As Digital Currency Group faces off with the Securities and Exchange Commission in court it is being sued by the FTX Debtors, who want Grayscale Bitcoin Trust to unlock its funds.
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The FTX Debtors management team is suing Digital Currency Group over its longstanding refusal to allow its Grayscale Bitcoin Trust investors to redeem their funds.
At issue is about a quarter-billion dollars that Sam Bankman-Fried's other bankrupt company, Alameda Research, has locked in DCG's Grayscale Bitcoin and Ethereum trusts.
Specifically, the investment firm's refusal to let shareholders redeem their investments has chopped about 90% off the value of those shares, according to the FTX Debtors. They want to force it open and extract $550 million from an investment currently worth half that.
It's another woe for DCG CEO Barry Silbert, whose firm owns not only Grayscale but Genesis, the bankrupt crypto lender which in January battled the Gemini exchange after locking up $9 billion owed to 340,000 customers of Gemini Earn.
In February, an agreement was reached that zeroed out DCG's investment in Genesis, but promised investors up to 80% back. Federal prosecutors are investigating the bankruptcy, Bloomberg reported in January.
Force it Open
The Grayscale Bitcoin Trust and other token investment trusts were at one point the only way for institutional investors to invest in bitcoin without custodying it. For several years, its shares were worth 20% to 30% more than the value of the Bitcoin that GBTC held. In March 2021, as other investment options appeared, that flipped to a discount that's grown to almost 45%.
"Our goal is to unlock value that we believe is currently being suppressed by Grayscale's self-dealing and improper redemption ban," said FTX Debtors CEO John Ray III, in a statement on March 6. "FTX customers and creditors will benefit from additional recoveries, along with other Grayscale Trust investors that are being harmed by Grayscale's actions."
FTX cited the 2% administrator's fee, saying Grayscale had "extracted over $1.3 billion in exorbitant management fees in violation of the Trust agreements," while it "has for years hidden behind contrived excuses" to stop shareholders from redeeming their shares. It added:
"If Grayscale reduced its fees and stopped improperly preventing redemptions, the FTX Debtors' shares would be worth at least $550 million, approximately 90% more than the current value of the FTX Debtors' shares today."
Blame the SEC
That discount is something that Grayscale parent Digital Currency Group blames on the Securities and Exchange Commission over the agency's refusal to allow the trust to become an exchange traded fund (ETF).
The FTX lawsuit comes as DCG prepares for opening arguments in its lawsuit against the Securities and Exchange Commission over the agency's refusal to allow the trust to become an exchange-traded fund.
While the SEC has allowed Bitcoin futures ETFs, it has refused many attempts to get a spot bitcoin ETF approved due to concerns about market manipulation and fraud.
A Grayscale spokeswoman said:
"The lawsuit filed by Sam Bankman-Fried's hedge fund, Alameda Research, is misguided. Grayscale has been transparent in our efforts to obtain regulatory approval to convert GBTC into an ETF — an outcome that is undoubtedly the best long-term product structure for Grayscale's investors. We remain confident in the common sense, compelling legal arguments that will be argued before the D.C. Circuit Court of Appeals."
