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A battle on two fronts: Grayscale sues the SEC as Alameda sues Grayscale

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(Kitco News) - Grayscale Investments, the digital currency asset management company behind the Grayscale Bitcoin Trust (GBTC), finally had its day in court amid an ongoing battle with the Securities and Exchange Commission (SEC) over its rejection of Grayscale’s bid to convert its GBTC into an exchange-traded fund (ETF).

A line of questioning from the panel of judges overseeing the case signaled skepticism on the part of the judges related to the SEC’s argument that bitcoin futures prices underlying futures ETFs were more resistant to manipulation than spot bitcoin markets might be if a spot bitcoin futures ETF was approved.

Grayscale called the denial of its ETF application by the SEC “arbitrary,” and is now seeking court approval to proceed with the conversion of GBTC to an ETF, which will be overseen and regulated by the SEC.

Judge Neomi Rao asked SEC Senior Counsel Emily Parise a number of questions about Bitcoin futures prices and how they compared with spot prices.

“It seems to me that [what] the Commission really needs to explain is how it understands the relationship between bitcoin futures and the spot price of bitcoin,” Rao said. “It seems to me that ... one is just essentially a derivative. They move together 99.9% of the time. So where's the gap, in the Commission's view?”

Parise responded that from the SEC’s perspective, the 99% correlation does not equate to causation, but instead only refers to once-a-day prices rather than intraday prices. For the SEC, “it is undisputed” that the spot markets for Bitcoin are fragmented, as opposed to the Bitcoin futures market, which trades solely on the Chicago Mercantile Exchange (CME).

The other judges overseeing the case also asked a number of questions related to the legal defense by the SEC and how it evaluated the tests it used to reject Grayscale's bid.

Following this line of questioning from the judges, the price of GBTC climbed 5% despite a stagnant Bitcoin price at the prospect that the investment vehicle could eventually transform into an ETF. There’s still a long way to go before GBTC reaches parity with Bitcoin, however, as data from Coinglass shows that the GBTC discount is currently at 44.55%.

The final ruling on the case from the judges could potentially take three to six months.

Alameda sues Grayscale and the Digital Currency Group

Meanwhile, in another courtroom, lawyers for the bankrupt trading affiliate Alameda Research have filed a lawsuit against Grayscale and its owner, the Digital Currency Group (DCG), over the structure of the Grayscale cryptocurrency trusts.

According to a press release distributed by FTX, Alamada has filed the lawsuit in the Court of Chancery in the State of Delaware, naming Grayscale, its CEO Michael Sonnenshein, and its owners the DCG and Barry Silbert as defendants.

Alameda is seeking injunctive relief to unlock $9 billion or more in value for shareholders of GBTC and the Grayscale Ethereum Trust (ETHE) and “realize over a quarter billion dollars in asset value for the FTX Debtors’ customers and creditors.”

The complaint cited that in just the past two years, “Grayscale has extracted over $1.3 billion in exorbitant management fees in violation of the Trust agreements.” It also highlighted that the firm has “hidden behind contrived excuses to prevent shareholders from redeeming their shares” for years, alleging that “Grayscale's actions have resulted in the Trusts' shares trading at approximately a 50% discount to Net Asset Value.”

“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,” the release said.

Grayscale DeFi fund now available to public investors as GBTC hits a record low discount

At the heart of Alameda’s lawsuit is the allegation that Grayscale and its management have breached existing trust agreements and fiduciary duties by refusing to allow redemptions for trust shareholders and charging high fees.

"We will continue to use every tool we can to maximize recoveries for FTX customers and creditors, said John J. Ray III, Chief Executive Officer and Chief Restructuring Officer of the FTX Debtors. “Our goal is to unlock value that we believe is currently being suppressed by Grayscale's self-dealing and improper redemption ban. FTX customers and creditors will benefit from additional recoveries, along with other Grayscale Trust investors that are being harmed by Grayscale's actions."

In an email response to the filing by Alameda, a spokesperson from Grayscale 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.”

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