There are plenty of reasons to criticise Grayscale and its parent company Digital Currency Group (DGC), but dogged determination isn’t one of them.
Grayscale has attempted once again to convince the US Securities and Exchange Commission (SEC) to allow conversion of the Grayscale Bitcoin Trust (GBTC), the world’s largest bitcoin-only investment vehicle, into a spot exchange-traded fund (ETF).
The SEC has shown no interest in allowing such a product, despite repeated applications and protestations by Grayscale and other market participants, arguing that current fraud and manipulation measures do not provide adequate protection for customers.
In a fresh petition filed on Friday, January 13 before the US Court of Appeals, Grayscale called the SEC’s refusal “arbitrary to its core” and “illogical” given the SEC’s granting of permission for bitcoin futures contracts.
“There is thus no reasonable basis for concluding that … surveillance adequately protects holders of one kind of ETP but not the other,” asserted Grayscale.
Grayscale said the SEC's decision should be held unlawful and set aside.
Converting GBTC into a spot ETF would be of huge benefit to the 850,000 plus GBTC investors who have seen their shares plummet.
GBTC’s problem lies in its structure. New shares in the product can be created, but they cannot be redeemed. Grayscale chief executive Michael Sonnenshein has ruled out allowing for redemptions. This leaves investors with only one option if they want to exit - sell them on to a willing buyer.
But sellers are hard to come by when the market is as depressed as it has been in the past 13 months, unless sellers are willing to part at a substantial discount.
This causes the trust’s shares to underperform against its underlying bitcoin holdings and in GBTC’s case, the discount has stretched as wide as 50% in recent times.
Since bitcoin (BTC) has rebounded sharply in recent weeks, this gap has narrowed, but it still remains at a painful 36% discount to net asset value (NAV).
What happens next?
Grayscale is under exceeding pressure to do good by its shareholders.
Fir Tree Capital Management opened a lawsuit against Grayscale in December 2022 in an attempt to strong-arm the trust into allowing redemptions.
Grayscale’s 850,000 investors have been “harmed by Grayscale’s shareholder-unfriendly actions,” said Fir Tree, which also wants Grayscale to cut its exorbitant 2% fee rate.
Fir Tree also chastised Grayscale for charging annual fees based on the price of assets under management rather than the discounted share price.
Read more: Grayscale faces legal action over its US$10.7bn bitcoin trust
Now, Grayscale’s parent company DCG’s controlling shareholder Osprey Funds has entered the arena with an offer to take over as the trust’s sponsor.
“I think you should use your powers to cause Grayscale to withdraw as sponsor of GBTC and name Osprey sponsor instead,” wrote Osprey chief executive Greg King in an open letter to DCG head Barry Silbert.
The letter continued: “We urge you to install Osprey Funds as sponsor of GBTC immediately both to protect GBTC holders and provide confidence to the non-DCG-affiliated stakeholders of GBTC and Grayscale who have an interest in the preservation of value.”
In support of the bid, Osprey has made the following recommendations:
- Slash the management fee to 0.49%, and clean up the expense structure of the fund which contains significant conflicts of interest
- Seek to implement a redemption program as soon as possible
- Pursue a listing on the New York Stock Exchange immediately by circumventing the SEC and working directly with Congress to enlighten the regulator “as to the rationale of approving the fund as an exchange-listed, ETP
Osprey isn’t the only one circling Grayscale.
On December 28, 2022, Valkyrie Investments co-founder Steven McClurg unveiled his company’s interest too.
He said: “We understand that Grayscale has played an important role in the development and growth of the bitcoin ecosystem with the launch of GBTC, and we respect the team and the work that they have done.
“However, in light of recent events involving Grayscale and its family of affiliated companies, it is time for a change. Valkyrie is the best company to manage GBTC to ensure its investors are treated fairly.”
With the vultures circling, Grayscale could have a fight for its flagship fund on its hands.
Ultimately, it’s the investors who matter most, so perhaps it really is time to pass on the baton.