By William (Bill) J. Kelly, CAIA, CEO of the CAIA Association.
Last week Gary Gensler did what he had to do. The SEC Commissioners invariably vote along party lines, but Mr. Gensler can now be called a centrist as it was he who joined the two Republican appointees to approve the first ever spot bitcoin exchanged traded fund. Love him or hate him, he has always been consistent in the view that “the Commission acts within the law and how the courts interpret the law.” Coming out of what is now known as the Grayscale Ruling handed down by the DC Court of Appeals he acted properly even though he may not love the pill he had to swallow. While some may call it sour grapes, his final admonishment should be taken to heart by all investors and ETP purveyors. Gensler warned that investors should remain cautious about risks, while underscoring “the SEC did not approve or endorse bitcoin via this approval” by clearing the way for what is now 11 (and sure to grow) ETP filings.
What is an investor to do and what now is the responsibility of our industry professionals? When you have an SEC Chair come on CNBC and categorically state that bitcoin is “a highly speculative and volatile store of value that is primarily used for illicit activities”, I am not sure if a valuation guide should be the port of first call. Perhaps more on point was the always affable Larry Fink who literally kept the CNBC chair warm for Gensler when he said on Friday that “ETFs are step one in the technological revolution in the financial markets, and step two is going to be the tokenization of every financial asset.” It is worth watching the full seven minutes of the embedded interview with Andrew Ross Sorkin.
Before putting a bold underscore on Fink’s observations, it is relevant to take in the views of another, perhaps more infamous than famous influencer, the one and only Elon Musk. While certainly a controversial character, take a look at what he said almost a decade ago at a Tesla shareholder meeting: it was (and still is) all about the factory and “the machine building the machine”, which is exactly the point made by Fink and the essence of the rest of the camel that may soon come into the tent … or as a modern day James Carville might say, “it’s the blockchain, stupid!”
The ability to digitize and tokenize virtually any asset is a powerful technological development that is truly achievable and accessible only via the advancements in distributed ledger technology. These are the rails where virtually any on-chain or off-chain asset can (eventually) be accessible by anyone in a transparent and immutable way. Ultimately, these rails might need to be “permissioned” and an ecosystem of fair and transparent price discovery will need to be established. It is interesting to note that digital assets were once the exemplar of DeFi: kill the TradFi intermediary and all transactions will be P2P. Now we might just find TraDeFi is truly the best way forward for all market participants. The early P2P foray defined by non-fungible tokens (remember them, most don’t) representing a fractional ownership of a virtual vessel, an arcane artist, or a pudgy penguin, did not land so well for the investor. This approach of a fungible token (in this case, bitcoin), offered in a regulated wrapper with a TraDeFi structure, just might be the optimal way forward.
Rails … an interesting and very visual way of understanding the connective tissue of Fink’s asset tokenization, Musk’s factory as a machine, and CAIA Association’s unwavering view of the true power and scale of the opportunity ahead. In 2023 we released our Digital Assets Microcredential, proudly and thankfully in conjunction with an industry consortium led by the digitally-minded crew over at Coinbase Asset Management. The importance of the development of the modern-day rail system was a powerful and visual learning objective to describe an infrastructure that needed full and seamless transportability of the cargo moving across those rails. Imagine your railcar (or digital asset) having to make a hard stop at a state or country boarder because someone else chose a railbed that was not gauged at four feet eight and one half inches. Therein lies power, and an opportunity.
Someone will inevitably put the silly laser eyes on this ‘entitled’ camel, but do not let that allow the true professional to focus on anything other than the longer game, and on what is truly an opportunity for all investors; for the moment, this just might be a misunderstood footnote on this latest product development.
Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.
About the Author:
Bill Kelly, CAIA, has been a frequent industry speaker, writer, and commentator on alternative investment topics around the world since taking the leadership role at the CAIA Association in January, 2014. Previously, Bill was the CEO of Boston Partners and one of seven founding partners of the predecessor firm, Boston Partners Asset Management which, prior to a majority interest being sold to Robeco Group in Rotterdam in 2002, was an employee-owned firm. Bill’s career in the institutional asset management space spans over 30 years where he gained extensive managerial experience through successive CFO, COO and CEO roles.
In addition to his current role, Bill is a tireless advocate for shareholder protection and investor education and is currently the Chairman and lead independent director for the Boston Partners Trust Company. He has previously served as an independent director and audit committee chair for ’40 Act Mutual Funds and other financial services firms. He is also currently an Advisory Board Member of the Certified Investment Fund Director Institute which strives to bring the highest levels of professionalism and governance to independent fund directors around the world. A member of the board of the CAIA Association, Bill also represents CAIA in similar capacities via their global partnerships with other associations and global regulators. Bill began his career as an accountant with PwC and is a designated Audit Committee Financial Expert in accordance with SEC rules.