Osprey Sues Grayscale: Misrepresenting GBTC ETF Approvals

Grayscale has been trying to convert itself into an Exchange Traded Fund (ETF) for quite some time but is being rejected by the SEC. Recently, digital asset manager Osprey Funds filed a suit against Grayscale on January 30, 2023, for violation of the state’s Unfair Trade Practice Act, concerning their advertising and promotion of Bitcoin ETH.

What does the Suit say?

The filing says that Osprey is the only competitor in the market for Grayscale for the over-the-counter traded Bitcoin trust asset management market. At the same time, Grayscale maintained its leading position via con.

“Only because of its false and misleading advertising and promotion has Grayscale been able to maintain to date approximately 99.5% market share in a two-participant market despite charging more than four times the asset management fee that Osprey charges for its services.”

What happened?

Osprey had alleged Grayscale promoted their participation in Grayscale Bitcoin Trust (GBTC) with hopes of accessing a spot-based Bitcoin ETF through conversion of their $12 billion GBTC. While Grayscale had presented the conversion as “a foregone conclusion when it knew that access was never likely to happen.”

Grayscale knew that such promotion of the conversion was false but continued nonetheless, all while the SEC had been rejecting the possibility of any conversion for a Bitcoin commodity fund since 2020. Osprey claimed that the statements in emails, Twitter, media appearances, and press releases were all filled with untrue information.

On June 29, 2023, the United States Securities and Exchange Commission officially denied Grayscale’s application for converting their GBTC into an ETF. They filed a review petition with the District of Columbia Court of Appeals on the same day, where the court is expected to hear the verbal arguments for the case on March 7, 2023.

Grayscale belongs to the Digital Currency Group (DCG) family, which owns Genesis Global Capital, Genesis Global HoldCo, and Genesis Asia Pacific, which filed for chapter 11 bankruptcy on January 19, 2023. Osprey is also battling rough tides and has laid off 15 staff members since last summer and have less than 10 people handling the firm at the moment while the company is trying to seek an award for damages Grayscale and injunctive relief.

The implication of Bitcoin ETF

Bringing a BTC ETF would increase its mass adoption allowing people to invest in the leading cryptocurrency easily without holding the coin in some wallet. On the one hand, this is a very good investment opportunity for the masses, but it also brings the crypto industry one step closer to the traditional banking system. Recently, Sen. Elizabeth Warren praised the SEC for separating the two sectors by not allowing any amalgamation.

Bringing the crypto industry closer to banking could expose them to the risks, and without proper regulations, this could prove catastrophic.