Grayscale Investment LLC, the world’s largest crypto asset manager, is facing a lawsuit from shareholders who accuse the company of mismanaging its Bitcoin trust and exploiting investors.
The Grayscale Bitcoin Trust (GBTC) shareholders, led by Alameda Research – the hedge fund and sister firm of collapsed crypto exchange FTX, sued the digital assets’ manager at the Chancery Court of Delaware on Thursday.
The plaintiff group comprises other GBTC investors, including Fir Tree Partners, Saba Capital, Owl Creek Asset Management, UTXO Management, and Aristides Capital.
Shareholders Demand Grayscale To Return Customer Assets From Its Bitcoin And Ether Funds
The goal of the activist campaign organized through X (formerly Twitter) is to force Grayscale to return $19 billion worth of cryptocurrencies belonging to its customers that are held by the company in its Bitcoin and Ethereum trusts.
The plaintiff accuses the asset manager of abusing its power over the assets to “enrich themselves at the expense of trust shareholders”. Allegedly, the firm refuses to allow customers to redeem their tokens and the only way to exit their position is by selling.
The group also wants Grayscale to repay customers the “exorbitant” management fee that it charges. Court documents claim that the firm has collected at least $1.3 billion in fees since launching the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Investment Trust (ETHE) in 2021.
The plaintiff seeks to claw back some of those fees and work out a plan to restructure the total fee structure of GBTC and ETHE to fit “competitive rates”.
The group has even set up a website to bring together the remaining shareholders in the fight against Grayscale. This is in accordance with an article mentioned in the terms and conditions of the trust that states shareholders can raise a case against the company if “unaffiliated parties” that collectively hold at least 10% of the outstanding shares join together as co-plaintiffs.
Those who wish to know more about the campaign and want to participate in the legal battle can sign up on the Grayscale Litigation website before the initial deadline of September 1.
Grayscale has denied all the allegations and filed a motion to dismiss the case, to which Alameda is scheduled to respond on September 15 – the final deadline to become part of the litigation.
How Do GBTC and ETHE Work?
GBTC and ETHE are one of the many cryptocurrency trusts operated by the digital assets manager. Being the sponsor of the trust, Grayscale is responsible for managing all aspects of the fund, including its management fees.
However, shares of the crypto trusts are issued by a participant authorized by Grayscale, which in the case of GBTC and ETHE has been the crypto banking firm Genesis since their inception.
Both Genesis and Grayscale are subsidiaries of the crypto conglomerate Digital Currency Group (DCG).
For the shares to be issued, interested parties have to deposit Bitcoin (BTC) or Ether (ETH) with Genesis, which then places the funds in the trust to create shares that are locked up for a period of six months.
The shares are considered seasoned at the end of the six-month lock-up period, after which they can be transferred to another party or sold on the secondary market.
The one condition or drawback for customers of the trust is that it is one-directional, meaning the cryptocurrencies deposited in the fund cannot be redeemed by selling the shares.
Although Grayscale asserts that they cannot legally redeem the shares, the plaintiffs contradict the claim by arguing that Regulation M under federal securities law does in fact allow fund redemptions as long as there is no ongoing share creation process taking place.
Grayscale currently holds 624,366 BTC worth more than $16 billion under GBTC, making the fund the world’s largest single Bitcoin holding.
The company charges an annual fee for managing the assets, which accumulates to 2% of the total holdings, giving the company 13,000 BTC (nearly $350 million) as revenue just from fees.
GBTC used to closely follow the price of Bitcoin, but due to its six-month share lockup period, the fund debugged from the value of the underlying asset and oftentimes trades at a premium of nearly 50%.
This is an advantage to shareholders, who can sell their GBTC shares at a higher value than that of Bitcoin. However, since February 2022, the shares have been trading below the net asset value (NAV) ratio, which continues to this day.
This has caused billions of dollars in losses to shareholders due to their shares losing their real value, prompting them to bring a lawsuit against the company.
Grayscale Waiting For Approval From The Sec To Covert GBTC Into An ETF
In the meantime, Grayscale has been waiting on a decision from the U.S. Securities and Exchange Commission (SEC) to convert the GBTC into a spot Bitcoin exchange-traded fund (ETF).
The asset manager has long been trying to get its Bitcoin trust approved as an ETP (exchange-traded product), only to be denied by the financial regulator each time.
In June 2022, the company filed a lawsuit against the SEC in which it claimed that the securities watchdog had randomly established that its application to list and trade GBTC shares was not enough to prevent market manipulation and fraud.
Grayscale argued that the SEC had previously approved the listing of its BTC Futures ETF shares despite the instrument possessing the exact same risks and vulnerabilities.
In a statement issued to the SEC in July, Grayscale said the agency should approve all spot Bitcoin ETF applications simultaneously, granting equal treatment to all applicants. Meanwhile, the company is still waiting for the regulator to approve its Bitcoin trust conversion.
Sec Is On The Verge Of Approving The First Spot Bitcoin ETF For The U.S. Markets
BlackRock and Fidelity, two of the largest asset managers in the world, filed applications with the SEC in June to list their spot Bitcoin ETF on U.S. stock exchanges, causing a frenzy in that market that saw Bitcoin cross the $30,000 mark for the first time in 12 months.
At the time of writing, there are seven spot BTC exchange-traded fund applications under the SEC’s consideration: Ark 21 Shares, Invesco Galaxy, iShares (BlackRock), Valkyrie, VanEck, WisdomTree, Wise Origin (Fidelity).
The applications are under the SEC’s 240-day review period, the first of which has a deadline in January 2024. The approval will mark an important milestone in the short history of Bitcoin and cryptocurrencies.