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Digital Currency Group’s Luno exchange cuts staff, Grayscale won’t cut fees

U.K.-based digital assets exchange Luno is turfing one-third of its staff in the latest blow to Digital Currency Group’s (DCG) struggling portfolio, while DCG’s Grayscale is under pressure to mend its investor-punishing ways.

On Wednesday, Luno held a virtual ‘town hall’ meeting with its global staff to announce that around 35% of them were out of a job. Luno’s global workforce—the company has hubs in Singapore and South Africa, as well as regional offices in numerous other jurisdictions—consists of around 960 ‘Lunauts,’ roughly 330 of whom are being made redundant.

In a subsequent blog post, Luno CEO Marcus Swanepoel said the company is adjusting following “an incredibly tough year for the broader tech industry and, in particular, the crypto market.” Swanepoel specifically cited last year’s collapses of Terraform Labs’ Luna token (no affiliation with Luno), the Three Arrows Capital (3AC) crypto hedge fund, and Sam Bankman-Fried’s FTX exchange as driving this downturn.

Swanepoel said the company had “proactively planned ahead” to mitigate the fallout, but “the sheer scale and speed of all of this happening, and all at the same time, has put significant strain on our original plan.” The company was therefore compelled to “readjust our focus to maintaining our leadership position in our core markets.”

A Luno spokesperson told CNBC that the layoffs would impact the company’s marketing teams the most. The spokesperson stressed that the cuts would have “minimal or no impact on key operating and compliance teams.” Swanepoel’s statement sought to head off any panic by stressing that “customer funds are safe and operations continue as normal.”

DCG first invested in Luno in 2014, then acquired the company outright in September 2020. At the time, Luno’s staff count was under 400, but DCG made “a significant financial commitment to help Luno expand globally, both in geographies where Luno currently operates and beyond.”

The ongoing ‘crypto winter’ has led to a flurry of layoffs at other DCG-owned/affiliated firms, while DCG itself cut 10% of its staff in November. DCG halted quarterly dividends to shareholders this month, and last week’s bankruptcy filing by DCG’s Genesis digital asset lending platform has U.S. federal authorities asking questions about financial transfers DCG made to Genesis pre-crash.

DCG boss Barry Silbert has attempted to weather the storm by shutting unprofitable units such as the HQ ‘life and wealth management membership platform’ while exploring the potential sale of other wholly-owned subsidiaries, including the CoinDesk media outlet. Meanwhile, one DCG unit continues to thrive, albeit at the direct expense of the suckers who invested in it.

Grayscale could redeem investor shares, but it just doesn’t want to

DCG’s Grayscale Investments, which offers institutional investors the ability to buy into a variety of crypto tokens without the bother of actually learning how blockchains or digital wallets work, reliably earns hundreds of millions per year and reportedly accounts for up to three-quarters of DCG’s annual revenue.

Grayscale’s biggest earner is its Grayscale Bitcoin Trust (GBTC), which holds over 600,000 BTC tokens. GBTC used to trade well above the net asset value (NAV) of its BTC holdings, but that position began to invert in early 2021. GBTC now trades around 43% below its tokens’ NAV, a modest improvement over the 49% discount at the end of December.

Grayscale’s long-term plan was to transform its various token trusts into spot-market exchange-traded funds (ETF). However, the U.S. Securities and Exchange Commission (SEC) has thwarted this goal, citing the sector’s lack of transparency and the likelihood of price manipulation. Grayscale continues to file legal challenges of these rulings that largely rehash previous arguments that failed to win the day.

This week, the District of Columbia Court of Appeals set a March 7 date to hear oral arguments in Grayscale’s SEC fight, with a ruling expected sometime in the fall. Grayscale CEO Michael Sonnenshein expressed confidence that his firm would emerge triumphant but told Reuters he was prepared to appeal to the U.S. Supreme Court if the D.C. court sided with the SEC.

GBTC investors are prevented from redeeming their shares, a right held solely by Grayscale and an option for which Grayscale appears to have zero appetite. Small wonder, given that Grayscale charges investors an annual 2% fee— based on the NAV of GBTC’s BTC tokens—not GBTC’s depressed share price—allowing Grayscale to continually whittle away at its investors’ wealth while padding its own bottom line.

Some GBTC investors have grown tired of this charade and are pressing Grayscale to either buy back their shares or ask the SEC to allow investors to redeem their shares for BTC. This week, Sonnenshein told Barron’s that he didn’t believe the SEC would approve either of those moves while Grayscale is suing the agency. Convenient, that.

In December, Grayscale told investors it wouldn’t pursue a tender offer to shareholders until all its legal options were exhausted. Asked why Grayscale couldn’t walk and chew gum at the same time, Sonnenshein said that “all of [Grayscale’s] energies are focused on ETF conversion.”

In the meantime, Grayscale can continue to bleed its investors via those annual fees for the better part of 2023 and possibly into 2024, preserving the financial lifeline that DGC so desperately needs at present.

We’re committed to doing the thing we’re not going to do

Sonnenshein’s efforts to demonize the SEC were on full display Tuesday when he went on CNBC’s Squawk Box and effectively blamed the agency for anyone suffering from 2022’s crypto meltdown. “Had the SEC already approved a spot Bitcoin ETF, allowed GBTC to convert to a spot ETF already, a lot of the recent investor harm we’ve seen in crypto would have been prevented. A lot of these investors would not have gone to offshore exchanges and gotten caught up” in the carnage.

But things went astray when co-host Rebecca Quick noted the vast discount at which GBTC currently trades and the fact that GBTC customers “aren’t allowed to redeem” their shares. Noting that “those seem like things that investors would be concerned about,” Quick challenged Sonnenshein: “Is there a point where you’re going to allow investors to start redeeming?”

Sonnenshein responded by saying “the path we’ve been on with GBTC is to convert it to an ETF … if we do exhaust all of our judicial options to challenge the SEC’s stance on this product, we would entertain working constructively with regulators and shareholders to offer a tender offer … that would not be a great outcome given that that would be a material deviation from bringing an ETF to market.”

An unimpressed Quick pushed back, asking, “Why don’t you lower your fees in the meantime?” Sonnenshein started to say that GBTC was “certainly committed to lowering our fees,” but Quick interrupted, asking, “Why don’t you just do it instead of committing to it?”

Clearly determined for Quick to get her daily dose of fiber, Sonnenshein offered up an even bigger bowl of word salad. Apparently, digital currency is “an environment where costs associated with running products are going to be higher today than they are maybe for traditional products like equities or fixed income. Certainly, in a competitive market where we believe GBTC will be the first ETF and other ETFs will come to market, there certainly will be likely a race to the bottom in fees and we’re committed to that for investors.”

Sadly, Sonnenshein wasn’t asked why GBTC fees are charged on its NAV rather than its share price. Still, it’s good to know that Grayscale will lower its fees eventually, you know, once it has actual competition. But for the time being, in this game of Monopoly, Barry Silbert’s only too happy to be the guy in the top hat.

Then again, should the feds choose to examine theories of GBTC price-boosting collusion between DGC, Genesis, and 3AC—or Grayscale execs’ admission that they “drove the discount” by “flooding the market with supply”—the next Monopoly card Silbert draws could read ‘go directly to jail.’

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