The liquidator of the FTX construct has filed a lawsuit against the largest crypto asset manager Grayscale Investments. In addition, other FTX debtors have filed claims against Grayscale CEO Michael Sonnenshein and the owners of the company Digital Currency Group (DCG).
FTX Trading Ltd. and its affiliated debtors are seeking injunctive relief to free up approximately $9 billion or more in value for shareholders of the Grayscale Bitcoin and Ethereum trusts. This is expected to realize approximately $250 million in liquid assets for customers and creditors of the insolvent FTX construct. The basis for the lawsuit is Grayscale's breach of "fiduciary duties."
Grayscale trusts at all-time lows
In the complaint filed, the FTX Receiver alleges the following: Grayscale breached the trust agreements by using artificial excuses to prevent unitholders in the investment products from redeeming the underlying assets for years. These actions allegedly caused the trusts to trade at a discount of up to 50% to their net asset value (NAV).
The discount results from the unilateral issuance made by the trust. Although spot Bitcoin can be exchanged 1:1 for GBTC, it is not possible to redeem GBTC for spot BTC in reverse. So until the SEC approves a spot bitcoin ETF, investors are stuck with GBTC. Adding to the already bad situation, some of the once largest shareholders such as Three Arrows Capital (3AC), BlockFi, and Celsius were forced to liquidate their investments due to bankruptcy proceedings. Nonetheless, asset manager Grayscale charged management fees of $1.3 billion over the past two years.
FTX insolvency administrator accuses abuse
Currently, $14 billion in capital is trapped in the Grayscale Bitcoin Trust (GBTC) alone. In addition, there are billions in assets in trusts for Ether (ETHE) and other cryptocurrencies. The goal of the lawsuit is now to free up those assets, it said. Nearly $20 billion is being held by Grayscale's self-serving practices and unjustified ban on redemptions, according to the plaintiff. If Grayscale were to lower its fees and cease and desist from preventing redemptions, FTX debtors' trust units would be worth at least $550 million (about +90% at the current price).
"We will continue to use all the tools at our disposal to maximize recoveries for FTX customers and creditors." - John J. Ray III, CEO and Chief Restructuring Officer of FTX Group
