FTX/Alameda sues Grayscale and Digital Currency Group

FTX exchange has decided to sue Grayscale and its parent company DCG regarding crypto investment fund products, which have been sliding throughout 2022.

FTX/Alameda sues Grayscale and Digital Currency Group. Photo: Bloomberg

FTX – a cryptocurrency trading platform that went bankrupt in November 2022 and its “sister” investment fund Alameda Research – suddenly filed a lawsuit against Grayscale Investments and its parent company, Digital Currency Group (DCG), claiming that both violated the investment fund management agreement. The lawsuit also accuses Grayscale CEO Michael Sonnenshein and DCG boss Barry Silbert.

Grayscale is well known as the company that turns many of the top cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) into investment products for large institutions in the US. Grayscale will buy BTC and ETH from the crypto market, hold it in a fund, and issue shares of the fund. This is considered an effective approach for institutional investors to the field of cryptocurrencies, in the context that the US still does not have specific supervision regulations for this group of assets. In return, Grayscale will charge the customer a management fee.

As of March 6, 2023, Grayscale is managing assets of up to $19 billion in crypto funds, including $14 billion in Bitcoin and $4.7 billion in Ethereum.

Cryptocurrency investment fund products are being offered by Grayscale. Screenshot on the morning of 03/07/2023

However, Grayscale’s limitation is that it does not allow stock holders to convert back to their original assets. Therefore, when the cryptocurrency market begins to collapse from 2021, the demand for the company’s treasury shares also “evaporates”, making the share price now 40 years lower than the price of the following cryptocurrencies. -50%.

Grayscale Bitcoin Trust parameters on the morning of March 7, 2023. Source: Grayscale website

According to the lawsuit, FTX/Alameda alleges that Grayscale charged “excessively high” management fees for Bitcoin and Ethereum fund products, even though they lost half of their value. Specifically, the exchange announced that in the last 2 years, Grayscale has collected up to $ 1.3 billion in management fees.

If Grayscale reduces fees and allows the exchange of shares to original assets, the shares held by the exchange will be worth at least $550 million, up to 90% higher than the current value.

New CEO of FTX John J. Ray III said:

“We will continue to use every tool to maximize the amount of assets recovered for FTX customers and creditors. Our goal is to unlock the amount of value that we believe is being held captive by the improperly self-imposed Grayscale redemption ban.”

Meanwhile, a representative of Grayscale stated:

“The lawsuit filed by Alameda Research includes false information. Grayscale has always been transparent about the licensing process to convert a Bitcoin fund into an ETF product – the best outcome for future stock prices.”

In its latest update, FTX at the beginning of March said it has raised the number of recovered assets to $ 6.1 billion, although many of them are illiquid crypto tokens. The bankruptcy unit that took over FTX admitted that the exchange is suffering from a heavy balance sheet deficit with liabilities of up to $9.4 billion.

Digital Currency Group, in January 2023, had to go through a crisis stemming from the collapse of FTX itself, with the end having to let another subsidiary, the lending unit Genesis, go bankrupt. DCG even had to sell a small amount of Grayscale’s Ethereum shares to get more money to maintain operations and reported a loss of up to $1.1 billion in 2022. DCG and Genesis are being investigated by the US SEC for inside transactions. .

Grayscale, in December 2022, announced that it would consider the option of converting treasury shares back to its original assets if it did not get a nod from the US authorities on the issue of ETFs. The company is also being sued by investment fund Fir Tree for letting the stock price slide.

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