On Thursday, May 11, Rep. Brad Sherman (D-CA) publicly released a letter he’d sent Gary Gensler, chairman of the Securities and Exchange Commission (SEC), urging him to take a closer look at the actions of DCG’s Grayscale Bitcoin Trust (GBTC) (NASDAQ: GBTC). Sherman wants the SEC to protect the funds of “as many as 850,000 retail investors” who are “trapped in their GBTC investment.”
GBTC, with a market cap currently around $2.5 billion, is the largest of the token-specific funds offered by Grayscale Investments LLC, which allows tech-phobic customers to effectively buy shares in tokens without worrying about managing their occasionally tricky storage requirements.
In late-2021, GBTC shares traded over $51 but cratered to around $8 just one year later. The shares currently trade at just over $14. GBTC’s most recent financial report shows it held just under 629,000 BTC tokens as of March 31. The trust booked a net investment loss of over $71 million for the quarter, an improvement over the $131 million loss in the same period last year.
Sherman’s letter cited the 42% discount (as of February 23) at which GBTC trades compared to the net asset value (NAV) of its BTC. The current discount (as of May 11) is around 40%. Both figures beat the nearly 49% discount GBTC traded at in mid-December. But GBTC boasted a 78.5% premium to BTC’s fiat value in mid-2018, which must seem an eternity ago in the minds of GBTC investors.
Sherman notes that GBTC “flooded the market with GBTC by continuously issuing new shares.” In the words of Grayscale’s own head of investor relations, Rayhaneh Sharif-Askary, this flood of new shares “drove the discount” to GBTC’s NAV.
Sherman adds that Grayscale has used this share-issuance gambit to refuse shareholder requests to redeem their GBTC shares for BTC held by Grayscale. This refusal is allegedly based on Regulation M, a prohibition on simultaneous sales and redemptions of the same security. But Sherman adds that “even after Grayscale ceased issuing new shares, they have refused to offer redemptions, hiding behind a 2016 consent decree” that stemmed from a 2014 Regulation M violation.
Sherman expressed concern that Grayscale’s handling of GBTC is “motivated by a desire to increase assets under management [AUM], regardless of its impact on GBTC’s retail investors.” Grayscale collects annual fees of 2% “based on the actual value of [BTC] and not the value of the GBTC that investors own.” Sherman posits that allowing redemptions would “decrease Grayscale’s management fees and assets under management.”
Sherman blames GBTC shareholders’ plight on “a governance structure that is dominated” by “DCG C-Suite executives and industry insiders.” Sherman fingers DCG for establishing GBTC’s fee percentage and approving the issuing of new shares that drove down GBTC’s value.
Before we examine Sherman’s proposed remedies to the above, it’s worth noting that the SEC and DCG aren’t strangers, as Grayscale has gone to court to appeal the SEC’s refusal to allow the conversion of GBTC into a spot-based exchange-traded fund (ETF).
Grayscale’s insistence on prolonging this Quixotic legal fight has outraged GBTC shareholders, who believe Grayscale is only doing so to preserve its AUM and thus maximize the revenue from its 2% fees. In January, Grayscale CEO Michael Sonnenshein expressed the highly convenient view that the SEC might not approve of GBTC buying back its customers’ shares or allowing them to redeem their shares for BTC while this matter is before the courts.
In 2021, GBTC fees totaled $615 million, around 2/3 of DCG’s overall revenue. But DCG’s other revenue streams took major hits in 2022, resulting in the January bankruptcy of its Genesis Global Capital (GGC) digital lending subsidiary. This week, DCG missed a scheduled $630 million payment to GCC’s bankruptcy estate and entered mediation with GGC creditors.
What’s 2% of failure?
Sherman’s letter has multiple questions for Gensler, including whether Regulation M is actually a “barrier” to GBTC shareholder redemptions, particularly since no new GBTC shares have been issued since March 2021. Sherman also asks if Grayscale’s legal challenge of the SEC’s ETF denial is really the redemption barrier that Sonnenshein claims.
Expanding on his DCG governance concerns, Sherman asks Gensler if it’s “a matter of concern that Grayscale does not have a single independent director on either its board of directors or audit committee?”
Regarding Grayscale maintaining its 2% fees “despite its failure to achieve its investment objective after almost a decade,” Sherman wants to know if this fee is excessively large compared with “similar investment vehicles.” Sherman also questions the legality of DCG pledging its own GBTC shares as collateral for loans and raises concerns over the marketing of GBTC to retail investors.
Sherman, a senior member of the House Financial Services Committee, closes his letter by saying Gensler’s “response and action will help reassure Congress and the markets of the SEC’s commitment to its core principle of investor protection.”
Sherman is a firm believer that companies such as DCG have been running amok for far too long. At last month’s hearing into the SEC’s activities, Sherman praised Gensler for “standing up to the crypto bro billionaires, where the multibillion-dollar frauds are just the beginning of the societal harm.”
Choke (point) on it
Not all Committee members are so fondly disposed towards Gensler, nor the agency he heads. On May 10, Committee chair Patrick McHenry (R-NC) and six fellow Republican representatives co-signed a letter to SEC Secretary Vanessa Countryman. The letter expressed the GOP reps’ “strong concerns” regarding the SEC’s proposal to expand the scope of the Investment Advisers Act of 1940 in a way that could prohibit exchanges custodying customers’ digital assets.
The reps claimed that the proposal “follows the SEC’s pattern of promulgating rules that go beyond the SEC’s authority and fail to provide a sufficient, statutorily-mandated economic analysis … Additionally, the Proposed Rule would have particularly harmful impacts to the digital asset ecosystem.” The reps urged the SEC to withdraw its proposal and warned that they “remain committed to holding the SEC accountable for seeking to continue to expand its jurisdiction.”
Reaction to Sherman’s letter from ‘crypto Twitter’ was the predictable mix of scorn, defiance, slight regard, and contempt for Sherman, the federal government, and anyone else who dares impede the token hustlers from their mission of boosting their bankrolls at others’ expense.
But Gensler isn’t wrong when he says existing laws apply just fine to digital assets. Gensler also isn’t wrong when he says not liking the message isn’t the same as not receiving the message. Crypto bros can choose to continue ignoring this message, but their persecution complexes won’t hold sway when these matters come before the courts. Code isn’t law. Law is law. Rules may be for fools, but habitual rulebreakers may find FAFO less rewarding than they imagine.
The New Republic published an article Friday in which writer Jacob Silverman sought to let some of the hot air out of the crypto balloon, specifically the idea that the sector is under a coordinated and unjust assault by the powers that be. Under attack, they may be, but Silverman suggests that this is their own damn fault.
“What’s happening here is not an anti-crypto conspiracy: It’s basic governance, with a number of agencies and institutions taking a hard look at an industry that has routinely caused economic calamity for many ordinary people … the industry ignored laws, operated recklessly, and blamed politicians for its mistakes.”
“Whether it’s stopping scams or checking its energy usage, the crypto industry has abdicated responsibility for what its products and technologies do … Crypto’s critiques of the financial system are sometimes worth heeding, but its solutions magnify financial capitalism’s worst sins.”
This seems the perfect moment to remind everyone that some blockchain proponents remain squarely focused on utility, not pump-and-dump scams. For like-minded individuals, the place to be from May 31 to June 2 is the London Blockchain Conference, a haven for developers building projects that people can actually use within a system that respects existing laws. Someone has to be the adult in this room. It may as well be you.
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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