Grayscale, the SEC & Genesis with Michael Sonnenshein - WBD623

Michael Sonnenshein is the CEO of Grayscale. In this interview,
we discuss Grayscale’s lawsuit with the SEC, Genesis’s lending
practices and bankruptcy, GBTC and the intercompany relationships
at DCG.


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The Grayscale Bitcoin Trust (GBTC) brought institutional
investment into Bitcoin and helped Bitcoin to mature. Launched in
2013, as a subsidiary of the Digital Currency Group (DCG), it was
devised as an official means of gaining exposure to Bitcoin for
high-net-worth entities. Many, including Grayscale, have sought
to provide a spot price ETF, but, in the absence of SEC approval,
GBTC has served as an attractive alternative investment vehicle.
In November 2021, GBTC had over $43 billion AUM.


GBTC is one of many funds Grayscale provides covering a plethora
of digital assets, including Ethereum, Solana, Zcash and Bitcoin
Cash. However, GBTC is the most dominant: at this moment GBTC
represents nearly 75% of Grayscale's total AUM. With its 2%
annual fee based on Bitcoin’s spot price, GBTC is a valuable part
of Grayscale and DCG's portfolio. At the current Bitcoin price,
GBTC commands approximately $420m in fees.


Grayscale is currently dealing with some major issues. Since
early 2021 GBTC has been trading below its net asset value (NAV).
This discount is currently hovering around all-time lows at 46%.
GBTC holders cannot redeem their shares for the underlying asset.
They have to sell their shares in an open market and shoulder
this discount. Those not forced to sell feel effectively trapped.


Grayscale is subject to a number of investor lawsuits, and an
activist campaign seeking to unseat Grayscale as the manager of
GBTC. Concurrently, Grayscale is suing the SEC over the latter's
refusal to convert GBTC into an ETF. The mechanisms of an ETF
allow for arbitrage trading keeping the share price aligned with
NAV. This is Grayscale’s strategy for reducing the current GBTC
discount.


Grayscale has also been caught up in the bankruptcy of the crypto
lending firm Genesis, another subsidiary of DCG. According to a
Financial Times report, DCG is selling shares in Grayscale funds,
“at a steep discount” to pay back Genesis creditors. There are
more fundamental questions about the role of Genesis’s lending.
According to Bitcoinist, the failed hedge fund Three Arrows
Capital took a $2.36 billion loan from Genesis backed by 17
million GBTC shares.