WBD655 Audio Transcription
Busting the GBTC Trust with David Bailey
Release date: Monday 8th May
Note: the following is a transcription of my interview with David Bailey. 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.
David Bailey is the co-founder & CEO of BTC Inc. In this interview, we discuss the upcoming Bitcoin Conference in Miami, the ongoing saga with Genesis, Grayscale & DCG, as well as the Redeem GBTC campaign that David has been spearheading.
“Where there’s smoke, there’s fire, and there’s so much fucking smoke at DCG you can’t breathe.”
— David Bailey
Interview Transcription
Peter McCormack: David Bailey, how are you, man?
David Bailey: Good. Thank you for having me on the show.
Peter McCormack: Any time. I fly into Miami tomorrow.
David Bailey: Okay, I like it, you're building the hype.
Peter McCormack: Well, I'm going to go the F1.
David Bailey: Nice.
Peter McCormack: And then I'm going to have a week off; I haven't had a holiday in a year.
David Bailey: A good place to do it.
Peter McCormack: And then all hard on the conference.
David Bailey: When are you going to come visit Puerto Rico?
Peter McCormack: Do you know what, me and Danny have been talking about this a lot.
David Bailey: Post-conference, come on over.
Peter McCormack: Yeah, we want to see you and we want to see Peter Schiff and we want to see Logan Paul; we think you're the three big hitters of Puerto Rico!
David Bailey: Dude, there is crew down here, there is a crew, but yeah, I think Peter Schiff and Logan Paul have got the Dorado scene on lock. Well, dude, thank you for having me on your podcast. If I remember correctly, the last time we did this was I think ahead of Bitcoin 2021, I think it's been a good minute.
Peter McCormack: I think I was in El Salvador when we did that, I think I was.
David Bailey: I was real hard. I actually had many people approach me after that interview, and they were like, "You know, I decided to come to this conference after you got so hyped". I had some great one-liners there, like, "If you come to the conference you might die", and, "Yellow fever didn't cancel the American Revolution, so COVID's not cancelling the Bitcoin Conference", so that was a fun interview.
Peter McCormack: I think if we'd have done it last year, there wasn't really much to shout about, but I think you've got plenty to lose your shit about this year again now.
David Bailey: Yeah.
Peter McCormack: How is everything going; everything ready or is it chaos?
David Bailey: No, it's chaos, every year is chaos when you're this close to the event. When you're about 45 days out, we go through our annual cancelling moment, so every year, we get boycotted by somebody; for some reason, about 45 days out, it happens perfectly. This year was ordinals, last year it was the Cuban Exiles, it was the San Francisco Feminists, the year before that it was because of COVID. We also got cancelled with Surfer Jim; I don't know if you remember the whole Chamath thing where Chamath tried to dunk on Surfer Jim and it kind of blew up in his face.
Peter McCormack: Yeah, and he'd come, did he?
David Bailey: Said he couldn't come. So, every year, about 45 days, there's a big drama, and then when we get to about under 3 weeks, the final 3 weeks, anything new, it gets stopped, like 30 days out, and then the final 3 weeks is like, "Oh shit, we forgot this, we're missing this", and it's just scramble, scramble. So, the whole team is going hard, but it's all coming together, it's going to be very nice.
Peter McCormack: Mate, we did our first live event in Bedford recently for 150 people and it nearly killed me, 150 people and I was nearly dead!
David Bailey: Yeah, man. Event organisers, they don't get any respect, it was like, "Oh, you're just throwing an event, what's so hard about that?" There are a lot of details, a lot of details, just a line item budget for the conferences, 1,500, 1,600 line items and each of those line items is a consolidated line item, so maybe there are 30 or 40 line items that fall underneath that. So, it's a massive production that takes -- I think our event team is probably a dedicated 30 people that just work year round just on the internet, and then there are more that work on it when we're in go time.
Peter McCormack: I see you've been sneaking some guests in recently as well; I saw Tulsi Gabbard is in.
David Bailey: Yeah.
Peter McCormack: That's a get.
David Bailey: That's a good one. We've got a few good ones; we've got David Marcus, was formally of the evil empire, Facebook, but now building a Lightning startup that I think he's revealing basically what they've been working on, and he's kind of dedicated the rest of his career to building on Lightning. We just announced RFK yesterday, which was pretty cool; you can talk to RFK while you're --
Peter McCormack: Holy shit!
David Bailey: You didn't see that?
Peter McCormack: No! I did a show with Larry Lepard recently and he was waxing lyrical about him and he said, "You've got to interview him".
David Bailey: So, yeah, well he'll be around for a few days so you've got to find some time to talk to him. But I don't know how to pronounce this guy's name, but we have, he's effectively the next president of Indonesia, Ridwan Kamil.
Peter McCormack: Yeah, I'm looking at it.
David Bailey: Yeah, I can't say it, but we don't know exactly what he's going to announce, but we may have our next El Salvador in the making, and I did a little Google search on the population of Indonesia. It's like 50 El Salvadors, no shade on El Salvador, but it's another level, so yeah.
Peter McCormack: You've got my buddy, Eric Weinstein on.
David Bailey: Yeah, and then we've got a couple of surprises yet to be announced that I think are going to blow some minds.
Peter McCormack: I got bumped; I was surprised to see myself, when you first announced it, I wasn't one of those first nine slots, and then all these big hitters come in, and I was like, "Yeah, I'm out of there!"
David Bailey: Sorry.
Peter McCormack: Motherfucked.
David Bailey: Yeah, man. We have to let the markets speak, okay, that's all I can say.
Peter McCormack: Look, it's a great set of speakers. In some ways, you had some massive names last year, but people, I was like, "Well, what's Serena Williams got to do with this?" It was so cool to see her there and see her talk, but everyone here now is important for really important reasons.
David Bailey: Yeah, last year's event, it was like sensory overload, we did it out of scale; it was the biggest finance event in the world last year, 26,000 people were checked in through the door, which means that we probably had 60,000 people come to Miami, and yeah, it was overload. People didn't even know what was going on because there was so much stuff, like Tucker Carlson was there. He did a speech to 20 people in some sideway room; no one even knew what was going on. We had the most random assortment of people there. So, this year, the event's half as big as last year, we have let's call it 12,000, 13,000 people, and we've compacted the footprint. So, last year, the footprint was bigger than the Superbowl; this year, the footprint is like 40% of last year's footprint. So, when people go there, it's going to feel packed, but it's because we're bringing it in, you're not having to walk two miles to see stuff.
So everything is much more focused and intentional, whereas last year it was just like throw in stuff and somebody's like, "Hey, I want to speak", and we just put them in a room and just move on. So, yeah, man, it's coming together quite nicely, it's a bear market event which means it's all the hardcore people, and I don't want to give anything away but there may be big changes coming after this year, and so you don't want to miss the Miami event, you don't want to miss it.
Peter McCormack: All right, well, listen, I'm going to grab something, I want to show you something, something I'm bringing with me, one second. I'm bringing these with me.
David Bailey: Okay.
Peter McCormack: Bringing these with me.
David Bailey: Of course, you have to, man.
Peter McCormack: Yeah, I'm going to bring those with me now; I don't know how the fuck I'm going to get them there though, I haven't thought that through. So, big changes are coming, right, and you're not going to give anything away, but that means it's not in Miami.
David Bailey: So, Bitcoin 2021, we actually had the guy that won the MMA World Championship or whatever, and he wanted to come to the conference, he wanted to go to Whale Night, etc, he wanted a Whale Pass, and we were like, "We'll give you a Whale Pass but on the sole condition you have to wear your belt, your World Championship belt, to the party and you have to stroll around saying, 'Bitcoiners are number one'", and he's like, "I'm in, done". So, bring in the trophy, you've got to flex, man, you've got to flex.
Peter McCormack: Dude, I'm MCing day two; I'm going to walk out on stage with them.
David Bailey: Dude, congratulations; it's so fucking cool what you're doing with Real Bedford.
Peter McCormack: All right, anyway, I'm going backwards, there's an important thing. So you're not going to be in Miami next year, what are you going to do; are you going to decentralise it and have it in five cities? Are you doing to do like the World Cup where they move it to five countries?
David Bailey: Dude, I don't know what you're talking about and I can't comment, I'm just saying you don't want to miss this year.
Peter McCormack: Right, okay. Well, I don't miss any year, I've been to all of them since 2019, I just love it, I'm pumped for it, and you're going to have some surprise. Okay, well listen, we'll wait and see it. Anything you want to say about the show before we start talking about Bitcoin, about the event?
David Bailey: What do I want to say about the show? All I'll say is this, there's a lot of hate that you'll see on social media, maybe targeted at one speaker or another speaker, we have speakers here that have many different views, many different perspectives on Bitcoin, how they use Bitcoin, what Bitcoin means to them. If there's someone speaking, you don't like what they have to say, the answer's very simple, people, you just don't listen to that speaker, you don't go to that speaker. But what I would challenge you to do is to go with an open mind, listen to people that maybe you don't agree with, hear where they're coming from, have a good faith meeting of the minds and the goal is to walk away with this conference inspired to go do something.
Be inspired to get off your keyboard, to get off Twitter for a few minutes, and go create something. And if you don't like what somebody has to say, go create the thing that you think is a better version of what they're saying. And if you do like what somebody has to say, figure out how you can join forces with them, work with them and push forward that initiative. That's what this fucking conference is about, and there are so many startups, there are so many technologies, there are new core developers every year that come out of this conference.
So, ignore the shade, it's always edgy and cool to hate on the thing that is, I guess, the top show, I hate to say it like that, but come with the mindset of how are you going to walk away with this doing something for Bitcoin, because that's why we've organised this, that's what we want people to come there with the mindset to do.
Peter McCormack: I don't think it's cool anymore to be edgy and critical of everything, I've noticed that it doesn't work so much anymore. I think there are too many reasonable people who have come into Bitcoin in the last few years, because you know, I get the same shit you get for the same reasons.
David Bailey: Because you're the number one podcast.
Peter McCormack: Yeah, and you try and have a broader conversation with a wide group of people. Every now and again, when I go on Nostr and somebody tries to give me some shit, they actually get shouted down, people are like, "Fucking grow up". I think that's a really small, irrelevant group now.
David Bailey: Well, the only thing that matters from that perspective is proof of work; if you put in the work and you deliver the results, that speaks louder than anything else can.
Peter McCormack: Exactly.
David Bailey: So, the fact that you keep creating a podcast that's fantastic and is dominant, dude, you don't need to say it, that says everything you needed to say, and so you've got to silence the haters by delivery.
Peter McCormack: But back at you, like when you get 12,000 people, or 24,000 last year, into the biggest finance event in the world and it's a Bitcoin event and everyone's looking at it, it's like, "Shut the fuck up, go and put on your own conference and see if you can get 20 people to your shit town".
David Bailey: Totally. We tell, "If you can do better, please. We own Bitcoin, we want Bitcoin to go up, so go do it better, please".
Peter McCormack: All right, I think we've got to talk GBTC, right?
David Bailey: Yeah. Dude, first off, I just want to say we are connected to all the different groups involved in this. Your podcast that you did, I don't know how many emails I got with people clipping your podcast and sending me parts from it. The entire GBTC community saw it, you did a great job and kudos to you, man; I know that's awkward to do, but dude, it needed to be said, so kudos.
Peter McCormack: There was no plan to it. It was funny, during it, Danny thought I'd soft-balled him; there was no plan when we sat down, we got a beer, we had a chat and I just started asking about the background, and as I was doing it I realised, "Hold on, if you knew that, you should have known this". So, we just walked through it and then, by the end, I was like, "I don't believe you". So, there was no plan to it, it just happened the way it was. I would still sit down with him again. He did exactly what I thought he would do and I think what he had to do, but at the same time, I didn't believe him.
David Bailey: Well, I've invited him to speak at the Bitcoin Conference, we're calling it a shareholder meetup because we can't call a shareholder meeting legally, it's the Trust documents forbid us from doing that. So, we're having a shareholder meetup and there's a bunch of GBTC shareholders that are going to be there; we have content about the Trust, what's being done to bust the Trust, and we've reversed time for Michael to speak to the shareholders. It's the largest gathering, as far as we're aware, of shareholders in one place, so if he wants to speak to his customers, if he wants to speak to his shareholders, we have a spot for him. So far, he has not responded to our offer, so if you could put in a good word for us, please do.
Peter McCormack: Dude, he unfollowed me on Twitter.
David Bailey: Brutal!
Peter McCormack: Yeah, he unfollowed me.
David Bailey: So, where do you want to start about GBTC? We're like there.
Peter McCormack: Give people the TL;DR, the ones who didn't listen to that show who maybe don't know exactly what's going on.
David Bailey: Okay. So, there are so many layers to this story, I'm going to do just the highest level job of it, but we can dive deeper where you find, I guess, maybe most interest. So, GBTC is a Trust product created by Grayscale, which is a company owned by DCG, which is owned by Barry Silbert; Barry Silbert's a Bitcoin OG, DCG is one of the oldest companies in our industry.
This Trust is one of 16 Trusts that they operate where basically you park cryptocurrency inside the Trust; the two biggest Trusts are GBTC, which holds Bitcoin, and ETHE, which owns Ethereum, and then those Trusts, the shares of those Trusts, they trade on the secondary market, like in your IRA, your 401(k) or you just go onto Fidelity or Scottrade, whatever, and type in those tickers and buy it.
Those holdings, those two Trusts, GBTC and ETHE, the rest are pretty small, but those two are worth roughly $25 billion to $30 billion right now; that how much crypto they're holding. Specifically for GBTC, they're holding 630,000 Bitcoins which makes it the world's largest holding of Bitcoin. But because of some sketchy shit that has been done at the DCG family of companies and because of some unethical, duplicitous behaviour from the management at Grayscale, the value of those shares that people bought, which are supposed to reflect the holding of those assets, are trading at a massive discount.
So, right now, GBTC is trading at a 40% discount to the value of the assets. So, let's say it's sitting on, hypothetically, $15 billion in Bitcoin, these are just rough numbers, $15 billion in Bitcoin right now, it's trading at, let's call it $9 billion as this valuation, and ETHE, it's even worse, I think it's like a 60% discount to the assets that it's holding.
So, there are roughly 850,000 shareholders of GBTC, almost 1 million people, they're collectively down on this trade, like let's call it $10 billion, and a lot of these people, they actually bought these shares a time when they were trading at a premium. So, there was one point in time where the value of the shares was worth more than the assets underpinning them. So, maybe I bought the shares at a 30% premium and now we're at a 40% discount, so I've actually lost 70%, 80%.
So, the scale of the situation, it is in my opinion bigger than FTX Alameda; FTX had a couple of million customers and they lost $8 billion or $9 billion, most of it will be recovered. With this situation, you have Grayscale that's lost $15 billion, $16 billion between ETHE and GBTC, reflecting 1.5 million shareholders, and that's doesn't include Genesis, which is deeply connected to the story, which is another company owned by DCG, which has maybe 400,000 creditors, you might now the number better than I --
Peter McCormack: I don't know the number.
David Bailey: -- and they've lost those creditors $5 billion. So, taking together, this is way bigger than FTX, and I actually think it's maybe at the source of a lot of the frauds that happened over the past year really that can be explained by behaviour coming from this DCG criminal enterprise.
Peter McCormack: All right, bold statement. So, we'll come back to the Genesis part. So, Michael Sonnenshein said to me he's working tirelessly in the best interests of GBTC shareholders, but my understanding is that there is a way of closing the NAV now.
David Bailey: Yeah.
Peter McCormack: And that's to do with the commission they take.
David Bailey: Yeah, well there's a whole bunch of stuff they could do. First off, according to some people we've talked to, one of the things that makes the biggest impact is there are all these sketchy inner party dealings happening between Grayscale and Genesis and DCG. If they would just pull back the curtain, reveal all the inner party conflicts, all the inner party transactions and just were fully open kimono transparent with people about what's happened, that would bring back confidence, at least in the management team and the business, and that alone would improve the situation without costing a dollar. Now, they can't do that because they've done some really shady shit that they would get in trouble for and that's why they don't want to go open kimono.
The next thing that they could do is they could just charge fees that are commercially standard that are similar to what anyone else would charge for a similar product. Instead, they're charging these exorbitant fees that are based off the NAV, which are the assets that are being held, they're not the actual value of the business, and so the effective fees that are being charged are like 4% per year.
So, if I'm a shareholder or investor and I'm looking at which trust do I invest into and there's this trust that holds Bitcoin and it charges 0.75% and there's this trust over here that charges effectively 4%, I'm picking the one that's cheaper; why would I pick the one that's charging me 4% a year? So, if they could just make their fees competitive, that would improve the situation. Then maybe the question that somebody listening to this would have is like, "Okay, well their fees are such a rip-off, why don't people leave?" and that's the real root of the issue, which is that you're not allowed to leave.
They have no redemption programme, even though they have the full ability to implement a redemption programme immediately, they choose not to because that would result in lower fees, and instead they create this narrative that they are aggressively pursuing becoming an ETF through suing the SEC and dragging out this long process, while this entire time they're just chipping away at the amount of Bitcoin that are sitting by charging these exorbitant fees. So, it's a tough situation, and one thing, I think you asked him this, was like, "Why don't you lower your fees?"
Peter McCormack: No, do you know what, it was on my list and I didn't because we got to the point where he was getting told to leave.
David Bailey: So, he keeps saying it in interviews, like, "Hey, we're committed to lowering our fee once we become an ETF". That makes no sense; an ETF costs more to run than a closed-end trust does. With an ETF, you have a redemption programme, you have to basically process withdrawals every day; there's a lot of work to run an ETF. With this Trust, you do nothing, they're don't create shares, they don't redeem shares, the Bitcoin just sits there, all they do is file with the SEC, so their costs are going to way up when they become an ETF. So, the only reason they would lower their fees if they became an ETF is because you have the ability to leave and everyone would leave at their current fees.
Peter McCormack: But at 2%, do they charge it on the Bitcoin, and if so, that's, what, 12,000, 12,500 Bitcoins?
David Bailey: 13,000 Bitcoins a year, yeah.
Peter McCormack: 13,000 Bitcoin a year, so that's about $400 million.
David Bailey: Yeah, so the most profitable trust in the world.
Peter McCormack: Yeah, so if you were cynical, you would say that incentive here is to drag this out as long as possible because --
David Bailey: Never redeem.
Peter McCormack: Yeah, if you can drag it out for three years, you've made over $1 billion, and if the Bitcoin price goes up and doubles, it's $2.5 billion, so there's an incentive to keep people trapped within this. Has anyone run the calculation of how many years it would take for them to essentially have half that Bitcoin as theirs?
David Bailey: Well, no, but eventually you could drain it down to zero; it would take a long, long time, but yeah. That's my opinion of what's happening, and the thing is like, if the price of Bitcoin 10Xs, their fees 10X. So if the price of Bitcoin goes up 10X, they're going to making $3 billion a year in fees for doing the same work that they were doing back when they were making $10 million a year in fees, and the only reason they get to charge that is because they won't let people leave.
So, I've been told, we're entering into the speculative realm because I can't verify this myself, but I've been told that even if Grayscale wins their lawsuit against the SEC to become an ETF, then they intend on having a multiyear period to actually convert into an ETF. So, even if they win and they get approval for their ETF, it's not like, "Hey, we're opening up", it's like, "Yeah, we're opening up in a few years once we've extracted another 50,000, 60,000 Bitcoins from this thing".
I'm a shareholder of this thing and I've lost a few million bucks in it, so the moment I realised that we were screwed is like I had always bought into this story that they wanted to become an EFT, I thought they were being honest about that, and I'm down with cause, I want to see that happen, "I'm in this fight with you all". Well, when I ran the numbers and I realised that, okay, they have 3.3% of the world's Bitcoin, they're charging 2% of NAV. For them to be an ETF, the best rate they're going to be able to charge, like the worst rate they can get away with, is like 75 basis points. Okay, well at 75 basis points, they've reduced their fees that they're making, their income, by two-thirds, they're making one-third of what they used to make.
So, assuming no one leaves the Trust when they open it up to become an ETF, they would need to 3X the amount of Bitcoin they're holding in order to make the same amount of revenue they're making right now. And when you have 3.3% of the world's Bitcoin supply, 3Xing that means you'd have to have 10% of the world's Bitcoin supply; where are they going to get another 2 million Bitcoins? There are only like 1 million-and-something Bitcoins on all the exchanges globally, so there's not even enough liquid Bitcoin out there for them to even get enough into their ETF to make the same amount of money they're making now.
So, if you just take the perspective, like they're going to follow the profit-maximising path, the profit-maximising path is never become an ETF, never open for redemptions, fight off every lawsuit that comes at you and just drain this thing for as long as possible.
Peter McCormack: It's like an inverse Ponzi.
David Bailey: Yeah, well the Ponzi part happened at Genesis.
Peter McCormack: Let's come back to that one. So, you talk about busting the Trust, so the interesting thing about the Trust is they don't have a 100% stranglehold on it forever; there are certain actions you can take to maybe bust it, right?
David Bailey: Yeah. So, there's really let's call it a wide variety of different tactics and strategies, and at the end of the day, the SEC and Gary Gensler and whoever the next Chair of the SEC is, they have got powers over this Trust. Also the Attorney General of Delaware has got powers of this Trust, and the Attorney General of Delaware can just revoke the Trust's Charter and just liquidate this thing if he wanted to. So, there are certain political processes by which you could effectuate change at Grayscale. There are certain litigation paths that you could go down in order to work through the court system and through the Trust documents in order to hold Grayscale accountable. That's more challenging, more time intensive and more costly.
Then there are, let's call it business tactics or strategy, which is like Barry and DCG have a lot of problems right now and there are certain deals that could be struck with the shareholders at Grayscale that would benefit Barry, maybe give him cash in the short term, and would benefit shareholders where there could be a win/win and both of us could solve part of our problem. There's so much upside in taking the discount from 40%, like you're doubling your money as shareholders. So, there's so much room to work with, you would imagine some sort of deal could get struck, but so far that's been not fruitful.
So, those are the three different buckets; the one that's maybe the most interesting from just the timeliness of this conversation is Genesis, like what's going to happen at Genesis? There's a very real possibility that the Genesis creditors could end up becoming the new owner of DCG, in which case we don't need to strike a deal with Barry to bust open this Trust; we need to strike a deal directly with Genesis creditors who are going to be setting the future path of the DCG estate. But yeah, there's litigation that's happening now, I can talk about all the different litigation that happening.
But just to back up a minute, there are a million shareholders of GBTC alone. Some of these shareholders are some of the biggest financial institutions in the world. There are vultures, and I don't want to call them vultures because vultures has a mean connotation, there are sharks, okay, these guys are very smart, have a lot of resources, circling the whole DCG situation, and they have the best law firms in the country, they have all the capital you could possibly need, and they are probing this thing in every way possible to figure out, "Where are the weak points where we can bust open this $30 billion and unlock all of this value?"
So, in some ways, I feel for Barry because he's kind of on an island and the sharks are circling him, they're not little baby sharks, these are like, what do you call them, megalodons, prehistoric sharks that can just eat the whole island, and our little, tiny role that we play in this is, we're like a runner back and forth between all these different parties connecting them. We're in a unique spot where we know who all the other different shareholders are in a way that other shareholders don't, so we just kind of help piece together different tactics that people are taking and try to be helpful and connect dots as we can.
Peter McCormack: All right. So, let's talk about the Genesis thing again, the TL;DR for the people who don't know about the fuckery that went on there.
David Bailey: So, I don't have all the statistics to the same degree I have with GBTC; I can talk about how it interacts though with Grayscale. So, there was a certain type of activity that was done at Genesis that was never disclosed to GBTC shareholders, and this is when our firm felt like we had been defrauded; when we found out this was going on, it was like, "Wow, if we had known this had been happening we wouldn't have done this investment".
Basically, Genesis was lending Bitcoin to a handful of select firms on the condition really that they take that Bitcoin, they park it in the Grayscale Trust, which you had to put Bitcoin in to get shares in the Trust, and then they were letting them take the shares that they got, which are supposed to be restricted, meaning that you can't move them, you can't trade them, you can't sell them for six months, and they were allowing them to take those shares, use them as collateral to borrow more money from Genesis and park it in the Trust. They basically enabled this cycling to happen.
So, if you look at the assets that were in Grayscale, at the end of 2019 there was like 300,000 Bitcoins that were in the Trust, and they had been growing linearly every single year. 2019 and 2020 is when they signed these master loan agreements at Genesis with some of the best names in the space, BlockFi, Three Arrows, Alameda, Celsius, Babel Finance; basically every firm that blew up is who they were doing this trade with. The amount of assets that were inside of GBTC went from 300,000 Bitcoins to 650,000 Bitcoins in 1 year time, and then they stopped creating new shares when the shares started trading at negative.
So, they used this financing tool to flood free Bitcoin into the hands of Ponzi schemes on the condition that those Ponzi schemes then parked the money back with them in a different vehicle where they knew the Bitcoin could never come back out. And the end result is not only did they flood the market with shares, which has caused this massive discount, but the creditors at Genesis who are now fucked and have lost all their money, okay, well where did their money end up? It ended up inside of Grayscale. So, really it's like he defrauded the Genesis customer base, he used y'all's Bitcoin, he laundered it through a Ponzi scheme, he had the Ponzi scheme give it back to him in a different vehicle, and he still has the Bitcoin, it's still sitting in Grayscale's Trust and he's making fees off of it.
So, it's kind of a sick thing that happened there, and if you compare what happened with FTX and Alameda, there are a lot of parallels; you know, FTT is their GBTC token, Alameda is their DCG, it's their slush fund where all the profits get spent on whatever they want to spend them on, and Genesis is their FTX, it's where the customers get lured in to deposit their funds, that then get sucked right back out to go into the other parts of the empire. And these loans that were happening from Genesis to all of these illustrious characters, they were never disclosed at Grayscale, and for the longest time, if you ask Michael Sonnenshein, "Hey, what about these loans?" he'll go, "That's Genesis, I have nothing to do with that".
Peter McCormack: Well, he signed --
David Bailey: Exactly. If you go to the bottom of those master loan agreements, his signature is on every single one of them. Grayscale has to approve the transfer of those restricted shares, etc, every single time. So, we only know about one of them, we only know about the Three Arrows one, where the documents actually came out in the bankruptcy case, but there's more and they've going to come out in time and we're going to see who else they were doing this trade with.
I also thought it was interesting from your interview, Michael said that they know every one of their customers that comes in, he was like, "Oh, we do Chainalysis, we do KYC", and you were asking about that and he kind of gave up the game a little bit where he said, "Oh, well, you know, it was Bitcoin coming from Genesis, and so when we do a Chainalysis on it, it's Genesis' Bitcoin". It's like, well, how can you say that you know the source of the customer funds when you took funds from the biggest Ponzi schemes in the industry, and however you were able to take those funds in, whether you washed them through Genesis or whatever, you weren't able to detect that these firms were Ponzi schemes.
The whole point of the KYC process, the whole point of the Chainalysis process is to detect criminal activity, and you created a structure so that that criminal activity could just be washed and come right in, and now the victims are the shareholders, the million shareholders who are sitting on a fucking asset that's down 50% because of that behaviour, so -- anyway, I'm getting wild a little bit!
Peter McCormack: Yeah, but I don't know how they thought they'd get away with it; I don't know how they thought the party would go on forever.
David Bailey: That is one of the big mysteries to me too, and one the things that people have told me is like, "Well, Barry has a background in bankruptcy", and Barry thought that he could structure this in a way that he was going to get away it. If that's the case, this guy is an absolute just -- like, "Hey, I'm going to run this scheme, I'm going to make sure I set up the right shell entities so that when I fuck you out of all your money, I'm going to leave you with nothing to go after and all your profits are going to be in another vehicle you can't touch that I'm going to make my money on". If that's intentionally designed, that is dark.
Peter McCormack: Yeah.
David Bailey: I will say, in terms of the intentionality, the Trust documents at Grayscale got changed five times over the lifetime of the Trust documents. There used to be a clause in the Trust documents going back all the way up to 2017 I believe, or 2018, that said if 75% of the shareholders get together and are unhappy with the sponsor, they can hold a vote and they can change the sponsor. Now 75% is a really high threshold, mostly it's 50% plus 1%, but 75%, okay, that's what the rule is.
They changed that, removed it and say, "Actually, we're amending the Trust documents", in the sketchiest way possible, like this implied consent way where there was no vote or anything, "We're changing the Trust documents so that no percentage is enough; you can't remove us as the sponsor". And it's like, what was the thought process behind making that change where you thought 75% is not a high enough threshold to protect us from how pissed off people are going to be once they realise what's happened?
Peter McCormack: I've thought about Barry a lot; I've met him and I met him a while back and he seemed like a good guy and I had no idea any of this fuckery was going on, but I was sitting there thinking, was he the mastermind behind this, trying to figure out some grand scheme, or is it people within the structure of what he's got have come up with these ideas; people who are running the loan book at Genesis have thought, "Well, we could do this?" I don't know how intrinsically involved he was, because it could be that someone is a big mastermind who comes up with it, or it could be just a chain of stupid decisions, like Genesis are trying to get as many loans as possible, GBTC, they're trying to grow the Trust enough.
But I always come back to the fact that, well, there has to be a link between the two because of those loan agreements, there has to be a link.
David Bailey: Well, so yeah. I can buy in that perverse incentives lead people to make decisions. Where the line is crossed is when you realise that you've made bad decisions and that there are lot of victims and that there's something you can do to make good to the best of your ability on those victims, but you choose not to do that. There is no, "Oh, I didn't know what was going to happen"; now it's like, "You know you're hurting people and you don't care, you care more about your own self-interests than you do about fucking 1 million or 2 million people".
Peter McCormack: That's exactly what I said to Sonnenshein in the interview, I said, "You can do something about it", and he said, "I'm working tirelessly for the shareholders, we're suing the SEC, I'm so brave, I'm suing the SEC, I'm the bravest guy to do that", and I was thinking, "No, you're full of shit; you can do something right now. All these people that you own money to", and I'm not even worried about the people who've got $10 million in there, fine; there are people in there who have got thousands, even Gemini customers have got thousands in there, but that's all they've got, or it's a really meaningful amount to them. There are so many people who are being fucked to protect a few people who are super rich, and that pisses me off; it's the opposite of everything we're trying to do.
David Bailey: 100%, and GBTC, it was sold as a product built by the adults in the room, and it was sold into people's 401(k)s and IRAs, and we've gotten 4,000 investors who have now reached out to us. We've gotten hundreds of messages of retirees that are wiped out, that are like, "I believe in Bitcoin, I still believe in Bitcoin, but I bought this thing at a premium, I'm down 80% and I'm going to have go get a job again and I'm 70 years old"; it's disgusting.
The two places where Michael Sonnenshein is being completely dishonest with people; one is, okay, he could make decisions today that would be good for shareholders, that would make Grayscale still be a $0.5 billion company or $1 billion company. If he just reduced the fees, if he was transparent about what was happening at the business and he was honest about a redemption plan, don't think you have to start immediately, or like partial redemption plan, those things would preserve the business, he'd have a fantastic business, there are still 600,000 Bitcoins in this Trust, but he can't do that because that's not good enough for DCG.
Peter McCormack: Yeah.
David Bailey: So, he's making decisions at Grayscale based on what's good for DCG, not for what's good for their customers or the Grayscale business or their shareholders, so that's one thing that he's being dishonest about.
The second thing he's being dishonest about is his whole ploy about not being able to do redemptions right now, this whole, "Hey, the SEC won't let us do the redemptions, we're not allowed to do the redemptions", that's a lie, it's a lie. I have talked to 20-plus law firms on this topic; I think this is actually something that's going to be clarified soon by Gary Gensler, but to seek the Reg M relief, to do the redemption programme that would get rid of the discount tomorrow, all they have to do is file notice with the SEC. The SEC would have to intervene to stop them, it's not like they need permission to do anything, they just tell the SEC, "Hey, we're doing this", and the SEC, they'd have to give, I think, five business days and then the SEC would have to intervene if they wanted to stop it.
Reg M, the thing that they're claiming the reason they can't do redemptions, is only when you are creating and redeeming shares simultaneously. If you're only creating shares or you're only redeeming shares, and there's been one year of time between one of those things happening, there's no controversy about being able to offer redemption programmes. So, his whole thing about, "We are singularly focused on becoming an ETF, so focused we won't even think about any other idea that we could implement right away to help people", it's just bullshit and he wants to act like he's on a crusade against the SEC to do right by shareholders when he could, in five business days, solve the entire problem but won't.
Peter McCormack: Well, I don't think he can, all I think he can do is blow the whistle on what he did and was part of; I don't think he can do it, he'll be fired.
David Bailey: Okay, then Barry; the buck stops with someone, so I'm going to say the buck stops with Michael because he's the CEO, but if he got fired trying to do the right thing, at least that would preserve his reputation; but okay, then the buck stops with Barry. But they could do that tomorrow and they're playing this total show game, lying to everyone's face and it pisses me off so bad to see it because the victims are real. If you read the complaint that FTX filed last night against the clawback, the $4 billion clawback; have you seen that?
Peter McCormack: No, I saw you tweet about it, like, "Let the games begin".
David Bailey: Oh yeah, well dude, everything's going to the next level right now. But this $4 billion clawback that they filed for, if you read the documentation, they say in their complaint that Genesis was the main feeder fund of the FTX and Alameda Ponzi scheme, and that at one point in time, Barry had lent Alameda $8 billion --
Peter McCormack: Oh fuck!
David Bailey: -- of money from the depositors at Genesis. So, they were just playing a net interest margin game where they were paying out the depositors at Genesis 3% and everybody thought, "Wow, I'm trusting the best that there is", and then he was turning around and lending it out to a literal criminal Ponzi scheme at 8% interest and pocketing the difference, $8 billion. He enabled these crimes; without that money, Alameda and FTX would have never gotten to the size that they got to. Same with Three Arrows; same with Voyager; same with -- go down the list. So, not only did he victimise all these people at Genesis but he victimised all the people at all of the other firms as well when he funded the criminal enterprises that fucked them over too.
So, I kind of look at GTBC as the ring of power and it corrupts all, and Barry has become Sauron, corrupted by this vehicle, and that ring of power is the source of all the money, the liquidity, that allowed these Ponzi schemes to expand so massively, and that's why he's the last domino to fall because he's the source of it all; all the dominos have tumbled backwards now to where it began.
Peter McCormack: Could these people end up in jail for this kind of thing? A lot of the things you've said, they remind me of everything I've seen when I've read about the Madoff case or watched the film about Madoff, where you see all the retirees who were fucked by it; Madoff got, was it 150 years?
David Bailey: Yeah. If Sam's going to go to jail, then I don't know why -- this behaviour's the same, maybe it's papered a little bit better. I know that there are criminal investigations that are ongoing right now at the Department of Justice in the state of New York and we will see what the outcome at the SEC, we'll see what the outcome of those investigations are. I'm a redneck from Tennessee and we have a saying, "Where there's smoke, there's fire", and there's so much fucking smoke at DCG you can't breathe. So, my guess is that, as you actually dig deeper and you get the documentation, the intercompany communication, etc, you're going to get the receipts for the crimes, but we'll see.
Peter McCormack: Yeah, and I don't know how much you can talk to this, but I'm guessing this has been a fucker for you to go through because there's clearly some, I don't know if it's personal investment or treasury management, but you're clearly exposed.
David Bailey: So we lost, let's call it $3 million or something on this trade, which sucks, but in the scheme of things, for our fund that we have, at the time that we lost those funds, let's call that like 8% or 7% of the fund, so it's painful but it could have been worse. Where we got wrapped up in this is we threw up a website, redeemGBTC.com. Well, first I started bitching on Twitter about it, then I threw up a website, redeemGBTC.com because so many people were hitting me up in my DMs, it was like flooding.
A shameless shill, if you're a shareholder of any of these Trust products, go to redeemGBTC.com, fill out the form, let us know who you are, we'll keep you up to date about what's going on, we may need your help on certain initiatives down the road, so please do that; it takes two minutes, please. So, we set up this website and then the floodgates started coming in of thousands of people, and it's like once you start reading the messages, this takes on like a whole other --
Peter McCormack: It's brutal.
David Bailey: It's brutal. I've been advocating for 12 years for Bitcoin, this is my career, this is my reputation, and we're allowing scams like this to happen on such a scale that I, for the first time in my entire career in Bitcoin, I felt ashamed to be involved in this, the first time ever. So, I felt like, "Damn, we have to wash this out". I'm not some big state person, I don't like the SEC; I don't like the government, I think they're as corrupt as anybody, but okay, well then if that means the responsibility's going to lie on us, we have to wash this out.
So, as I've learned more and more, I've been sucked into this. So, this is not what I want to be doing, no one's paying me to do this. If we're successful, my shares will go up in value but it's not enough to justify the amount of time that we're spending on this. It's just our reputation and our legacy, as an industry, is being marred by this behaviour and people knew this was going on, people have known this was going on and they haven't said anything about it because of the money, because there's too much money to be made, and if you open your mouth you might lose some of it. We've seen where that is a road to, it's a road to some massive calamity that sets the industry back four years.
Peter McCormack: Yeah, it's brutal. I went through it with BlockFi, I had the emails about BlockFi; it's fucking brutal seeing what people are going through. And do you know what, the really strange is everyone's really cordial when they explain it to you, they're not ranting at you, they're just telling you the story they've been through, but it's brutal to see, and I saw it on Reddit a lot as well. It's really shifted my personal approach to what I think I should be doing and what I should be supporting. I agree with you and anything we can do to help and support, you know you just reach out and let us know on that, man.
David Bailey: Dude, well, thank you. Well, I can tell you, you getting Michael on the record, other journalists interviewing Michael and letting him speak, the more he says, the more information that he gives shareholders, etc, into what happened, and even if he doesn't intend to, he is, so give him as many interviews as you all can.
Peter McCormack: Did I tell you how that interview came about?
David Bailey: No.
Peter McCormack: So, I first interviewed him, he was like my 30th interview ever back in 2018, and so I've never spoken to him since. So, we were going to New York to do a run of shows and Danny, my producer, said, "We should get Michael on the show". I was like, "No, mate, there's no chance he's going to come on the show, don't even bother". He was like, "Okay".
His fucking PR firm wrote to us and said, "Oh, would you like to have Michael on the show?" And we were like, "Funny that, we're going to be in New York in two weeks, sure", and they went, "Great, we'll get it set up". And the whole time I was thinking, "No, you're not going to come", and then they messaged us in advance and said, "Can you let you know the questions you're going to ask?" I was like, "No, we don't give anyone any questions; we can give you some topics but no questions".
Then obviously, I called you up and said, "By the way, I've got an interview with Michael Sonnenshein coming up, can you give me some of the background to what's going on with the Trust", and then it happened, and it was really weird. I was surprised they would come on the show.
David Bailey: The best part of the interview, to me, was when you were just like, "We're just two guys enjoying a beer, hanging out in New York, no PR firms, PR people".
Peter McCormack: Yeah, well his Head of Crisis Management was in the room. I don't know if you noticed, but there's a moment he goes like this, and that moment, he's looking at his Head of Crisis Management and I think he's basically saying to her, "What the fuck; where have you put me?" She, interestingly enough, at one point I said something, she blurted out something, and I was thinking, "What the fuck are you doing? You're not in the interview. You can be in the room, but you're meant to shut up".
Then, the next day, they were writing to us asking us to edit bits out, which we refused to do. Look, it is what it is, look, straight up, I'd have him back on if he wants to talk. He's obviously armed now to know what I'll be like, but I will still talk to him, I want to appeal [? - 00:58:30] to him. Barry the same, I'm sure they'll both listen and I would have Barry on; Barry has always refused to do an interview, for obvious reasons, but I'd always have him on and I'll always be fair with him, but yeah, what a fucked situation, man. Well, listen, we just need to get to Miami and just get past --
David Bailey: Drink a beer! I'm sure that Michael and that Barry have a lot of pressure on them right now and I'm sure that they're having a hard time sleeping, and I'm sure no one wants to be in the shoes that they're in right now, and so I respect that it's a tough situation. Before all this happened, I had a ton of respect for Barry Silbert, a ton of respect for him, but shit has gone sideways and you are in the position to do something about it immediately, and your total obligation and duty is to act to right the thing that happened, and every day you don't do that, not only do you burn goodwill, you hurt more people.
So, these guys, they have to rise to the moment and do the right thing by people or otherwise they're going to be forced to do the right thing through the courts or through the political system and history will not look favourably on them. But yeah, not to be negative, I'm excited for Miami.
Peter McCormack: Yeah.
David Bailey: I'm ready for a new epoch, I'm ready for fresh beginnings and I'm interested to see who the new leaders in our industry are that are going to be able to rise up in the vacuum created by the implosion of all these firms.
Peter McCormack: Roll on Miami. All right, man, well listen, I've got to go and pack, I haven't even packed; I've got to get at up 5.00am and go and catch this flight. So, listen, when are you getting in?
David Bailey: A few days before the conference, so give me a shout, let's hang out.
Peter McCormack: Yeah, I'll find you, we'll hang out, we'll have a beer. I know you're going to be busy, but look, appreciate everything you're doing; this event, I've loved it since the first one in San Francisco. I always love seeing your mum, always love catching up with her, it's brilliant. And I love what you did in Amsterdam with the conference there. So, listen, anything we can do to help, give me a shout and I'll see you in Miami.
David Bailey: Peter, much love. See you in Miami. Catch you later.
