• FTX subsidiary Alameda owns assets in Grayscale’s Bitcoin Trust
• Debtors allege that Grayscale breached the trusteeship agreement
• SEC rejected the conversion of Grayscale’s Bitcoin Trust into an ETF – with serious consequences
Debtors of bankrupt crypto exchange FTX — which includes previous subsidiaries FTX Trading and Alameda Research — have sued Grayscale, the world’s largest crypto asset manager, in a Delaware court. The accusation: Grayscale violated “fiduciary duties”. They are demanding an amount of nine billion US dollars, which would then go to the insolvent crypto exchange due to the debt relationship. Can FTX actually hope for such a payback? Or will this prove to be a false hope?
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FTX wants $9 billion from Grayscale through appeal
FTX borrowers hold stakes in Grayscale’s $14 billion Bitcoin Trust (GBTC) as well as the $4.7 billion Ethereum Trust (ETHE). With its Bitcoin Trust, Grayscale, part of the Digital Currency Group, is the world’s largest holder of Bitcoin, owning 635,000 BTCs.
The catch with Grayscale’s trusts: You can’t redeem the shares for cryptocurrencies or their equivalent, you can only sell them on the secondary market, as BitcoinBlog points out. On the secondary markets, however, the price deviates significantly from the value of the bitcoins and you often only get half of the actual BTC price.
According to their own statement, the debtors of FTX – the protagonist here is Alameda Research – are seeking an injunction to remove the haircut of the two trusts by allowing redemptions. According to the company, such a remedy would net investors in the two trusts at least $9 billion and customers and creditors of the FTX debtors themselves at least a quarter billion more than their shares are currently worth.
“Our goal is to unlock values that we believe are currently being suppressed by Grayscale’s proprietary trading and improper redemption ban,” said FTX bankruptcy trustee and interim CEO John J. Ray in the statement. “If Grayscale reduced fees and stopped unnecessarily preventing redemptions, FTX’s obligor shares would be worth at least $550 million, which is about 90 percent more than they are today,” the statement said press release. Ray assures that FTX debtors are using “every possible means” to “maximize recovery for FTX customers and creditors”.
FTX accuses Grayscale of violating the trusteeship agreement
FTX also alleges that Grayscale earned exorbitant amounts — specifically, $1.3 billion — in management fees in violation of trustee agreements. Grayscale denies this information. “The lawsuit filed by Sam Bankman-Fried’s hedge fund Alameda Research is misleading,” a Grayscale spokeswoman told Yahoo Finance. Grayscale has repeatedly stated that it cannot set its discount on how shares in its Bitcoin Trust are traded unless it obtains SEC approval to invest its Bitcoin Trust in an exchange-traded fund (ETF). to convert “Grayscale has been transparent in its efforts to secure regulatory approval to convert GBTC into an ETF – an outcome that is undoubtedly the best long-term product structure for Grayscale investors,” the spokesperson added.
SEC rejected conversion of GBTC into ETF
Both Grayscale and the trust’s shareholders, who are critical of the company, have indicated that the shares may be redeemed if the trustee seeks Regulation M status. However, Grayscale has said it won’t seek Regulation M status without first trying to win its case against the SEC, which didn’t approve its request to convert the trust into an ETF. In June 2022, the SEC denied Grayscale’s application to convert GBTC into an exchange-traded fund, citing concerns about the lack of cryptocurrency oversight and the risk of price-fixing.
Many crypto players have Grayscale’s Bitcoin Trust in their crosshairs
FTX Debtors’ lawsuit against Grayscale follows a public request by hedge fund Fir Tree in December and proposals by wealth managers Valkyrie, 3iQ and Osprey Funds to acquire Grayscale’s Bitcoin Trust. Osprey is also suing Grayscale, accusing the asset manager of “falsely and misleadingly” advertising its Bitcoin trust, according to a lawsuit filed in Connecticut Superior Court.
Last week, FTX said it was facing a “massive shortfall” after finding $2.2 billion in FTX assets versus hedge fund Alameda’s $9.3 billion in net loans. In general, Grayscale has not been left unscathed by the crypto sell-off – on the contrary, even the world’s largest crypto asset manager has to tighten its belt in the current crypto winter. Gryscale will therefore do everything in its power to prevent a billion-euro repayment to Alameda Research & Co.
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