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Will Lawsuit Against DCG Impact GBTC’s Chances of an ETF Conversion?
Analysts are speculating over whether the lawsuit might have any implications for its GBTC conversion chances.
Updated Oct 20, 2023, 3:40 p.m. Published Oct 19, 2023, 5:27 p.m.
Charges filed by New York State against the owner of the Grayscale Bitcoin Trust have prompted a fresh round of speculation over the future of the world's largest bitcoin fund.
Digital Currency Group (DCG), its subsidiary Genesis Global Capital and crypto brokerage Gemini Trust on Thursday were sued by the state of New York for allegedly defrauding investors of more than $1 billion.
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DCG is also the parent of company of Grayscale Investments, the manager of the $16.7 billion Grayscale Bitcoin Trust (GBTC), which is in the process of attempting to win SEC approval to convert that closed-end fund into a spot bitcoin ETF (DCG is also the parent of CoinDesk).
Even as Grayscale was not accused of any wrongdoing, analysts are speculating over whether the lawsuit might have any implications for its GBTC conversion chances.
“This strikes me as enough for SEC to put GBTC conversion on ice, at least for now,” tweeted Travis Kling, founder of crypto asset management firm Ikigai. “[The] SEC could still approve spot ETFs though.”
Bloomberg Intelligence analyst James Seyffart suggested that the only relationship that could have impacted GBTC is that Genesis was the sole authorized participant (AP) of GBTC for most of its existence until late 2022 when it stopped being an AP for the fund.
“But that isn't the smoking gun that some seem to think,” he said. “Being an AP is an agreement to be the facilitator of creating and redeeming shares in a fund.”
Seyffart explained that in this case someone hands over bitcoin to Genesis and they’d go through the process of giving 'equivalent' value of GBTC shares in return.
“In this case there was admittedly a closer relationship because they are/were sister companies at DCG,” according to Seyffart. He concluded that with the current information available, there seems to be no impact on GBTC’s application from the DCG lawsuit.
GBTC’s shares are up 2.4% on the day, slightly more than bitcoin itself, suggesting the market has not taken the lawsuit as a negative to the chances of a conversion.
David Weisberger, CEO and co-founder of algorithmic-trading platform CoinRoutes, also saw the lawsuit as unrelated to the conversion of the fund.
“I am neither an attorney nor legal expert, but I don’t think there’s any scenario in which Grayscale will sell their bitcoin and dissolve their trusts, regardless of this lawsuit,” said Weisberger. “Even if DCG is forced to sell the trust, it would just come under operational management by a different entity. As a result, this case seems unrelated to the likelihood of the Greyscale trust conversion to an ETFs being approved.”
Sean Farrell, head of digital asset strategy at Fundstrat, said he doesn’t think the lawsuit matters with respect to the conversion.
“Grayscale owns GBTC but GBTC is its own bankruptcy remote trust,” Farrell said.
Grayscale did not immediately respond to CoinDesk’s request for comment.
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