Digital Currency Group could break losing streak with SEC flip-flop on ETH ETFs

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Barry Silbert’s Digital Currency Group (DCG) has once again come up short in its bid to recoup its own losses ahead of customers of its bankrupt Genesis digital lending platform.

Late last week, U.S. Bankruptcy Judge Sean Lan approved a bankruptcy liquidation plan that will see Genesis Global return around $3 billion in cash and tokens to customers impacted by the lender’s filing for bankruptcy protection in January 2023.

The bankruptcy followed Genesis suspending redemptions the previous November, which in turn followed the bankruptcy of the FTX exchange and the implosion of the Three Arrows Capital (3AC) ‘crypto’ hedge fund, both of which had borrowed heavily from Genesis.

As the courts wrestled with how to untangle this incestuous web of transactions, DCG attempted to prioritize repayment of its own losses over those suffered by Genesis customers and creditors. In particular, DCG argued that everyone else should be repaid only the value of the digital assets at the time of the bankruptcy filing rather than the much higher current value of these assets.

That ploy would have left more assets in DCG’s pocket, despite evidence that DCG/Silbert misrepresented the fiscal health of Genesis to other entities—including the Gemini Earn program of the Winklevoss twins’ Gemini digital platform—and lingering concerns over some questionable financial transactions between Genesis and other DCG entities.

Judge Lane rejected DCG’s self-serving arguments, saying there were “nowhere near enough assets to provide any recovery to DCG in these cases.” Lane added that DCG lacked legal standing to object to the restructuring plan, and that everyone else in this sordid scenario—including federal and state agencies seeking billions in claims—was ahead of DCG in the line for repayment.

Speaking of, on May 20, New York’s Attorney General (NYAG) announced a $2 billion settlement with Genesis Global’s various divisions, marking the largest such settlement with a digital asset firm in the state’s history. The settlement, which required the bankruptcy court’s approval, will establish a ‘Victims’ Fund’ for the roughly 29,000 New York residents who lost money on Genesis via their ‘investments’ in Gemini Earn.

This Victims’ Fund will receive distributions from assets remaining in the Genesis Estate after initial distributions to creditors. If the creditors can’t be made whole based on today’s token prices, the Fund will claw back up to $2 billion from Genesis’ remaining assets. Genesis creditors will then receive distributions based on the ‘full and fair amounts of their actual losses’ until the Fund is depleted.

NYAG Letitia James called the settlement “a major step toward ensuring the victims who invested in Genesis have a semblance of justice. Once again, we see the real-world consequences and detrimental losses that can happen because of a lack of oversight and regulation within the cryptocurrency industry.”

While Genesis is now off the hook, the settlement doesn’t resolve the fraud complaint the NYAG filed against DCG, Gemini, Silbert and former Genesis CEO Soichiro Moro. The NYAG accused the aforementioned individuals/entities of causing over $3 billion in losses to their former customers.

In March, Genesis reached a $21 million settlement with the U.S. Securities and Exchange Commission (SEC), which alleged that Genesis was offering unregistered securities to customers via Gemini Earn. As part of that settlement, the SEC agreed not to press for payment of that $21 million until after other creditors were made whole.

Sonnenshein out as Grayscale CEO

DCG has yet to indicate whether it plans to appeal Judge Lane’s ruling, but given its actions to date, an appeal seems inevitable. DCG’s remaining cash cow isn’t exactly setting the world on fire, which may be contributing to the exits of its senior execs.

On May 20, Grayscale Investments, issuer of the GBTC spot-based exchange-traded fund (ETF), announced that its CEO, Michael Sonnenshein, was stepping down after 10 years with the company and three years as CEO. Sonnenshein is said to be moving on to “pursue other interests,” presumably those that might not make him such a figure of scorn among GBTC investors.

Peter Mintzberg, currently head of strategy for Goldman Sachs’ (NASDAQ: GS) asset and wealth management division, will succeed Sonnenshein on August 15. Until then, Grayscale’s CFO, Edward McGee, will oversee matters.

Sonnenshein’s skedaddle followed Silbert’s exit as Grayscale’s chairman the day after Christmas 2023. Silbert praised Sonnenshein for “his stewardship of Grayscale,” which began life as a trust but converted to an ETF this January.

Back when GBTC was a failing trust, DCG resisted efforts by investors to redeem their GBTC shares, citing regulatory restrictions that most observers believe never actually applied to GBTC. This resistance to redemption allowed DCG to go on charging annual fees of 2% of assets under management (AUM), bleeding this puppy dry while investors stood powerless on the sidelines.

Those investors have been taking their vengeance on DCG ever since that ETF conversion, as DCG initially refused to lower its 2% fees, despite rival ETFs charging customers fractions of this rate. GBTC eventually felt the pressure to cut fees to 1.5% but this was viewed as too little, too late for most.

Earlier this month, GBTC reported a trading day with $63 million in inflows, breaking an ignominious 78-day streak of outflows that saw $17.5 billion—representing more than half the BTC tokens under management pre-ETF—leave GBTC, most of it going to other ETFs. Sadly for DCG, the downward spiral resumed shortly after this inflow blip, continuing its dubious status as the one BTC ETF that consistently posts negative flow.

In April, Grayscale announced plans for a ‘mini’ GBTC with fees that will be competitive with its ETF rivals. However, nothing in Grayscale’s SEC filing actually commits them to the 0.15% fee they announced for this GBTC mini-me, leaving many critics suggesting that it was simply a bid to stop the bleeding with vague promises of jam tomorrow.

SEC flip-flopping on ETH ETFs?

DGC’s last shot at salvation (fiscal, not moral) could come from the conversion of Grayscale’s Ethereum-based trust to an ETF. All things ETH have been on a tear this week following rumors that the SEC could be wavering in its (presumed, never outright stated) opposition to ETH spot-based ETFs.

On May 21, Grayscale filed an amended statement with the SEC that expunged language in its previous filings referencing the ability to stake ETH via the trust. The move follows similar filings by other ETH ETF hopefuls— Ark/21Shares, Fidelity, Franklin, Invesco/Galaxy, and VanEck—after the SEC invited applicants to submit revised applications this week.

Specifically, Grayscale now says that no one involved with its ETH Trust “will directly or indirectly, engage in action where any portion of the Trust’s Ether becomes subject to Ethereum proof-of-stake validation or is used to earn additional Ether or generate income or other earnings.”

Bloomberg analyst James Seyffart tweeted Monday that “every single person we spoke to today … was blindsided by the SEC’s change of stance. No issuer is ready. Exchanges aren’t ready. Lawyers weren’t prepared.” Seyffart later told Fortune that the SEC appears to have had its change of heart due to a “top-down decision” by the Biden administration following the shifting ‘crypto’ mood in Congress.

Trump loves money… all kinds

There does seem to be an ongoing tonal shift in how Biden’s party is viewing ‘crypto’ regulatory proposals. Last week saw the U.S. Senate defy Biden’s threat to veto SAB121, the SEC’s proposed accounting change that critics claim makes it impossible for banks and other TradFi institutions to custody digital assets. The Senate voted 60 to 38 to kill SAB121, with 12 Democratic senators—including Majority Leader Chuck Schumer—joining their GOP colleagues in opposition to the SEC’s plan.

While the Senate’s margin of victory wasn’t veto-proof, the SEC’s abrupt about-face on ETH ETFs may indeed suggest that Biden is having second thoughts about issuing his threat. It doesn’t help that his November election rival, Donald Trump, has gone full-throated in his ‘crypto’ support—even if no one’s actually sure what Trump’s support means in real-world terms or whether his pro-crypto stance will survive past election day.

This week, Trump became the first major presidential candidate to announce that he would accept campaign contributions in digital assets, including BTC, ETH, SOL, DOGE, and SHIB. The announcement said that as “Biden piles regulations and red tape on all of us, President Trump stands ready to embrace new technologies that will Make America Great Again.” Plus, you know, pay Trump’s legal bills.

On Monday, Democrats in the House of Representatives received an email regarding two ‘crypto’ bills expected to come to the floor for a vote this week. The bills are FIT21, which envisions a larger role for the Commodity Futures Trading Commission (CFTC) in regulating digital assets, and Rep. Tom Emmer’s (R-MN) CBDC Anti-Surveillance State Act, which basically prohibits the federal government from issuing a central bank digital currency.

The email, obtained by Politico, notes the Dem committee leadership’s opposition to both bills but stops short of ‘whipping’ Dem reps to vote ‘no’ on both. Instead, reps were instructed to make their voting intentions known to the whip by 6 pm Monday.

How will the votes go? Honestly, it’s anyone’s guess. Given the upheaval of the past week or so, we half expect to wake tomorrow to learn that the SEC has approved Rai stone ETFs, and the dead worm in RFK Jr.’s brain is accepting campaign contributions in the form of unvaccinated bone marrow.

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