McClurg describes this arrangement as a “hostage” situation: Investors cannot exit without absorbing a large markdown on the price of bitcoin.
However, the demands mapped out by Bailey and RedeemGBTC are an unhelpful oversimplification of the situation, suggests Grayscale, which claims to be doing everything in its power to do right by its investors.
Namely, Grayscale has entered into a legal battle with the US Securities and Exchange Commission (SEC) over its campaign to convert the trust into an exchange-traded fund, or ETF, which would let investors cash in their shares for the bitcoin in the pot.
On June 29, 2022, the SEC announced it would not grant permission to convert the trust, citing fraud and market manipulation concerns. Grayscale has sued the SEC over the decision, which it calls “arbitrary and capricious.” The two parties are scheduled to present their respective cases to a judge on March 7 and Grayscale expects a final decision to be reached by the autumn. The firm is bullish about the prospects of an ETF of this kind coming to market: “It’s a matter of when, not if,” says Sonnenshein.
Although Grayscale could reduce its fees in the meantime, Sonnenshein argued in a recent interview with crypto journalist Laura Shin that the funds are best directed toward the ongoing legal battle with the SEC. Once the trust has been converted into an ETF, Grayscale promises to reduce its fees immediately.
There has also been a “meaningful misunderstanding,” Sonnenshein tells WIRED, among frustrated investors, who say that Grayscale could apply to the SEC for exemption from rules that prevent them from cashing out. The only way to apply for exemption, says Sonnenshein, is to pursue conversion to an ETF.
Bailey’s lawyers have also argued that Grayscale could allow investors to cash out without dealing with the SEC at all. But it’s not that simple either, says Sonnenshein, because of a cease and desist letter issued by the SEC in 2016 that prevented the trust from issuing new shares and allowing shareholders to cash out simultaneously.
The complexity of the securities laws that apply to trusts like GBTC creates opportunity for disagreements of this kind. “It’s a spider’s web,” says Andrew Parish, a veteran crypto founder with close relationships to parties across the industry. “It’s a mess that can hardly be understood by anyone other than accountants and lawyers.”
Pretenders to the Throne
Contenders to take over from Grayscale have emerged from the ranks of the rebellion, including McClurg’s Valkyrie. Bailey also has skin in the game: Not only does his hedge fund hold $2.5 million in GBTC shares, but his companies also have a combined $113,000 stake in Valkyrie. If Valkyrie were to succeed in its bid to take on the management of GBTC, it would absorb hundreds of millions of dollars in annual management fees, and Bailey would profit indirectly.
But Bailey also says he holds a stake in DCG, Grayscale’s parent company, that’s greater in value than his Valkyrie position, so he also stands to lose if Grayscale is forced out. “This started because we were frustrated our fund had lost some money on its [GBTC] investment,” says Bailey, “But once we started to receive comments from people about how they had been affected, it became something else. [We realized that] people need immediate relief.”