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The crypto asset manager launched a spot bitcoin ETF following SEC vote

With the Securities and Exchange Commission’s approval of U.S. exchange-traded funds holding bitcoin, cryptocurrency asset manager Grayscale Investments must focus more on managing risk and communicating with participants, Chief Financial Officer Ed McGee said.

Stamford, Conn.-based Grayscale was one of several firms that launched a spot bitcoin ETF on Thursday after the SEC approval of the vehicles the previous day. The Grayscale Bitcoin Trust, which the company converted into a spot bitcoin ETF, saw $2.3 billion in trading volume in its first day on the New York Stock Exchange.

Grayscale was thrust into the center of the debate over bitcoin ETFs when a court in August ruled the SEC shouldn’t have rejected its application to make the conversion. The SEC didn’t appeal the ruling.

McGee spoke with CFO Journal about the financial implications of Grayscale’s ETF and how he expects his role to change. His responses have been edited for length and clarity.

WSJ: What is the core financial impact you expect the ETF to have on your business?

McGee: From a sponsor or CFO perspective, the most impactful takeaway from this event is we will now be operating an open-ended fund, which would impact the fee we earned as denominated in bitcoin on a more variable basis, meaning the number of bitcoins we were taking in and the risk management of that was a fairly steady state up until this point. Now, with the ability for more bitcoins to come into the fund or bitcoins potentially coming out of the trust, managing that adds a new variable layered on top of a volatile asset, which resulted in a risk management process we’re ready to handle.

WSJ: As CFO, what will be the biggest change to your day-to-day responsibilities?

McGee: It will be twofold. It will be monitoring the performance of the product and net inflows into the product and how we risk-manage new assets within the product. That will take up a large portion of time.

From an initial onboarding perspective, we are consistently going to be evaluating our counterparties’ performance, and we would expect them to be evaluating Grayscale. Those relationships will now move from awareness or touch points we’ve had with them in other capacities to now being service providers for the Grayscale Bitcoin Trust. In that capacity, that will likely be more frequent oversight and conversations with those counterparties as to how the product is behaving, how they’re performing in relation to the market infrastructure for ETFs. If they have any questions, of course we’re going to be available, and I’m going to be available to make sure they understand what Grayscale Investments is doing and how it’s operating to the extent it benefits their ability to service GBTC because that will only benefit the investors.

McGee: We have engaged liquidity providers and authorized participants. As part of entering into agreements with those parties, they become new stakeholders. From my perspective, there may be more time providing information to those stakeholders as it relates to Grayscale Investments as an operating entity in addition to the Grayscale Bitcoin Trust, which they are likely familiar with but they’re less familiar with us as an entity. That third-party vendor management and third-party oversight process incorporates new key stakeholders we largely have had relationships with, so we’re familiar with each other from a market stakeholder perspective. But as contracted counterparties, that will be something that changes going forward.

WSJ: What would be an example of risk-management moves you would make and when?

McGee: If there was a significant amount of bitcoin that came into the fund due to a creation event, that will change the amount of bitcoin in the trust. We’re very comfortable dealing with the digital assets and risk managing new bitcoin that comes into the trust. We’ve been doing that for years. But what that will change from my perspective is now the amount of bitcoin we at Grayscale have exposure to as managers of the fund will also increase. Are we taking appropriate measures to make sure we understand we have that exposure? For how long will we have that exposure? Should we as an operating entity react to increases or decreases in digital-asset prices on a bigger notional value of tokens we’re exposed to?

After Legal Victories, Grayscale Charts New Pathways (October 2023)

That can take many forms. That could change our expectations for converting that bitcoin to cash and treasury optimization and balance-sheet optimization. It could work its way into existing risk-monitoring models we have as to how much accrued risk is sitting within the business, more from the awareness perspective. Whether or not you should mitigate that risk through either hedging or other strategies to ensure there isn’t an impact on the Grayscale operating enterprise we shouldn’t live with from a risk tolerance perspective.

WSJ: What issues do you expect these authorized participants to have?

McGee: We look and feel like a traditional asset manager when interacting with others. Some may be surprised we aren’t a nascent crypto-only or crypto-native operating enterprise. While we do feel we have expertise with this asset, the feedback we’ve gotten from these market participants has been positive in that we are at an institutional grade from a compliance and due diligence perspective.

WSJ: You’ve said you weren’t sure of the expected size of the ETF in terms of participation and total funds. Do you have any more clarity around that?

McGee: The timeline for these new investors to engage with these digital asset products will vary. That means some of these investors have been waiting. They have their understanding and their thesis well understood and will be engaging with the products more quickly than others who still may need to see how the environment develops, how their own internal risk-management functions evaluate digital assets, not bitcoin ETFs listed on national securities exchanges. Therefore their adoption or lack thereof may not reveal itself to the market for months or even later in the year. That’s just fine from our perspective.

WSJ: How does the ETF affect the long-term growth plans for the company?

McGee: This demonstrates the culmination of a belief we’ve had for a long period. U.S. investors should have the ability to express their belief or lack thereof in this asset class through something familiar to them: Wrapping bitcoin in a security wrapper traded on a national securities exchange sitting alongside other investments in their portfolio is a fantastic thing for the investor to have the option to pursue. What it does to the Grayscale Investments operating company is still yet to be determined, but we’re prepared for any outcome.

Some European officials are wary of plan discussed by U.S. and U.K.

The U.S. and its partners are exploring ways to use some of the $300 billion in frozen Russian central bank reserves to back loans to Ukraine, one of a series of ideas that Western officials are considering as they struggle to agree on a method to seize Russian funds without spooking international investors.

With Congress blocking funding for Ukraine, there is renewed impetus in Washington to find other sources of long-term financial support. After the outbreak of war, billions of dollars in Russian foreign currency reserves, gold and government bonds were frozen across the U.S., Europe and Japan to ensure they weren’t used to fund its illegal invasion.

Pushed by the Biden administration, the Group of Seven democracies is now exploring several ways to confiscate the frozen Russian funds to give to Ukraine, a move that would represent a significant escalation against the Kremlin and that is fraught with legal difficulties.

G-7 officials hope to present options in time for the second anniversary of the invasion in February. But it could take at least another year before anything actually happens, some officials say. There are fissures among Western allies about how best to proceed. While the U.S. and the U.K. back the idea, other European partners, in particular Germany, worry that seizing Russian sovereign assets would backfire, dissuading countries around the world from storing their wealth in the West for fear it might get taken away.

“The G-7 leaders asked that options be developed and the matter be studied, to the extent that there are risks that they’d be evaluated, international law issues studied and so we’re in the process of doing that, but certainly no decision has been made,” Treasury Secretary Janet Yellen said this week.

Nonetheless, the political imperative of using Russian assets to help pay the massive costs of supporting Ukraine and helping it rebuild have become increasingly compelling, European and U.S. officials say. G-7 leaders have already said Russia must pay for the cost of the war.

Ideas under discussion range from taxing the interest payments the frozen assets generate to seizing the funds outright and transferring them to Ukraine, according to people familiar with the talks.

Another idea is using Russian government reserves as collateral for loans to Ukraine. Under this idea, which is still at an embryonic stage, lenders would receive the Russian assets if Ukraine defaults on the loan, potentially issued by an international financial institution such as the World Bank. That could create a financial incentive for Russia to avoid destroying Ukraine’s economy and its ability to pay back its debts, the thinking goes. Another advantage: The underlying collateral could be handed back to Russia if hostilities halted and the seizure needed to be reversed.

As with other sanctions-related initiatives since the war began, like the price cap on Russian oil, Washington’s push on confiscating assets has caused tensions with European countries, including concern about the legality of the move, the precedent it sets and how it would work practically. Europe holds the vast bulk of the frozen Russian assets, around 180 billion euros of them, equivalent to around $197 billion, in Belgian clearinghouse Euroclear.

“There is a concern among some—the U.S. Treasury, the Fed, the ECB—that if you do this you undermine the reserve status of the dollar and euro,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, adding that he didn’t think confiscating assets would turn key countries away from the world’s two most liquid currencies.

Currently the West is spending around $100 billion a year supporting Ukraine, said Timothy Ash, an associate fellow in the Russia and Eurasia program at think tank Chatham House. The costs of both supporting and rebuilding Ukraine over the coming years will be substantial. If allies are sincere about supporting Ukraine but won’t seize Russian assets, “then where are we going to get that money from?” he says.

A key point of contention is whether the West can seize Russian assets under international law. U.S. officials believe it would be legal to confiscate the assets, pointing to principles that allow those affected by a country’s violation of key international norms to breach the protection that central bank assets are usually guaranteed.

Some senior European officials say they are skeptical. The U.S. and its allies aren’t at war with Russia, and Russia didn’t amass its wealth through illicit means but largely by selling oil and gas, much of which went to the West. Another concern is that seizing Russia’s assets could appear arbitrary.

British Foreign Secretary David Cameron said recently that the legal arguments behind confiscating Russian assets are solid. “I am pushing hard on this. The world has changed. The arguments against are not as strong as people said, and there is a legal route,” he said.

Biden administration officials have been working with Capitol Hill to develop legislation that would authorize the seizure of Russian assets in the U.S. Cameron said that he hoped that all G-7 members would unite to seize the assets but that the U.K. and the U.S. could go it alone if needed.

Beyond the legal questions, the Western partners are still debating the basics of any potential plan, including whether to restrict the use of the Russian money for reconstruction efforts. Giving Ukraine the Russian money to directly fund its military could prove particularly provocative to Moscow, inviting broad retaliation.

The Kremlin said in late December it has a list of U.S. and European assets in the country it would seize in a countermeasure.

The European Commission has already proposed a more modest plan to use proceeds—interest payments and others—from the assets, mostly held at Euroclear to support Ukraine.

The European Central Bank has argued the plans, which could generate around €4 billion annually, may tarnish the international attraction of the euro by driving countries such as China or Gulf states to withdraw investments in euro assets for fear they could suffer a similar fate.

EU governments forced the European Commission, the EU’s executive body, to delay by months a proposal on taxing the windfall. When the proposal finally came in December, it focused only on legislation to place the profits from matured Russian assets into separate accounts at financial institutions in the bloc, leaving aside for now a separate proposal on how to use the revenue for Ukraine.

Internal EU discussions on taxing the Russian proceeds have avoided talk of confiscating the underlying Russian assets, diplomats say. A decision by the bloc would likely need backing by all 27 governments.

Still, U.S. officials are quietly confident they can persuade Europe to come on board with Russian asset confiscation, as they did after months of wrangling to implement a Washington-inspired price cap on Russian oil in 2022. Having every major Western economy move together would mitigate risks to the euro, the U.S. argument goes.

There are precedents. In 1990, former President George HW Bush froze some $30 billion in Iraqi and Kuwaiti assets in the U.S. following Saddam Hussein’s invasion of Kuwait, a move echoed by the U.K. and France. The U.S. took a similar step following its invasion of Iraq in 2003 while Washington froze Yugoslav assets in the U.S. during the 1990s. The assets were eventually returned.

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Vienna’s co-housing model offers a key to keeping families in the city

As surging rents in world capitals diminish social diversity, projects such as Austria’s Gleis 21 offer one way to ease the crisis

Once a week, Michael Kerbler and his neighbours eat dinner together in a modern, open-plan kitchen built on the roof of their apartment building in central Vienna. Floor-to-ceiling windows provide an excellent view over the city and the park just below. There’s a well-equipped playroom next door so the children can entertain themselves while the adults chat over a glass of wine. Some of the food comes from the raised vegetable garden also on the roof, along with a yoga studio, library sitting room and large sauna. All the residents have their own flat in the building and for this they pay an average of €600 a month.

Gleis 21 is an award-winning, intergenerational co-housing project in Vienna that the residents own, operate and manage collectively. Plant-filled terraces encircle the four-storey building, built almost entirely from wood apart from four central concrete pillars. Unlike a 1970s commune, residents have their own separate apartments as well as access to the communal spaces on the 700 sq m rooftop. There are 38 units in all, including a two-bedroom guest apartment that can be booked for visiting friends and family.

The residents, who range in age from 27 to 72, came up with the concept, raised the money and oversaw the construction of the building. The core group was formed in 2015. By 2017, they had the architect’s plans and the funding in place. The building was completed in 2019 and they all moved in shortly before lockdown. The total cost of the project was almost €10mn. The group found €2mn themselves, the rest came from the bank in the form of a 30-year mortgage and they also received subsidies and a loan from City Hall.

One of the reasons Vienna is repeatedly voted one of the most liveable cities in the world is because its urban planning is centred on the question “is this good for children?” as opposed to “is this good for property developers?” The children who live in Gleis 21 walk across a park to their local school and have a community of neighbours who can look after them when their parents are at work. Meanwhile, parts of many of the world’s leading cities — including Hong Kong, Sydney, San Francisco, New York and London — are in danger of becoming child-free zones because young families simply cannot afford to live in them. Primary schools in some London boroughs, such as Islington and Camden, are closing because there are not enough pupils.

As cities such as London and New York enter another year where high rental prices are causing major social problems, could co-housing projects help ease the burden?

Vienna has several innovative affordable housing schemes aimed at different social groups. The co-housing model is popular with middle-class families who have some capital but can’t afford to buy and want to bring up their kids in the city. To make sure the property is never sold on the private market, residents of Gleis 21 do not own their flats. Instead, they own shares in the building company they formed.

Their monthly “rent” is their share of the mortgage repayment. At the start, each member of the co-housing group must pay €580 per sq m as a deposit (some flats are bigger than others). If they sell, they get that money back plus a bit more depending on how long they have lived there and how much money they have put in to pay off the loan.

A retired radio journalist, Kerbler is one of the oldest residents. He worked as a foreign correspondent in Africa and was impressed by how people in small villages cared for the very young and very old collectively and had found ways to resolve conflict. He and his wife didn’t like the idea of spending their old age living without children and younger people around them. “We were looking for another model of different generations living under one roof,” he says. “This is what brought us together. We wanted to change how society works and manage some of the problems of modern living collectively.”

Denmark was the first European country to adopt this co-housing model in the late 1960s and early 1970s. Most of the communities were formed by families with young children who wanted to share the burden of childcare. Since then, it has evolved to include single parents, empty nesters and older people. From the 1980s onwards, the Danish government has supported co-housing groups with low-interest government loans.

The first co-housing community in Denmark was Sættedammen, about half an hour by train north of Copenhagen. The group who built it were inspired by an article in a Danish newspaper headlined: “Children should have 100 parents.” It consists of 32 individual terrace houses with one big communal garden and a community house in the middle with a kitchen, playroom and laundry. Back then there was no government support, so the residents own their own house and a share of the communal areas. They can sell to anyone they like and there is no formal process for new owners to be approved by the community.

Morten Fangel, 79, a retired civil engineer, was one of the first to move there in 1972 and the youngest adult at the time. There are now 65 residents but the low turnover rate means two-thirds of them are now elderly, and the community struggles to attract younger families. Morten believes the traditional private ownership structure is a barrier because of rising house prices and interest rates. There are 14 children living there now, far fewer than in the early years. There is a voluntary agreement that if someone moves out, they will try to sell to a family with children.

There are always downsides to living with others but Fangel claims they have had relatively few disputes over the years. One of the biggest rows happened early on when cracks appeared in the walls, and they disagreed about how to deal with the problem. “There was a lot of shouting at our communal meetings,” says Fangel, “until we finally came to an agreement with the building contractor, but it was stressful.”

There have been tensions recently with elderly residents complaining about noise from the communal trampoline, which stands in the middle of the shared garden. “The children were screaming day and night so there has been a lot of discussion about moving the trampoline and not allowing in their friends who don’t live here. But I think we can reach a compromise.”

Most co-housing groups draw up their own rules on how to live together and how to share responsibility but this does mean being prepared to sit through long meetings with your fellow residents as you talk through difficult issues. Kerbler returns to the analogy of the African village. “In any democracy there are winners and losers and sometimes you don’t get what you want — but then you have to look at the positives.”

Morten Fangel moved into Sættedammen in 1972 and was the youngest adult there at the time © Valdemar Ren/FT

Finding land or an available property is the first step in any development. In Denmark, Germany and Austria this is much easier than in the UK or the US because the state earmarks parcels of new developments for co-housing. Gleis 21, which means Platform 21, is built on the site of a former railway goods terminal known as Sonnwendviertel, an urban neighbourhood south of Vienna’s main railway station. It now has over 5,000 apartments housing more than 13,000 residents.

It’s not unlike the area around London’s King's Cross and St Pancras, home to one of the largest redevelopment projects in the city. Camden Council demanded some provision for affordable housing when it gave planning permission but it was minimal compared with the 50 per cent demanded by Vienna City Hall.

The big mistake is to create affordable housing only for poor people, it’s important to include the middle class

Maria Vassilakou, former Vienna deputy mayor

In Sonnwendviertel, there are private apartment buildings with doormen next to apartments subsidised by the city, giving the area a genuine social mix. This is another of the keys to Vienna’s successful housing policies. By building socially mixed communities, it avoids creating ghettos. “The big mistake is to create affordable housing only for poor people, it’s important to include the middle class,” says former deputy mayor Maria Vassilakou.

When Vienna embarked on redeveloping the brownfield site around the railway station, four of the buildings were earmarked in the master plan as co-housing units. These were subject to a competition that Kerbler and the other members of his group entered and won in 2015. “These people tend to be middle class, educated, motivated and socially aware,” says architectural journalist Maik Novotny. “They have an important role to play in the development of a new neighbourhood and, as far as the city of Vienna is concerned, they are the yeast of urban development.”

To win the competition, the Gleis 21 group had to put forward a concept of what they would do for the wider community. Their solution was to offer four flats to asylum seekers (selected by a local charity) and make the ground floor of the building into a performance space and café, which is currently used by a local dance group and an organisation offering after-school music lessons for kids. Both groups pay an affordable rent to Gleis 21, which goes to paying off the mortgage.

The Cannock Mill co-housing project in Colchester, UK, is an eco-village for older residents

If someone sells and moves out, the other residents have the right of veto over who moves in next. “We had a German family who moved back home and so two members of the group were tasked with interviewing replacements,” says Kerbler. “We asked them to fill out a questionnaire so we could understand their motivation for wanting to live here.” Everyone has to invest 10 to 15 hours a month in cleaning and maintaining the common areas as well as carrying out administrative jobs, so they have to be sure new members will muck in and share their values.

On the same street as Gleis 21 is a co-housing group for older people occupying one floor of a multistorey building. The residents, aged 59 to 90, are mainly women who formed the collective because they wanted to remain in the city but not live on their own. In many European countries, this model is seen as a cheaper alternative to private retirement communities. It also allows older people to support each other, stay active, engaged and healthier and is therefore cheaper down the line because it keeps them out of care homes.

There is now a burgeoning co-housing movement in the UK, including communities for older people such as New Ground in Chipping Barnet, north London, which is exclusively for older women, and Cannock Mill near Colchester, an eco-village with residents aged between 60 to 83. In Cambridge, there’s the award-winning Marmalade Lane, a sustainable multigenerational housing development with 42 terrace houses.

In Leeds there is Chapeltown, which houses 33 families, and Lilac (low-impact living affordable community) built on the site of an old school in Bramley. Lilac has 20 units built around a communal house and garden with shared amenities such as washing machines and garden tools. Rather than taking on individual mortgages, the residents pay 35 per cent of their net income into a mutual home ownership society, which owns the houses and the land.

According to the Cohousing Association of America, there are about 170 established co-housing communities in the US, mostly in California and New York, where there are state housing grants available. Rather like the original Danish model, most residents own their own homes but share common spaces, which fosters community spirit but isn’t always affordable for lower-income families.

But whether you’re in Vienna, Los Angeles or Leeds, getting a co-housing community off the ground is complicated. Anyone embarking on this journey should start by getting practical advice from their local co-housing association or, in the UK, their Community Housing Hub. These projects are driven by small groups of highly motivated people, particularly in the UK or the US where there is relatively little help from local or central government in terms of planning, loans or earmarking land for co-housing developments.

According to a recent survey by polling firm YouGov, a majority of both Conservative and Labour voters believe the UK government should invest in more social housing. Co-housing communities are just one small part of the solution to this crisis but they should not be overlooked. Given the elections coming up on both sides of the Atlantic, policymakers would do well to study the Vienna model.