Grayscale considers GBTC buyback if it loses SEC lawsuit

Grayscale Investments has informed investors of a contingency plan to deliver some capital to GBTC shareholders ⏤ even if it loses its appeal of the SEC’s decision to block GBTC from converting into a spot bitcoin ETF. Grayscale might institute a 20% share buyback.

All spot bitcoin ETF applicants since 2014 have failed to address the susceptibility of bitcoin’s price to market manipulation by unregulated, offshore exchanges. Indeed, nothing more clearly illustrates the vulnerability of bitcoin markets to fraud and unsupervised manipulation than FTX — which was once bitcoin’s second largest exchange.

Grayscale planned to convert its Grayscale Bitcoin Trust (GBTC) into an ETF. However, the SEC denied the application, citing numerous insufficiencies.

• The firm challenged the decision in the US Court of Appeals for District of Columbia Circuit.
• It asked the court to vacate the SEC’s decision in a legal brief filed on October 11, 2022.
• It alleges that the SEC violated its own Administrative Procedure Act by approving several digital asset derivative ETFs but rejecting a spot ETF. 

The SEC rebuffed Grayscale in a legal brief, saying that the ETFs are priced on bitcoin futures which trade on the Chicago Mercantile Exchange, which is regulated by the Commodity Futures Trading Commission (CFTC).

Next steps for Grayscale’s buyback and battle with the SEC

Grayscale has until January 13 to file a response to the SEC’s rebuttal. The court then set February 3 as a deadline for final briefs. Finally, it will hear oral arguments and potentially make a ruling at that point, or advance toward further proceedings.

Grayscale expressed confidence that the three-judge panel of the Court of Appeals will rule in its favor. However, even if it loses, Grayscale has now proposed buying back up to 20% of the outstanding GBTC shares. The proposal provides an alternative to the share creation and redemption mechanisms made possible by an ETF.

Grayscale’s plan for a GBTC buyback will require approval from shareholders and the SEC. Grayscale CEO Michael Sonnenshein expressed concern about creating a buyback plan that meets SEC requirements.

“The SEC may not provide this relief, in which case GBTC would not be able to pursue such a tender offer,” he admitted.

Read more: Grayscale Bitcoin Trust and its ties to crypto meltdowns

GBTC buyback announced yet -46% discount to NAV persists

GBTC shares recently traded at a discount of -50% of its net asset value (NAV). At press time, it sits at -46%. Some investment firms like ARK Invest view the discount as a buying opportunity while others expressed concern about the financial health of Grayscale’s parent company, Digital Currency Group (DCG).

Another company in DCG’s portfolio, Genesis Global Capital, has been hit hard by the bankruptcies of Terraform Labs, Three Arrows Capital, and FTX. Parent company DCG needed to absorb a loss of approximately $1.2 billion that Three Arrows Capital owed to Genesis Global Capital when Three Arrows Capital filed for bankruptcy.

In his letter to investors, Grayscale’s CEO Michael Sonnenshein acknowledged the Genesis Global Capital situation yet denied that it affected GBTC’s bitcoin. He said DCG and Genesis “are not counterparties or service providers for GBTC or any of our other products, and as such, do not impact our products’ operations.”

On December 6, 2022, affiliates of an investment adviser named Fir Tree Capital Management LP filed a lawsuit against Grayscale, alleging that Grayscale failed to release information about fund liquidity and operating costs. The affiliates also allege that Grayscale has a conflicted, insider-controlled management structure. Grayscale’s CEO did not address the lawsuit in his letter to investors.

Read more: Lawsuit puts pressure on Grayscale to open GBTC books

GBTC currently lacks a redemption program for the bitcoin it holds in trust. A previous settlement with the SEC came with a decision that its previous Regulation M redemption option violated SEC regulations regarding market manipulation.

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