FTX’s trading affiliate Alameda is suing Grayscale over crypto investments

FTX trading affiliate Alameda has sued crypto investment firm Grayscale and its owner Digital Currency Group over the structure of their large bitcoin and Ethereum trusts, dealing a further blow to the SoftBank-backed crypto conglomerate.

Alameda, which is run by restructuring expert John Ray along with other FTX affiliates, accused Grayscale and DCG’s management of being “obsessed with self-interest” and enriching themselves “at the expense of trust shareholders”, by refusing to allow redemptions and charging exorbitant fees . fees.

Grayscale, DCG’s asset management business, operates several cryptocurrency trusts from which it earns lucrative fees for managing bitcoin, ether and other tokens for clients. Investors can buy shares in the trusts through their brokerage accounts, rather than having direct exposure to the coins.

Alameda owns more than 22 million shares in Grayscale’s flagship bitcoin trust, the complaint said, and another 6 million shares in the company’s Ethereum trust, representing more than 3 percent and 2 percent of total outstanding shares, respectively.

Those holdings were worth $290 million on secondary markets at the end of last week, the complaint added, and could be worth nearly double that if Grayscale reduced its fees and allowed investors to redeem their shares for equivalent value in the underlying cryptoassets. .

Since the collapse last year of FTX — which was founded by Sam Bankman-Fried, who was forced to step aside when the exchange and affiliates, including Alameda, filed for bankruptcy — shares in the trusts have fallen to significant discounts to the underlying crypto . It’s enough. Grayscale’s bitcoin trust trades at a 45 percent discount to the price of bitcoin.

Grayscale does not allow investors to redeem their shares for the coins held in the trusts, which would help close the significant net worth gaps.

“Because of [Grayscale and DCG’s] malfunction. . . the only way for shareholders to exit their investments is by selling their shares in the trusts in the secondary market, where shares trade at a fraction of their proportionate interest in trust assets,” FTX alleged in its filing with a Delaware court on Monday.

In a statement, FTX’s John Ray said: “We will continue to use all the tools we can to maximize recovery for FTX customers and creditors.”

The lawsuit marks the latest issue for Connecticut-based DCG, which is one of the largest and oldest crypto investors. DCG’s CEO, former Houlihan Lokey banker Barry Silbert, and Grayscale’s CEO, Michael Sonnenshein, are also named in the complaint.

DCG has been battling the fallout from falling crypto prices and the collapse of FTX since last year.

The lending unit of the crypto broker, Genesis, filed for bankruptcy earlier this year. The group is seeking to sell news site CoinDesk in a bid to raise cash and repay creditors.

Grayscale’s flagship bitcoin trust holds about 3 percent of all bitcoin, worth $14.7 billion, from which the asset manager earns a 2 percent fee. It earns a fee of 2.5 percent for 3 mn of ether in its ethereum trust.

The asset manager has long argued that the trusts should be converted into exchange-traded funds. Grayscale is suing the US Securities and Exchange Commission to block the creation of a spot bitcoin ETF, arguing that this would benefit investors and allow redemptions. Oral arguments in that case are scheduled to be heard by a federal appeals court on Tuesday.

“The lawsuit filed by Sam Bankman-Fried’s hedge fund, Alameda Research, is misguided,” Grayscale said, adding that the company “has been transparent in our efforts to obtain regulatory approval to convert GBTC to an ETF — a result that is undoubtedly the best long-term product structure for Grayscale’s investors”.