah, we spent the better part of 2017 registering our Bitcoin vehicle, GBTC, as an ETF on the New York Stock Exchange.  We made tremendous progress with our regulators, but ultimately pulled it out of that process late in 2017 just realising that our regulators weren't yet ready for it.

Peter McCormack: Do you think the ETFs are coming?

Michael Sonnenshein: We do.  I think from our perspective it's a "when" not an "if", but it's very early in the lifecycle of educating regulators around this.  I think given that GBTC, our Bitcoin vehicle, is one of the top three most heavily traded securities on the OTC market in the US every day, it's pretty strong evidence that investors want securitised exposure to digital assets like Bitcoin.

Peter McCormack: Are these institutional investors coming in because they've got a fear of missing out and they feel like they need to have this within their portfolio, they feel like they'll miss the early gold run, or is this just now a sensible component of a balanced portfolio of products?

Michael Sonnenshein: All of the above.  You have some investors carving out a piece of gold, a gold allocation, and putting it into digital assets, looking at the riskiest end of the spectrum of where they invest, and that's why they're putting money to work in digital currencies because they are risky, they are volatile.  You have some investors who feel that digital currencies are influencing or impacting other areas where they invest, payments and other technologies.  You also have a lot of people who recognise that this is an asset that's arrived; it's not going away.  They have to put some money to work in order to force themselves to pay attention to it.

Peter McCormack: Of your seven products, I've noticed, is it four currently are in negative and three are in positive?  Obviously, your Bitcoin Trust has done very well from launch, but obviously it's been a rocky time for the last six months.  I know from friends who got in the space late, who I was telling last year, who finally took the dip in December/January and are now in a loss position, I'm telling them to just be patient.  Are you having similar conversations now where people feel like there's some regret or fear?

Michael Sonnenshein: I think that people are viewing the downtrend in prices generally as opportunities to get in lower, particularly in the fixed supply assets where they feel the depression in prices presents more opportunity than it does doubt or uncertainty; which is interesting, because I think throughout the end of 2017 and the beginning of this year, one of the reasons we launched our Digital Large Cap Fund, our diversified fund, is because we were encountering people who were saying, "I think I missed Bitcoin" or, "I think I missed Ethereum" or, "I'm not sure how to pick the winners, avoid the losers" or whatever it may have been. 

That's why Grayscale launched its first diversified offering.  You've also seen a lot of other asset managers popping up with index-like products so people can make a singular investment but get broad-based exposure.

Peter McCormack: Yes, so Coinbase has just launched theirs, right?

Michael Sonnenshein: I believe so.

Peter McCormack: I'm wondering what's the difference between theirs and yours?

Michael Sonnenshein: I think everybody has different criteria that qualifies.

Peter McCormack: You have a lower entry criteria on the amount to invest, right?

Michael Sonnenshein: Yeah, and also I think with the actual constituent tokens, whether or not it rebalances or reference rates are used, etc, there's a lot of different nuances between the various products out there.

Peter McCormack: Do you have any kind of view on the actual market for dapps and things being built, because one of the main criticisms that keeps coming back is where are the products, where are people actually building things that people are using?

Michael Sonnenshein: Not at the Grayscale level, but at Digital Currency Group, we've now again invested in 130 different digital currency-related businesses in over 30 countries around the world.  So, we hope we're investing in the businesses that are building the picks and the shovels, so to speak; the exchanges, the wallets, the infrastructure, the order management systems, the indices, the payment rails, the identity management solutions, etc.  Those are definitely alive and doing quite well.  I think some other decentralised applications, other things built on top of Ethereum and some other protocols like that are still very early in their lifecycle.

Peter McCormack: I personally have a concern or worry that there isn't actually a need for as many decentralised applications that people think.  I think possibly there are a lot of opportunities in the building of centralised products, which the traditional world of financing companies understands, on top of this decentralised liquidity pool that people can access.

Michael Sonnenshein: Yeah, you're totally right and I think we share your same view.  We don't need a decentralised Uber; we don't need a decentralised Airbnb.  These are platforms that by and large work really, really well and have fantastic global communities that are contributing and using them.  But I think there are certain areas where there is definitely a need for decentralisation and some of those products and services will grow and thrive.

Peter McCormack: There's a lot of talk about the tokenisation of assets.  Do you believe in that as an opportunity?

Michael Sonnenshein: We do, but it's not going to exist or thrive outside of a more firm, regulatory landscape for it.  I was saying earlier at the conference today, and I've said quite a bit before, if we look at other industries, manufacturing, healthcare and even financial services, these are all industries that have regulatory frameworks around them and thus the products, the businesses, the services, the consumer protections, etc, that all come inside those industries all are available because there's a regulatory framework around them.  So, we think the same is going to be true, or hope to be true, of digital assets, including security tokens and various applications like that.

Peter McCormack: My fear with security tokens or my concern is raising capital in volatile cryptocurrencies whilst having to operate a business in dollar, pound whichever jurisdiction you're in.  Do you see, therefore, an opportunity for stablecoins to exist?  It seems to me almost for securities to work, they will need a stablecoin.

Michael Sonnenshein: Yeah, the entire ecosystem of stablecoins is still very nascent, slightly more nascent than Bitcoin and other protocols obviously, but it's too early in the lifecycle of some of these projects, like Basecoin, to fully assess whether or not they'll come to fruition or what impact they'll have.

Peter McCormack: I can't see them being in a trust that you would create for a stablecoin.

Michael Sonnenshein: Probably not, but I never say never.

Peter McCormack: Never say never.  So, I want to talk to you about custody.  I get nervous managing a handful of Bitcoin or a few Litecoin.

Michael Sonnenshein:  As you should.

Peter McCormack: As I am and everyone should be.  But you're handling billions here.  What can you tell me about how you handle custody and what keeps you up at night?

Michael Sonnenshein: For us, we partner with what we always believe to be the leading digital asset custodial solutions available to us.  I think as the world's largest asset manager, we have a fiduciary responsibility to not only constantly be vetting who is new and coming up in that world and what services they're offering, but also staying in very close dialogue with our existing custodial solutions, all of which are third parties, looking at what they're doing to ward off threats and different kinds of attacks, because there's always a target on their back.  So, on the Bitcoin side of things, we work with a firm called Xapo.

Peter McCormack: Are they the guys with the big vault underground?

Michael Sonnenshein: They have several big vaults underground, one of which I've visited several times.  We have to constantly do our due diligence on these firms and involve security experts that we consult with, our lawyers, our auditors, our accountants.  We also have to ensure that their disaster recovery systems are up to snuff; really there is a really heavy, heavy list of items that we go through with every single provider we would work with. 

Oftentimes, even though someone's technology may be great, operationally it may not work for our business or they may not have the right types of registrations or legal frameworks under which they're operating.  For us, we're constantly flying around the world looking at who's new in the custodial space and trying to stay ahead of the curve.

Peter McCormack: Are you using multiple custodial solutions to de-risk yourselves?

Michael Sonnenshein: Yeah, so for our Bitcoin vehicle, all of the Bitcoin is held with Xapo.  For our other vehicles, we have created a solution on top of Ledger's technology that layers on physical cryptographic security and geographical dispersion.  So, we had to layer on this ad hoc solution on top of Ledger's technology, not because Ledger is in and of itself secure, but because we wanted to create a similar framework to Xapo, who again is employing those three different pillars.  For us, we're going to see who else is new and coming up in the world, but for now these are the solutions that we feel are most sound.

Peter McCormack: Is that a custody solution you're managing yourself?

Michael Sonnenshein: It's a custody solution of which we are one of many, many, many pieces that need to come together in order to access any digital currency.

Peter McCormack: Sounds really scary.

Michael Sonnenshein: It's not scary.  It's a robust solution such that no one or group of individuals has unilateral access to digital currency.  So, quite easy to get digital currency in, exceedingly difficult to get digital currency out of any of these platforms.

Peter McCormack: I want to talk a bit about the market.  It was an amazing year last year, but obviously the downtrend has been quite emotional for a lot of people.  It feels like a lot of people have been upset and left the market, but you still obviously believe in it.  What do you believe is happening with the market; how do you see the rest of the year playing out?

Michael Sonnenshein: There are some really good things on the horizon.  I think one is getting regulatory clarity from places like the SEC, that Ethereum is not a security, that we saw last week, is great.

Peter McCormack: Is that an actual confirmation, because I've read different things?

Michael Sonnenshein: It's a pretty strong statement and those kinds of statements are vetted before they're provided.  I think for now, the community's taken stock of it.  I think from our perspective, we're seeing a major shift in who's involved in the space, seeing a movement out of softer, weaker retail hands and seeing those assets move into the hands of institutions who are true believers; they know they have to be patient and will be patient to see the asset class come to fruition. 

So, I think when you couple that with some other great product announcements and see some more custodial solutions coming online this year, some more major institutions coming online this year, be it non-deliverable forwards of Goldman Sachs or the Fidelity custody solution or other assets like that, other important announcements like that coming online, you'll I think see a firming up of prices and certainly see more adoption.

Peter McCormack: It's a really interesting shift to see products coming from Goldman Sachs, JP Morgan, the likes of who previously have been very critical of cryptocurrency and putting out statements which people would call FUD.  Why do you see this now?  What's changed?

Michael Sonnenshein: I think the taboo nature of the asset class has been shrugged off.  When I was in the space, starting in 2014, there were no banks, no insurance companies, no credit card companies, nobody had done anything in the space.  Then Goldman Sachs invested with Digital Currency Group into Circle.  As soon as Goldman Sachs did that, it provided enough air cover for pretty much every other bank and other major financial institution to get involved in the space. 

Once again, maybe it is Goldman taking the lead by offering non-deliverable forwards and maybe that forces other banks to get into the space in a derivative sense, which is then maybe the precursor to trading spot digital assets like Bitcoin.  But I think it's meaningfully graduated as a whole from the early days of human trafficking and the dark web, to really a platform for innovation that's creating this next layer of money.

Peter McCormack: Obviously, you've worked in the traditional banking sector.  How do you see cryptocurrencies changing banking or impacting banking?

Michael Sonnenshein: That's a loaded question.

Peter McCormack: I know.

Michael Sonnenshein: It's too hard to say at the moment.  I will say one thing though, that what I'm seeing from global banks is often that the blockchain or distributed ledger technology working groups inside each of these institutions is oftentimes unfortunately getting very frustrated.  They're trying to make progress; they're trying to create proofs of concept within their respective organisations, but then ultimately there's so much red tape and so many layers of approval that not enough progress is being made and many of these folks are leaving places like major financial institutions and moving either to start their own digital currency-related businesses or joining firms like DCG. 

So, when that happens, it's great to see that shift of human capital and talent, but I also then lose my friends behind enemy lines, so to speak.

Peter McCormack: That's very interesting.

Michael Sonnenshein: Yeah.

Peter McCormack: Because we have seen, especially with Coinbase, a number of key recruitments, and also Andreas recently put out a very interesting point that there's very little difference between Coinbase and a bank.

Michael Sonnenshein: That's a decent perspective, and actually Grayscale's had a really high profile recently.  Our new VP of Finance, her name is Samantha McDonald, she is actually the outgoing CFO from the SPDR Gold ETF.  The SPDR Gold ETF is the largest gold ETF globally and so to see her go from taking the finance role at the largest gold ETF to coming over to Grayscale, who owns the largest Bitcoin or what I'll call digital gold investment product, is really a representation of that shift from this old stodgy antiquated gold into what many of us believe is gold 2.0.

Peter McCormack: Just considering what's happening in the future, can you tell me now what's coming up for Grayscale, what's coming up for you, what you're excited about?

Michael Sonnenshein: Sure.  So, we just recently announced, what we were talking about earlier, that we're going to launch our ZenCash vehicle in the third quarter of this year, so super excited about that.  I think it's our hope to bring out at least one or two more products in the back half of this year, but in the meantime we're very focused on building out our team, on building our asset base and really continuing to try and be thought leaders in the industry.

Peter McCormack: Who do you want to hear from, how can they get hold of you?

Michael Sonnenshein: We want to hear from anybody and everybody.  We want to hear from investors looking to get smarter about the space.  We are an asset manager, so we're always looking to raise assets; we're not going to be shy about that.  So, the best way to get in touch with us is going to our website www.grayscale.co.  You can get in touch with us there, on LinkedIn, on Twitter and always, first and foremost, we want to be an educational resource, but obviously happy to field any investment enquiries as well.

Peter McCormack: Brilliant.  Thank you for doing this, it was great to catch up and hopefully we'll do it again sometime.

Michael Sonnenshein: Awesome. Thanks for having me.