GBTC Litigation: Fir Tree and Grayscale Reach Agreement

Fir Tree Partners, a significant shareholder of the Grayscale Bitcoin Trust (GBTC), and Grayscale Investments have reached an agreement resolving a lawsuit filed by Fir Tree in December 2022. The litigation sought documents and information from Grayscale about potential mismanagement and conflicts of interest at GBTC.

The lawsuit highlighted Fir Tree’s concerns about Grayscale’s refusal to allow redemptions despite no relevant regulatory restrictions, GBTC’s extensive conflicts of interest and lack of independent oversight, and its campaign to convert GBTC into an ETF.

Under the terms of the agreement, Grayscale has agreed to voluntarily produce certain books and records in response to Fir Tree’s demand. In return, Fir Tree has agreed to dismiss its books-and-records litigation against Grayscale.

Despite this agreement, Fir Tree expressed disappointment that Grayscale management refused to comply with Fir Tree’s information rights for months and has still failed to address concerns about GBTC’s structure and the unavailability of redemptions.

Fir Tree has proposed a simple solution for GBTC, suggesting that Grayscale permit redemptions of outstanding GBTC shares so that shareholders may recover some portion of their investment. This proposal has been repeatedly rejected by Grayscale over the last eight months.

In March 2023, Fir Tree proposed an alternative solution: that Grayscale conduct a tender offer for a meaningful percentage of outstanding GBTC shares. This proposal was also rejected by Grayscale and DCG.

Fir Tree believes that a tender offer could unlock significant value for GBTC shareholders, DCG, and Genesis creditors. For example, if Grayscale were to conduct a tender offer for 20% of shares outstanding at 94% of NAV, it could potentially unlock $3.6 billion in immediate value for GBTC shareholders who participate in the tender offer.

Fir Tree urges Grayscale to act in the best interests of all GBTC shareholders and finally commit to a long-overdue tender offer to unlock billions in immediate value for all shareholders who participate in a tender.

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Grayscale CEO Calls on SEC to Protect Investors

Grayscale Investments’ CEO Michael Sonnenshein has called on the United States Securities and Exchange Commission (SEC) to protect Grayscale investors by returning the true asset value to them. In a recent interview on the popular podcast “What Bitcoin Did” hosted by Peter McCormack, Sonnenshein stated that he “can’t imagine” why the SEC “wouldn’t want” to protect Grayscale investors by approving the Grayscale Bitcoin Trust (GBTC) as a spot Bitcoin exchange-traded fund (ETF).

Sonnenshein explained that the SEC acted arbitrarily by denying approval for GBTC to be a spot Bitcoin ETF while approving Bitcoin Futures ETFs. He added that the SEC violated the administrative procedures act, which ensures that the regulator doesn’t show “favoritism” or act “arbitrarily.” According to Sonnenshein, Grayscale is currently suing the SEC over the denial of its initial application, and a decision on the case could be reached by fall 2023.

If GBTC were approved as a spot Bitcoin ETF, there is a “couple billion dollars” of capital that would immediately go back into investors’ pockets, on an “overnight basis,” as the fund would “bleed back” up to its net asset value (NAV). Sonnenshein explained that this is due to GBTC currently trading at a discount to its NAV, but if it were to convert to an ETF, there would be an “arbitraged mechanism” embedded, and there would no longer be a discount or a premium.

Grayscale has over a million investor accounts, with investors worldwide counting on the firm to “do the right thing for them.” Sonnenshein “can’t imagine” why the SEC wouldn’t want to “protect investors” and “return that value” to them. He added that Grayscale isn’t going “to shy” away from the fact that it has a “commercial interest” in this approval.

This comes after the SEC filed a 73-page brief with the U.S. Court of Appeals for the District of Columbia in December 2022, outlining its reasons for denying Grayscale’s request to convert its $12 billion Bitcoin Trust into a spot-based Bitcoin ETF in June 2022. The SEC based its decision on findings that Grayscale’s proposal did not sufficiently protect against fraud and manipulation. The agency had made similar findings in several earlier applications to create spot-based Bitcoin ETFs.

Grayscale is a digital currency investment firm that offers a range of investment products, including the Grayscale Bitcoin Trust, which is designed to provide investors with exposure to the price of Bitcoin without the challenges of buying, storing, and safekeeping Bitcoin directly. The trust is listed on the OTCQX market and is available to both accredited and non-accredited investors. GBTC was launched in 2013, and as of January 2022, it held over $30 billion in assets under management. Grayscale’s Bitcoin Trust is one of the most popular ways for investors to gain exposure to Bitcoin, and the firm has been at the forefront of the movement to bring Bitcoin to the mainstream.

The SEC has been hesitant to approve Bitcoin ETFs, citing concerns about fraud, manipulation, and the lack of regulation in the cryptocurrency market. In the past, the SEC has rejected several proposals for Bitcoin ETFs, citing concerns about market manipulation and insufficient investor protection. However, the agency has recently shown a more favorable attitude toward Bitcoin, with several Bitcoin Futures ETFs receiving approval.

In the case of Grayscale’s GBTC, the SEC has raised concerns about the trust’s structure and the potential for market manipulation. Grayscale’s proposal to convert GBTC into a spot-based Bitcoin ETF was denied in June 2022, with the SEC citing concerns about the lack of regulation in the Bitcoin market and the potential for market manipulation.

Grayscale has challenged the SEC’s decision, arguing that the agency acted arbitrarily and violated the administrative procedures act. Grayscale’s CEO, Michael Sonnenshein, has been vocal in his criticism of the SEC’s decision, arguing that it has hurt investors by preventing them from realizing the true value of their investment in GBTC.

The case is currently making its way through the U.S. Court of Appeals for the District of Columbia, and a decision is expected by fall 2023. If Grayscale is successful in its challenge, it could pave the way for other Bitcoin ETFs to be approved, opening up a new avenue for investors to gain exposure to Bitcoin.

Overall, the Grayscale-SEC dispute highlights the challenges facing regulators as they try to balance investor protection with the need to foster innovation in the cryptocurrency market. As the market for digital assets continues to grow, it is likely that we will see more clashes between regulators and industry participants as they try to navigate this rapidly evolving landscape.


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Institutional investors pull back from crypto amid regulatory crackdown

In the aftermath of the regulatory crackdown in the United States, institutional investors may have gotten the jitters on cryptocurrency. As a result, digital asset investment products had the highest weekly outflow of any asset class in 2023.

The institutional cryptocurrency fund management CoinShares said on February 20 that digital asset investment products suffered withdrawals of $32 million last week, the greatest outflow of the year. This was the largest outflow since the beginning of the year.

The outflow follows a massive crackdown on the digital asset industry in the United States, which has targeted everything from staking services to stablecoins to crypto custody as the Securities and Exchange Commission ramps up what industry analysts have dubbed its “war on crypto.” The SEC has targeted everything from staking services to stablecoins to crypto custody as it ramps up what they have dubbed their “war on crypto.”

According to CoinShares analyst James Butterfill, outflows peaked at $62 million halfway through the previous week, but they dropped down by the end of the week as sentiment recovered.

The vast bulk of these withdrawals, or 78%, were made from investment instruments connected to Bitcoin (BTC), while Bitcoin short funds received an infusion of $3.7 million during this time period. The company placed responsibility for the increasing outflows on the heightened scrutiny from regulators.

We think that this is because investors in ETPs have a more pessimistic outlook on recent regulatory pressures in the United States in comparison to investors in the wider market.

Despite this, the general market had a gain of 10% over the time period in question, which was not reflective of the pessimistic outlook expressed by institutional investors. Butterfill said that as a result of this, the total assets under management for institutional products reached $30 million, which is the highest level since August.

However, blockchain equities reversed the trend with inflows that totaled $9.6 million for the week. Ethereum (ETH) and mixed-asset funds also saw withdrawals of capital over the same time period.

In the month of January, institutional investors resumed their practice of investing in cryptocurrency funds, with total inflows of $117 million for the last week of the month, marking a new record for the past six months.

Nevertheless, there has been a withdrawal from funds during the last two weeks, after a period of four weeks in January when there were deposits.

The change in attitude might be attributed to a regulatory enforcement action that occurred on February 9, when the SEC brought charges against Kraken for the staking services it provided. A few days later, it filed a lawsuit against Paxos about the minting of Binance USD (BUSD), and only the week before that, it suggested reforms that would affect cryptocurrency companies that operate as custodians.


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The UK’s Regulatory Policy Committee is Against the FCA

There is a lack of consensus among those who make decisions on public policy in the United Kingdom over whether or not retail investors should be barred from purchasing, promoting, or distributing derivatives and exchange-traded notes (ETNs) that are linked to cryptocurrencies.

The Regulatory Policy Committee is of the opinion that the measure, which was implemented in 2021, cannot be justified given the present state of affairs. In January of 2021, the restriction was enforced by the Financial Conduct Authority (FCA), which is the primary regulatory body in the United Kingdom.

Since that time, businesses are not permitted to sell bitcoin derivatives products to retail clients. These products include futures, options, and exchange-traded notes (also known as ETNs).

In spite of the fact that 97% of people who responded to the FCA’s consultation opposed the “disproportionate” prohibition, the FCA went ahead and enacted the blanket ban anyway. Many of the respondents argued that retail investors are capable of evaluating the risks and the value of crypto derivatives.

The Regulatory Policy Committee (RPC), which is an advisory public body that is sponsored by the Department for Business, Energy and Industrial Strategy of the United Kingdom government, presented its arguments against the FCA’s restriction on January 23.

The RPC conducted a cost-benefit analysis and determined that the yearly losses caused by the policy were about 333 million dollars (or 268.5 million British pounds).

According to the RPC, the FCA did not offer a detailed description of the particular events that may take place in the event that the restriction was not in place.

In addition, it failed to provide an explanation of the methodology and calculations used to assess the costs and benefits at the time.

In light of this, the RPC assigns the ban the “red” rating, which indicates that it does not fulfil its intended function.

The unfavourable evaluation provided by the RPC does not automatically result in the immediate repeal of the Act.

In spite of this, given that the committee has connections to the Department of Business, Energy, and Industrial Strategy, it is possible that this will signal a difference in understanding of what constitutes fair regulation between the FCA and the government.

The British financial authorities made a number of substantial measures to encourage the growth of the digital economy last year. These efforts were documented in a report.

For instance, “designated crypto assets” were included in a list of investment transactions that are eligible for the Investment Manager Exemption. This exemption is for investment managers.


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Samsung Investment Exploring Hong Kong Spot-Bitcoin ETF


Following closely on the heels of its exchange-traded fund (ETF) for Bitcoin futures in Hong Kong, Samsung Asset Management has stated that it is exploring the launch of a spot Bitcoin ETF on the city’s exchange, provided that the laws allow for it. This announcement comes shortly after Samsung Asset Management launched its Bitcoin futures ETF in Hong Kong.

In a recent interview with Bloomberg that was published on January 13, it was reported that Sam Park, the chief executive of Samsung Asset Management in Hong Kong, was recently quoted as saying the following: “It truly depends on how policy is going to be created.”

He stated that developing Hong Kong into a hub for the Bitcoin business is “clearly” the goal of the administration in charge of the city’s affairs in Hong Kong.

Rebecca Sin, an ETF analyst at Bloomberg Intelligence, made the observation that “Hong Kong is well positioned to become Asia’s crypto gateway.” She anticipates that spot Bitcoin and Ether (ETH) products will be permitted there by the end of the year. Sin’s statement was made in reference to the fact that Sin believes Hong Kong is well positioned to become Asia’s crypto gateway. The basis for Sin’s forecast was the assertion that Hong Kong is “ideally positioned to become Asia’s crypto gateway.”

On January 13, Samsung debuted an exchange-traded fund (ETF) that will invest in Bitcoin futures on the Hong Kong Exchanges and Clearing Market. The Hong Kong Exchanges and Clearing Market is the only exchange in Asia that presently offers trading in Bitcoin futures ETFs. This distinction currently belongs to Hong Kong.

Additional interest has been shown in Hong Kong futures exchange traded funds (ETFs), such as the $73.6 million that was invested in two ETFs managed by CSOP Asset Management prior to their listing on December 16th. This investment is an example of the additional interest that has been shown in Hong Kong futures ETFs.

The fact that so much bitcoin activity is taking place in countries other than the United States is being attributed by many people to a lack of clarity in the applicable laws. Because of this, legislators are advocating for crypto legislation to be enacted as rapidly as is practically possible.


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Valkyrie to Liquidate Bitcoin Balance Sheet ETF following Low Customer Demand

Valkyrie Funds LLC, a digital asset ETF issuer in the US, announced Tuesday that it would liquidate one of its exchange-traded funds (ETFs) that invests in innovative public companies with exposure to Bitcoin.

The digital assets manager said it would shut down the Valkyrie Balance Sheet Opportunities FUND (Nasdaq: VBB) at the end of this month and then be delisted from Nasdaq, where it has traded since December 2021.

Any investor who holds shares of the fund at liquidation will get a cash redemption equal to the net asset value (NAV) of their claims, according to a filing with the Securities and Exchange Commission on Tuesday.

Valkyrie termed the fund’s dissolution as the best course of action, stating that the move was part of an ongoing review of products to ensure the company best meets customer demands.

The firm said the action was taken after thoroughly consulting the company’s Board of Directors. They determined that discontinuing the fund was the best course of action for all those involved.

Customers never showed much interest in Valkyrie’s second ETF, where the largest positions are MicroStrategy (MSTR) and Tesla (TSLA), firms known for holding Bitcoin on their balance sheets. According to the report, net assets under the fund’s management are only about $570,000 as of now.

Investors may trade shares up until the end of the trading day on October 28. Valkyrie said it would satisfy expenses related to the liquidation, the distribution of cash proceeds, and brokerage expenses.

Last December, Valkyrie Balance Sheet Opportunities ETF aimed to invest primarily in companies that invest in, transact in, or have exposure to the Bitcoin asset class on their balance sheets or those that operate within the Bitcoin ecosystem. The fund is the second in a family of Valkyrie’s ETFs designed to enable investors to participate in the digital asset landscape.

The fund’s discontinuation happens when many investors are still interested in Bitcoin investments despite the market downturn. According to a recent survey, more than 80% of financial advisers in the US are being asked about cryptocurrencies, but many struggles to allocate clients effectively to this asset class. With many publicly traded companies in the US already holding Bitcoin and more corporations, entities, and countries increasingly entering the space, investing in these companies provides indirect exposure that many individuals are seeking.

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Grayscale Launches New Crypto Dealer as Genesis Got Incapacitated With 3AC Bankruptcy

Grayscale Investments, one of the largest asset managers in the digital currency ecosystem has launched a new broker-dealer dubbed Grayscale Securities, recent filings with the United States Securities and Exchange Commission show.


The firm has to launch this new outfit considering the fact that its sister firm, Genesis is battling a liquidity crisis following its huge exposure to the now bankrupt Three Arrows Capital (3AC). Genesis filed a $1.3 billion claim against 3AC, making some of the firm’s broker-dealer operations somewhat difficult to handle at this time.


As a dynamic investment manager, Grayscale requires a steady offshoot to handle its crypto trust products and fronting an in-house dealer will afford it the stability it so craves. Grayscale Securities has registered with the SEC as well as with FINRA and it will henceforth be able to source the required crypto holdings for the parent company’s trusts.


The transition from the dependence on Genesis as its broker-dealer to the integration of Grayscale Securities kickstarted on Monday, October 3rd. The transition is even more advised as Genesis has been seeing an exodus of its key officials with its current woes brought on by its exposure to 3AC.


Grayscale itself has been in the news lately especially with its recent legal spat with the United SEC over the failed conversion of its Grayscale Bitcoin Trust (GBTC) to a full-fledged Bitcoin Exchange Traded Fund (ETF) product. 


In its characteristic manner, the SEC rejected the application for the conversion of the product after many delays. With the belief that the SEC’s decision is not in the best interest of its clients and the broader investing community, Grayscale went ahead to onboard Donald Verrilli, a top solicitor during the Obama Administration to lead its lawsuit against the commission.


The case is still in its early stages and it comes off as one that may be stretched out like the ongoing SEC vs Ripple lawsuit.

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Crypto-Related Funds Witnesses Slow Down of Money Outflow

The third quarter of 2022 has witnessed a slowdown in money flowing out of crypto-related funds, according to a report from Bloomberg.shutterstock_2104097378 i.jpg

The report added that the slowdown is a possible sign that many investors might have already withdrawn from the risky asset class.

Data compiled by Bloomberg Intelligence showed that $17.6 million was withdrawn by investors from crypto exchange-traded funds in the three months ending September 30.

By Sep 30, that number had fallen below the record $683.4 million withdrawn from such funds in the second quarter, the data analysis showed.

According to the report, the past two months had witnessed the most outflows. Upwards of $200 million were poured by investors into crypto ETFs in July.

The high degree of outflows in the second quarter was in relation to plunging cryptocurrency prices. The world’s largest digital asset based on market value, bitcoin, fell nearly 60% during the second quarter of 2022 and posted a record low of $17,785 on June 18. However, the cryptocurrency rose 3.7% in the third quarter.

The report stated that narrower price fluctuations aligned with the more muted crypto-linked ETF outflows in the third quarter. On Sep 30, bitcoin was trading above $19,400 – a range close to its prices at the beginning of the quarter.

Todd Sohn, ETF strategist at Strategas Securities, told Bloomberg, “I wonder if the second quarter was the ‘get me out part of these funds.” 

He added that the third quarter saw “some laggards” and investors who are just “keeping the faith mentality” and waiting for crypto to rebound.

With central banks around the world raising interest rates to curb soaring inflation, global banks have sunk in the past few months, and risky investments such as cryptocurrencies have fallen victim as recessionary fears rise.

“Everything’s more correlated right now,” Stephane Ouellette, chief executive officer of FRNT Financial Inc. – a crypto brokerage firm – told Bloomberg. 

“The people buying the ETF are in the same position as the people who are in Bitcoin,” he said. “Everyone’s panicking, so they’re acting the same.”

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Platform Has a Strong Case against SEC, says Grayscale’s CLO

A legal official of Grayscale Investment said the company has confidence in a lawsuit against the U.S. Securities and Exchange Commission (SEC). The company is struggling in a legal battle with SEC for applying to convert its Grayscale Bitcoin Trust (GBTC) product to a spot Bitcoin ETF. 


For many that might have been wondering whether Grayscale Investments has a chance against the United States Securities and Exchange Commission (SEC) whom it dragged to the Court of Appeals, the company’s Chief Legal Officer (CLO), Craig Salm has affirmed that the case the firm has against the regulator is a solid one.

Grayscale initiated a lawsuit last month when it received a rejection decision with respect to its application to convert its Grayscale Bitcoin Trust (GBTC) product to a spot Bitcoin Exchange Traded Fund (ETF). Drawing on the success of the GBTC product amongst investors, Grayscale said it has hoped to step up the designation, and regulatory provisions of the product by upgrading its status.

The SEC, however, did not see the company’s ways and like other notable Bitcoin ETF rejections, the regulator said it has issues with how the price for the spot BTC ETF will not be subject to manipulations. To back its Petition for Review filed with the Appellate Court, Craig said that the SEC is contradicting itself considering it has previously approved a slew of Bitcoin Futures ETF in the US.

To Grayscale, both Bitcoin Futures and Spot Bitcoin ETFs derive their prices from spot Bitcoin making them very similar. In an expository Q&A, Craig said the timeline for the completion of this legal brawl is indeterminate, but from precedent, it may take as much as 12 to 24 months.

“We can’t be certain about timing, but based on how long federal litigation tends to take – including briefings, oral arguments, and a final court decision – it can typically take anywhere from twelve months to two years, but could be shorter or longer. However long it takes, we believe the strength of our arguments should result in a final decision in our favor at the D.C. Circuit Court of Appeals,” he said.

Grayscale is one of the few firms that report its products to the SEC and Craig confirmed that the lawsuit will not alter its working relationship with the regulator. Its confidence in beating the SEC is hinged on its strong case and the prowess of renowned solicitor, Donald B. Verrilli whom the firm recently onboard as a part of its legal team.

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Grayscale Goes to Court After SEC Rejects its Proposed ETF Bid

The United States Securities and Exchange Commission (SEC) dashed the hopes of Grayscale Investments with a rejection of its application to convert the Grayscale Bitcoin Trust product to a full-spot Exchange Traded Fund (ETF). (68).jpg

In response, the investment asset manager has filed an appeal with the United States Court of Appeals for the District of Columbia Circuit where it will argue that the regulator violated the Administrative Procedure Act (APA) and Securities Exchange Act of 1934.

The SEC’s rejection is predicated on the fact that there is no trusted system with which to prevent fraud, the same position it has hinged its past rejection decisions on. The swift appeal filed by Grayscale is because it was prepared for this sort of action as Chief Executive Officer, Michael Sonnenshein had promised lawsuit months prior to when this final decision was expected.

“Grayscale supports and believes in the SEC’s mandate to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation — and we are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market,” Sonnenshein said.

The company tapped Donald Verrilli, a top Solicitor under the Obama Administration as a part of its legal team back in June. Verrilli will now be leading the charge against the SEC, arguing that the fact that there are Bitcoin Futures ETFs running on US exchanges invalidates the lack of trust in the safety of the ecosystem that the SEC hinged its decisions on.

“This is a place where common sense has a really important role to play. You’ve got a situation now in which you have certain kinds of exchange traded funds, one that is focused on bitcoin futures, and the SEC has approved that, the SEC is given it the seal of approval,” he said to reporters back in June. “In order to do so it had to make a determination that that giving this approval was consistent with the securities laws, and in particular, that that there wasn’t a sufficient underlying risk of fraud and manipulation.”

The timeline of the appeal is yet to be unveiled, but this may be yet another long-drawn legal battle between a crypto-native firm, and the US SEC after Ripple Labs Inc.

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