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Osprey Funds CEO proposes takeover of Grayscale’s GBTC

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Osprey Funds’ founder and CEO, Greg King, has written an open letter to Barry Silbert, majority owner of Digital Currency Group which owns Grayscale, suggesting that he uses his powers to ‘cause Grayscale to withdraw as sponsor of Grayscale Bitcoin Trust (GBTC) and name Osprey sponsor instead’.

Grayscale has assets of USD12 billion, Osprey and REX Shares, King’s other fund group, have combined assets of USD1.5 billion. GBTC is trading at a discount of 36 per cent to NAV.

Osprey’s King proposes that, if appointed to take over the trust, the firm would slash the management fee to 0.49 per cent, from its current 2 per cent, and clean up the expense structure of the fund ‘which contains significant conflicts of interest’ according to the firm.

Other proposals are that Osprey would seek to implement a redemption program as soon as possible; would pursue a listing on NYSE immediately, “where I have listed dozens of exchange-traded products during my career),” King writes, “but from a position of collaboration with regulators. 

“For example, we would not engage in any lawsuits against the SEC, but instead, would work directly with Congress to enlighten the SEC as to the rationale of approving the fund as an exchange-listed, ETP.”

King continues: “Osprey is the best-positioned third party to manage GBTC at this point. Effective management of the Grayscale Bitcoin Trust requires specific expertise and the trust of both regulators and all market participants. Grayscale and Osprey are the only providers with the required skillset, but only Osprey has the trust.”

King  cites three proven capabilities needed in terms of expertise.

• The manager must be familiar with the custody and mechanics of operating a physical bitcoin-related fund. Osprey has managed OBTC successfully for three years, working with both Fidelity and Coinbase as custodians, and handling hundreds of millions of dollars’ worth of physical bitcoin seamlessly.

• Second, the manager must be familiar with operating an OTC-traded grantor trust subject to SEC reporting requirements. These products involve many complexities not well understood by other fund management companies, including those that operate ETFs or closed-end funds. We know this through first-hand experience. Learning the ropes on OTC-traded trusts was something that came to us only by actually doing it. Osprey obtained ticker-based trading for OBTC in February 2021 and caused it to become a voluntary SEC-reporting entity in September 2021. OBTC’s SEC filings are all current and in good standing.

• Third, the manager must be familiar with the operation of ETPs, as it is the goal of GBTC to one day become an ETP. Our team has significant experience with the management of ETPs, which are much different than closed-end funds, and we will take a constructive approach to working with regulators and the exchanges to get GBTC full ETP privileges as soon as possible.

King comments that mistrust of Grayscale and its many affiliated relationships has become a major concern for many GBTC holders and other market participants. “We note that the Fir Tree Capital Management complaint highlights many of these concerns. There have also been many concerns articulated about Grayscale’s high fees, lack of transparency and alleged stall tactics related to GBTC’s opportunities to enact a redemption program.”

Osprey’s King cites ways the firm has done its best to instil and maintain trust with its funds’ shareholders. 

“Our market makers are all unaffiliated third-party broker-dealers; Our custodian, Coinbase Custody, is not an investor in us nor are we in them; We do not have a lending business, enabling us to be free of the conflicts that come from lending to clients who then purchase the fund to then pledge back to the lender, etc.; We do not own GBTC, nor are we seeking to profit from the favourable market movements in GBTC that may be triggered by an announcement of our management; We voluntarily demonstrated ownership of the bitcoin in the Osprey Bitcoin Trust by publishing the public blockchain address on Twitter; (Grayscale still has not disclosed theirs); We announced a potential redemption program for OBTC in an 8k.”

While Grayscale has not responded to the Osprey approach, it has published a Reply Brief to the SEC as part of its lawsuit challenging the SEC’s decision to deny GBTC’s conversion to a spot Bitcoin ETF, claiming: ‘This is the next milestone in our ongoing litigation’.

“For more than 850,000 investors, converting GBTC to a spot bitcoin ETF would unlock over USD4 billion of value by providing the regulatory relief necessary for the product to simultaneously create and redeem shares, thereby enabling arbitrage to address both premiums and discounts of the shares as compared to net asset value”, Grayscale says. “The SEC’s reluctance to further bring bitcoin into the regulatory perimeter through a spot bitcoin ETF has prevented US investors from gaining the bitcoin investment exposure they both want and deserve.”

Chief Legal Officer, Craig Salm, who leads Grayscale’s legal team, writes on what he calls ‘a moment of broad distrust of the entire ecosystem, asking if there are broader implications for this lawsuit on the crypto community.

Salm writes: “Our lawsuit is about determinations on questions of law. Despite the SEC’s historical reluctance, or current perceptions of the crypto industry more generally, this is a legal case about fair and equal treatment under the law. That means events and speculation surrounding Terra/LUNA, 3AC, Celsius, Voyager, FTX, Alameda, BlockFi, Genesis Capital, Gemini, DCG, or anyone else are not relevant to the ultimate question the Court will have to answer: Did the SEC act arbitrarily and capriciously, and discriminate against issuers, in denying the conversion of GBTC to a spot bitcoin ETF after it approved ETFs that hold bitcoin futures (a derivative of bitcoin)? That’s it.”

Salm adds that at times when a significant amount of trust and confidence in the crypto ecosystem has been damaged, regulated access to the asset class is more important than ever. 

“Products like spot ETFs would further open up access to bitcoin for those that want to hold it in the form of a security, in their brokerage or retirement account, through a regulated investment vehicle, with SEC reports, audited financials, tax documents, and the like.

“I and the team at Grayscale understand that not everyone falls into that category, but there will likely always be people who want to access bitcoin through accountable centralised intermediaries and platforms. For example, based on existing laws, rules and regulations, many large institutions are legally required to delegate custody and therefore need third party service providers. And if you support the bitcoin protocol, I think it’s clear why you would want more ways for people to access bitcoin – even if those bitcoin are wrapped in something else on a 1:1 basis, such as an ETF or other financial product.”

Salm concludes: “ We are fighting for all those who believe in the future of bitcoin. So, if you’re long bitcoin – whether you self-custody your private key(s) on a piece of paper, cryptosteel, hardware wallet, a brainwallet in your head, or entrust them to a third party – I encourage you to support our ETF case.”

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