Grayscale cites security concerns for withholding on-chain proof of reserves

November 19, 2022 Coin Telegraph

Bitcoin

Grayscale shared a letter from Coinbase Custody attesting that each of Grayscale’s crypto products is fully backed, but stopped short of providing the wallet addresses.

Cryptocurrency investment product provider Grayscale Investments has refused to provide on-chain proof of reserves or wallet addresses to show the underlying assets of its digital currency products citing “security concerns.”

In a Nov. 18 Twitter thread addressing investor concerns, Grayscale laid out information regarding the security and storage of its crypto holdings and said all crypto underlying its investment products are stored with Coinbase’s custody service, stopping short of revealing the wallet addresses.

6) Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.
— Grayscale (@Grayscale) November 18, 2022

“We know the preceding point in particular will be a disappointment to some,” Grayscale added, “but panic sparked by others is not a good enough reason to circumvent complex security arrangements that have kept our investors’ assets safe for years.”

The move by Grayscale comes as pressure mounts on crypto business to introduce proof of reserves in the wake of FTX’s liquidity issues and subsequent bankruptcy.

Some Twitter users hit out at Grayscale’s view that security concerns surrounded its decision to withhold its wallet addresses, with one commenting the addresses of Bitcoin (BTC) inventor Satoshi Nakamoto are well known and are of higher value to attackers, “yet Satoshi's Bitcoin remains secure.”

Grayscale shared a letter co-signed by Coinbase CFO, Alesia Haas, and Coinbase Custody CEO, Aaron Schnarch, that broke down Grayscale’s holdings by its investment products and reaffirmed the assets “are secure”, that each product has its “own on-chain addresses” and the crypto always belongs “to the applicable Grayscale product.”

Grayscale added that each of its products is set up as a separate legal entity and “laws, regulations, and documents [...] prohibit the digital assets underlying the products from being lent, borrowed, or otherwise encumbered.”

Grayscale is known for its Grayscale Bitcoin Trust (GBTC), a security tracking the price of Bitcoin, it also has products tracking the price of other cryptocurrencies such as Ether (ETH) and Solana (SOL).

Investor concerns come as Genesis Global, serving as the liquidity provider for GBTC announced on Nov. 16 that it had halted withdrawals citing “unprecedented market turmoil” resulting in significant withdrawals from its platform that exceeded its current liquidity.

Genesis is a part of the crypto-focused venture capital company Digital Currency Group (DCG) which also owns Grayscale. GBTC is trading at a discount of nearly 43% compared to its net asset value in part due to investor speculation on GBTC’s exposure to Genesis.

Breaking: Crypto lender Genesis Global halts withdrawals

November 16, 2022 Coin Telegraph

Coin Telegraph

The troubled firm is also acting as the liquidity provider of Grayscale Bitcoin Investment Trust.

According to a new tweet by Genesis Global on Nov. 16, the institutional crypto lender said it would “temporarily suspend redemptions and new loan originations in the lending business.” In explaining the decision, the firm cited “unprecedented market turmoil” related to the collapse of troubled cryptocurrency exchange FTX, resulting in “abnormal” levels of withdrawals that Genesis Global claims to have exceeded its current liquidity.

The firm also added that its current liquidity was negatively impacted by the collapse of hedge fund Three Arrows Capital in June. As part of bankruptcy proceedings, the brokerage has filed a $1.2-billion claim against Three Arrows Capital.

Though it’s unclear what the firm’s liquidity levels are, Cointelegraph previously reported that Genesis Global had $175 million worth of funds stuck on FTX. In response, Digital Currency Group, the parent company of Genesis Global, sent its subsidiary an emergency $140-million equity infusion to cover losses.

It’s now apparent that the transfer was insufficient to meet consumer withdrawal demands. As for the next steps, Genesis Global stated:

“We have hired the best advisors in the industry to explore all possible options. Next week, we will deliver a plan for the lending business. We’re working tirelessly to identify the best solutions for the lending business, including among other things, sourcing new liquidity.”

Genesis Global also claimed that its spot, derivatives trading and custody businesses remain “fully operational.” In its latest quarterly report, the firm stated that it has $2.8 billion worth of active loans. Since the announcement, its parent company, Digital Currency Group, has clarified that it has no impact on its own operations. However, Genesis Global currently serves as the liquidity provider of the popular $6.7-billion Grayscale Bitcoin Investment Trust (GBTC). The fund is currently trading at a discount of nearly 40% to its net asset value at the time of publication in part due to investor speculation on its exposure to Genesis Global.

Update 2:35 PM UTC: Cryptocurrency exchange Gemini confirms Genesis Global is the lending partner for its Earn program and will not be able to meet customer redemptions within five business days. Gemini also states that the event does not affect the firm’s other products and services and that “all customer funds held on the Gemini exchange are held 1:1 and available for withdrawal at any time.”

Update 2:40 PM UTC: GBTC released a statement saying that "all Grayscale products remain safe and secure, held in segregated wallets in deep cold storage by our custodian @Coinbase." The company also claimed its digital asset products are unaffected, and that the firm does not borrow nor lend with custodied assets.

Grayscale Bitcoin Trust closes with 41% premium lost amid FTX meltdown

November 10, 2022 Coin Telegraph

Coin Telegraph

On Nov. 9, the GBTC closed at a record discount of 41% with a one-share price standing at $8.76.

Following the FTX bank run, which accelerated by Nov. 7, Bitcoin (BTC) price started to buckle and, at the time of writing, lost 21% in five days. Among the victims of the swift market meltdown is the world’s largest institutional Bitcoin fund, the Grayscale Bitcoin Trust (GBTC).

On Nov. 9, the GBTC closed at a record discount of 41%, with a price per share standing at $8.76. Overall, the GBTC has been gradually declining for almost a year since its peak position of $51.47 per share on Nov. 12, 2021.

A structural problem of GBTC lies in the fact that it’s an investment trust fund with its shares not freely created nor offering a redemption program . This inefficiency creates significant price discrepancies versus the fund’s underlying Bitcoin holdings.

That is why Grayscale has been reportedly trying to convert the GBTC to an exchange-traded fund (ETF), which allows the market maker to create and redeem shares, ensuring the premium or discount is, at most times, minimal.

The firm has been waiting for a final decision from the Securities Exchange Commission (SEC) since filing its application in October 2021. On June 29, SEC officially denied Grayscale’s application to convert GBTC to a spot Bitcoin ETF. Then Grayscale decided to go to court — on Oct. 11, it filed the opening legal brief to challenge the SEC’s decision.

The current market crisis began on Nov. 2, after reports that a leaked balance sheet from the Sam Bankman-Fried-founded trading firm Alameda Research suggested the company held a significant amount of FTX Token (FTT), the native token of the FTX cryptocurrency exchange. A large trading firm holding so much of one asset concerned the crypto community and brought questions regarding the relationship between Alameda and FTX.

The situation has been unfolding rapidly since that day, leading to a full-scale “bank-run” of FTX users who began to withdraw their funds from the exchange. Reported data from Nansen on Nov. 7 showed stablecoin outflows on FTX reached $451 million over seven days.

New Grayscale Poll Finds Bipartisan Support for Clear US Crypto Regulations

November 2, 2022 The Daily Hodl

Grayscale’s Bitcoin ETF Battle With the SEC Earns Support From Crypto Titan Coinbase

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The crypto industry fights regulators in the courts: Law Decoded, Oct. 10–17

October 17, 2022 Coin Telegraph

Coin Telegraph

Grayscale and Ripple against the SEC, Coin Center versus the Treasury — it’s a hot season in the U.S. courts.

Perhaps one of the most captivating signs of the industry’s maturity is the increasing amount of court cases in which crypto companies fight back against perceived regulatory abuses. Last week saw some major advancements in that direction.

Digital asset manager Grayscale has filed its opening brief against the United States Securities Exchange Commission to challenge its decision denying Grayscale’s application to convert the Grayscale Bitcoin Trust (GBTC) to a spot Bitcoin exchange-traded fund (ETF). According to Grayscale, the SEC must submit its brief by Nov. 9.

A U.S.-based crypto policy advocacy group, Coin Center has followed through with its intention to take the Treasury Department’s Office of Foreign Asset Control, or OFAC, to court over sanctioning cryptocurrency mixer Tornado Cash. Lawyers for Coin Center as well as crypto investor David Hoffman, an anonymous human-rights advocate known only as John Doe, and software developer Patrick O’Sullivan filed a joint complaint against the OFAC, Treasury Secretary Janet Yellen and OFAC Director Andrea Gacki. The complaint alleged that sanctioning Tornado Cash was “unprecedented and unlawful,” in part, due to privacy concerns over crypto transactions.

Meanwhile, Ripple CEO Brad Garlinghouse revealed that he expects the long-drawn-out battle between Ripple and the SEC to end in the first half of 2023. “Federal judges work at their own pace,” he stated, before adding, “Optimistically, we’re talking about three to four months. Pessimistically, it could be longer than that.” The fintech boss said that Ripple would consider a settlement with the SEC, providing that XRP is not classified as a security.

MiCA passes through the European Parliament Committee

Members of the European Parliament Committee passed the key crypto framework policy, Markets in Crypto-Assets (MiCA), in a vote of 28 in favor and one against, with a final vote expected in a full European Parliament session soon. Following the MiCA vote, members of the EU Parliament also overwhelmingly approved a provisional deal on the Transfer of Funds Regulation, legislation aimed at having compliance standards for crypto assets in an effort to crack down on money laundering. The two regulatory frameworks, if given final approval, would apply to member states with the EU but potentially serve as an example for global lawmakers on crypto. Following all the procedures and checks, the crypto policies could go into effect starting in 2024.

OECD’s framework to combat international tax evasion using digital assets

The Organisation for Economic Cooperation and Development (OECD) has published a framework aimed at helping tax authorities achieve greater visibility on crypto transactions and the users behind them. The crypto tax framework proposes automatically exchanging information on crypto transactions between jurisdictions annually, given a rise in the number of unregulated exchanges and wallet providers. If approved, the framework would likely facilitate information sharing on crypto transactions between the OECD’s 38 member countries — a list that includes the United States, Japan, South Korea and many nations within Europe.

Portugal proposes 28% tax on crypto profits

Long considered a cryptocurrency tax haven, Portugal’s government has proposed a 28% tax on capital gains from cryptocurrencies held for less than a year. The government’s 2023 State Budget document featured a short section addressing the taxation of cryptocurrencies, which, to date, have been untouched by the Portuguese tax authorities, given that digital assets were not recognized as legal tender.

A proposed income tax from operations involving cryptocurrencies through activities such as mining, trading and capital gains was put forward in the 444-page document. The State Budget also proposes a 4% taxation fee for free transfers of cryptocurrencies in instances of inheritance, as well as stamp duties on commissions charged by intermediaries involved in the cryptocurrency sector.

Grayscale BTC Trust trades at a record 36.7% discount, but is it justified?

October 15, 2022 Coin Telegraph

Coin Telegraph

Grayscale’s BTC trust trades at a 36.7% discount to their actual BTC holdings, and it’s possible that more than just the market-wide downtrend stands as the reason for the spread.

U.S. investors have been waiting for a Bitcoin exchange-traded fund (ETF) approval since May 2014 when the Winklevoss Bitcoin Trust filed an amendment request at the Securities and Exchange (SEC).

Over the years, the SEC has rejected every applicant and the latest denial was issued to WisdomTree’s application for a spot Bitcoin ETF on Oct. 11. The SEC concluded that the offer did not have the ability “to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules.”

Bitcoin investment trust vehicles have existed since 2013, but they have been restricted to accredited investors. Launching a spot-based BTC ETF would open the market to retail investors and a broader array of mutual funds in the industry.

At the moment, U.S. regulators are reluctant to release what many believe would be a more fair and transparent product for Bitcoin. A conflicting reality is, while BTC spot ETFs continue to be rejected, the exact same product has long been available for bonds, global currencies, gold, Chinese equities, real estate, oil and silver.

The Grayscale Bitcoin Trust Fund (GBTC), a U$ 12.3 billion investment fund, is currently trading at a record-high 36.7% discount versus its Bitcoin holdings, but this might not be a buy the dip-type of discount. The gap started after the Toronto Stock Exchange launched the Purpose Bitcoin ETF in February 2021, which is a spot investment product.

What is an exchange-traded fund?

An ETF is a security type that holds diversified underlying investments, including commodities, stocks or bonds. The ETF might resemble a mutual fund because it is pooled and managed by its issuer.

SPY, the ETF that tracks the S&P 500 index, is the most recognizable example of the instrument. The mutual fund is currently managed by State Street and carries $328 billion in assets under management.

More exotic structures are also available, like the ProShares UltraShort Bloomberg Crude Oil (SCO). This fund uses derivatives and aims to offer two times the daily short leverage on oil prices, meaning investors are effectively betting on a downturn in oil prices.

Buying an ETF gives the investor direct ownership of its contents, creating different taxation events versus holding futures contracts and leveraged positions.

Trust funds, like GBTC do not offer redemption or conversion rights

Investment trust funds sit outside the SEC’s authority and are actually regulated by the U.S. Office of the Comptroller of the Currency.

Grayscale's GBTC is the absolute leader in the cryptocurrency market, even though it has been structured as a company — at least in regulatory form. The investment trust is considered a closed-end fund, meaning the number of available shares are limited.

Consequently, GBTC shares are not freely created, nor do they offer a redemption program. This inefficiency creates significant price discrepancies versus the fund’s underlying Bitcoin holdings. In contrast, an ETF allows the market maker to create and redeem shares, ensuring the premium or discount is at most times minimal.

For instance, Purpose Bitcoin ETF (BTCC.U) held a $3.59 net asset value per share on Oct. 13, and the shares closed at $3.60 on Toronto exchange. Similarly, U.S. derivatives ProShares Bitcoin Strategy ETF (BITO) underlying price was $11.94 on Oct. 13, while its shares traded at $11.95.

Grayscale is fighting the SEC, but results could take years

In June 2022, the asset manager Grayscale initiated a lawsuit with the SEC regarding converting the GBTC into a spot-based Bitcoin ETF. The firm has been waiting for a final decision from the regulator since filing its application in October 2021.

Grayscale's senior legal strategist stated that the SEC rejection was "arbitrary" by "failing to apply consistent treatment to similar investment vehicles." As a result, the asset manager pursued a legal challenge based on the SEC's alleged violation of the Administrative Procedure Act and Securities Exchange Act.

It must be noted that eight and a half years have passed since the first request for a Bitcoin spot ETF registry was submitted. At the moment, GBTC charges a fixed 2% yearly administration fee, so the 36.7% discount might be justified given that the SEC continues to reject appeals and requests from every fund manager.

In essence, the investment trust product is far less optimal than an ETF, and so far, Grayscale has done little to minimize the impact on GBTC holders.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Grayscale Investments Makes Move Against SEC, Files Opening Legal Brief in ETF Rejection Lawsuit

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Digital Asset Giant Grayscale Launches New Bitcoin and Crypto Infrastructure Investment Product

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Grayscale announces new arm to invest in Bitcoin mining hardware

October 6, 2022 Coin Telegraph

Bitcoin mining

Grayscale plans to buy mining equipment at discounted prices and offer co-investment opportunities to accredited investors.

Grayscale Investments announced on Oct. 6 the formation of Grayscale Digital Infrastructure Opportunities LLC ("GDIO"), a co-investment opportunity focused on Bitcoin mining hardware. By leveraging its affiliated staking infrastructure firm, Foundry, the company plans to acquire mining equipment at reduced prices during the crypto winter.

The company said the new entity will be available to individuals and institutional accredited investors at a minimum investment of $25,000. The funding is expected to be completed before the end of this year and will offer liquidity similar to private equity or infrastructure assets that have a three-to-five-year investment horizon, as Bloomberg reports. Investors who are considered accredited must meet certain criteria regarding their income, net worth, qualifications and knowledge of financial markets.

“Our team has long been committed to lowering the barrier for investing in the crypto ecosystem — from direct digital asset exposure, to diversified thematic products, and now infrastructure through GDIO,” said Grayscale CEO Michael Sonnenshein in a press statement.

Foundry operates one of the biggest mining pools in the world, Foundry USA, under the same parent company as Grayscale, the Digital Currency Group. Last year, Foundry USA became the second-largest Bitcoin mining pool after China’s ban on crypto trading and mining activities.

Recently, more companies have sought consolidation opportunities amid a bear market and high-energy costs. In September, the Crypto mining firm CleanSparkannounced an agreement to acquire Mawson's Bitcoin mining facility in Sandersville, Georgia for $33 million.

Days before, the company disclosed a purchase agreement with Cryptech Solutions for 10,000 Bitmain Antminer S19j Pro units for a total price of $28 million. In July, Clean Spark bought over 1,000 Bitcoin miners from Whatsminer M30S at a "substantially discounted price." In June, the mining company also bought 1,800 Antminer S19 XP rigs.

Grayscale

MiCA passes through the European Parliament Committee

OECD’s framework to combat international tax evasion using digital assets

Portugal proposes 28% tax on crypto profits

What is an exchange-traded fund?

Trust funds, like GBTC do not offer redemption or conversion rights

Grayscale is fighting the SEC, but results could take years

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