The firm terminates proof of reserves

While there are still no details on a possible rescue of Genesis Trading, there is at least apparently some positive news regarding Grayscale Bitcoin Trust (GBTC).

Ryan Selkis, co-founder of Messari tired on Tuesday that it appears Genesis has “days, not weeks” to reach an agreement with creditors to avoid Chapter 11. A building block for the crypto community, the question of whether Grayscale really owns Bitcoin 1:1 is now under scrutiny . by the research firm OXT Research.

For its part, Grayscale, which is the largest legal holder of Bitcoin with around 633,000 BTC, refused to provide proof of reserve in recent days. Grayscale said in one statement via Twitter that it cannot make a cryptographic proof of reserve from Coinbase Custody publicly available due to security concerns.

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

Shortly after, Coinbase Custody also published a letter to Grayscale investors. The company reassured investors and confirmed that funds were held in cold storage. But due to strict regulation, Coinbase Custody is prohibited by law from lending customer funds, the company said.

OXT Research provides evidence of grayscale reserves

To start a community-led effort to provide transparency for GBTC holdings, OXT Research has taken steps in recent days to identify likely GBTC addresses and balances based on public information and blockchain investigation.

On Sunday they published the part of their analysis, where they used public data and chain forensics to identify 432 addresses with 317,705 BTC as likely GBTC custodial activity. However, this represented only about 50% of the current holdings reported by GBTC.

“Further work is needed to identify the remaining addresses. […] But identifying the remaining ~315k BTC will be time-consuming,” OXT Research said.

IN Second part of the analysis, published a few hours ago, the research firm used additional forensics on the chain to confirm the approximate balance of 633,000 BTC held on Coinbase Custody.

The starting point for part one of the analysis was the transfer of 240,000 BTC from the then GBTC custodian XAPO to Coinbase Custody after July 2019, but this approach was exhausted. That’s why OXT Research expanded into Grayscale and Coinbase Custody’s interactions with known counterparties in part two of the investigation.

As a result, the firm concludes that Grayscale’s self-reporting is credible:

Obviously, no heuristic or set of heuristics is perfect, and this analysis certainly includes false positives and negatives. But our result is almost identical to G(BTC) self-reported holdings.

Part 2 estimate: 634,639 BTC
G(BTC) Reported: 633,394 BTC

However, there is also a (small) catch. Despite having as much BTC as they claim to hold, Grayscale has chosen to forgo transparency. “Why?”

Initially, the research firm assumed that “Coinbase Custody has some kind of non-disclosure agreement.” However, this contradicts an official letter.

We had originally thought that Coinbase Custody had some kind of privacy policy.

But read the two underlined sentences from this letter.

It seems clear that Coinbase Custody is willing to disclose addresses. pic.twitter.com/AAMs7qQKNm

— 🏴∴Ergo∴🏴 (@ErgoBTC) 23 November 2022

OXT Research therefore concludes that one of the only real reasons why Grayscale might not want to provide their addresses is that they want to avoid giving information about who their most used counterparties are.

This could be DCG and Genesis Trading, according to OXT Research. The analysis shows that Grayscale has two preferred wallet clusters as counterparties. Both of these clusters have “OTC” wallet profiles with low numbers of transactions and addresses, high BTC volumes, and a preference for activity during EST business hours:

They are also closely linked, with 1057 direct transactions and 336k BTC in direct flow between the two clusters. A massive ratio, indicating that these may be the same entity.