Alameda Research, the subsidiary of now-defunct crypto exchange FTX, has sued Grayscale Investments for alleged mismanagement of its Bitcoin and Ether trusts.
According to FTX CEO and chief restructuring officer John J. Ray III, Alameda's action is part of its effort to "maximize recoveries for FTX customers and creditors." After filing for bankruptcy last November, FTX has attempted to redeem its assets across various institutions. As of January 2023, the company managed to recover $5 billion in liquid assets.
“Our goal is to unlock value that we believe is currently being suppressed by Grayscale’s self-dealing and improper redemption ban.”
John J. Ray III, CEO and Chief Restructuring Officer at FTX
Alameda claimed that it owned $290 million worth of shares in Grayscale's BTC and ETH trusts as of March 3 but acknowledged that its records might be incomplete. Alameda's shares in Bitcoin and Ether trusts managed by Grayscale amounted to over three percent and two percent, respectively, of the overall float as of the end of 2022.
The lawsuit alleged that those shares could rise in value to over $540 million if Grayscale did not implement "exorbitant management fees" and "improperly" prevented redemptions.
The Grayscale Bitcoin Trust (GBTC) imposes a two percent annual fee, significantly higher than the average 0.54 percent annual fee charged by the entire U.S. exchange-traded fund ecosystem, per Bloomberg Intelligence. The crypto community called the GBTC a "cash cow" for its parent company, Digital Currency Group.
In addition to its high fees, Grayscale explained that due to the trusts' structure, it was impossible for Grayscale to redeem shares under the current regulatory landscape.
Alameda's lawsuit, which was filed in the Delaware Court of Chancery, also named Digital Currency Group, its founder Barry Silbert and Grayscale CEO Michael Sonnenshein.
A Grayscale spokesperson responded to the lawsuit, insisting it was "misguided." According to the representative, Grayscale has been transparent about its efforts in obtaining approval to redeem investors' shares.
The legal complaint came a day before the oral presentation of Grayscale's lawsuit against the U.S. Securities and Exchange Commission (SEC), where the crypto asset management company sued the agency for denying its request of converting the Bitcoin trust to an exchange-traded fund (ETF) — which would allow investors to liquidate their assets.
Grayscale already applied for regulatory approval to convert its GBTC into an ETF in 2021 — it would make GBTC assets backed by BTC instead of the token's derivatives. However, the SEC turned down Grayscale's request last summer, saying Grayscale was unable to provide critical information regarding investor protection and concerns of market manipulation.
The GBTC, which is worth around $14 billion, has been trading at a sharply discounted rate to the cryptocurrency in its holding for two years. Its lawsuit against the SEC seeks injunctive relief to unlock over $9 billion in funds for all shareholders of the Grayscale trusts.
Grayscale said it was "confident" that it would win its lawsuit against the SEC.
Other lawsuits against Grayscale
Hedge fund Fir Tree Capital Management and digital asset manager Osprey Funds also filed separate lawsuits against Grayscale.
Fir Tree filed its suit at the end of 2022, saying that "Grayscale's shareholder-unfriendly actions" had harmed GBTC's retail investors. The hedge fund said Grayscale initially promised to offer Bitcoin access to investors with the intention to convert the digital asset into an ETF upon receiving a permit from U.S. regulators.
Meanwhile, in January, Osprey accused Grayscale of doing "false and misleading advertising" for GBTC. The lawsuit was also related to GBTC's conversion into an ETF, with Osprey urging Grayscale to withdraw as a sponsor of GBTC and name Osprey as one of the trust's sponsors to allow lower fees and implementation of redemption for shareholders.
Grayscale responded to Osprey's accusation, calling it "frivolous." The company was adamant that "the conversion of GBTC to an ETF is the best long-term product structure for Grayscale's investors," arguing that regulatory approval of a spot Bitcoin ETF would also benefit its industry peers.