Onramp Launches Spot Bitcoin Trust With Multi-Party Custody

Bitcoin financial services firm Onramp has launched a spot bitcoin (BTC) trust for high-net-worth investors that takes advantage of the cryptocurrency’s multisignature (multisig) capability to enable what Onramp calls multi-party custody – where a group of separate custodians each hold a private key in a multisig arrangement.

Onramp has recruited qualified custodian Kingdom Trust and bitcoin financial services firm Unchained Capital to create a 2-of-3 multisig model, meaning two of those three entities will need to sign a transaction in order to move client funds. The goal is to give clients direct exposure to bitcoin without the hassle of self-custody or the risk of trusting a single custodian.

Each unit of the trust will be equivalent to one BTC and clients will be able to process in-kind redemptions, where they redeem the underlying asset (bitcoin) without triggering a taxable event, according to Onramp.

Whether a bitcoin trust can process in-kind redemptions – essentially letting investors take out the underlying crypto in exchange for their shares – has proven a thorny regulatory question in the past.

In the mid-2010s, the Grayscale Bitcoin Trust (GBTC) shut down its redemption program after coming under scrutiny from the U.S. Securities and Exchange Commission. (Grayscale is owned by Digital Currency Group, which also owns CoinDesk.)

So investors are essentially stuck in GBTC, unless they choose to sell their shares, and shares in the $18.7 billion fund are currently trading at a steep discount to the underlying bitcoin.

Grayscale filed an application to convert the trust into an exchange-traded fund, but the SEC last year rejected the application. The investment firm sued the regulatory agency, asking the U.S. Court of Appeals for the District of Columbia to review the SEC's order.

The SEC has not approved any bitcoin ETFs, only allowing ETFs backed by bitcoin futures contracts.

Tanguma says Onramp will not offer in-kind redemptions until an initial 12-month lockup period has passed. He said the company's multi-party custody arrangement sets it apart from Grayscale and offers a new model for bitcoin custody.

“It's essentially the product GBTC should have been,” Michael Tanguma, CEO and co-founder of Onramp told CoinDesk. “And I believe it will be the future of how bitcoin is custodied.”

When asked whether Onramp would need SEC approval to start the redemptions, and if so why the regulator would approve the plan, Tanguma responded: "It does not require formal approval because bitcoin is a commodity as per the [Commodity Futures Trading Commission], not a security. With that, Onramp does plan to work with securities lawyers to get opinion letters in place to reduce the 12-month lock-up period for redemptions, and will work with all regulators to make sure Onramp stays compliant in all jurisdictions where it offers its services."

It bears pointing out that the SEC oversees capital markets including funds that invest in commodities such as gold or bitcoin.

GBTC's lack of a redemption mechanism has been a source of disgruntlement for institutional investors, including Fir Tree Capital Management, which has sued GBTC over the matter, arguing that Grayscale's policy is "self-imposed."

“The lawsuit filed by Fir Tree Partners against Grayscale Investments is baseless and without merit," a Grayscale spokesperson told CoinDesk. "We remain steadfast in our belief that the conversion of GBTC to an ETF is the best long-term product structure for investors, and are 100% committed to that endeavor. We look forward to clarifying the numerous mischaracterizations about our company and products in the Delaware Court of Chancery.”

UPDATE (April 17, 16:05 UTC): Adds comments from Grayscale about the Fir Tree Partners lawsuit and details about Grayscale's SEC application to convert to an ETF.