Barry Silbert successor at Grayscale, Michael Sonnenshein, wants the ability as CEO to commingle the bitcoin backing its $23 billion bitcoin trust, GBTC, in shared, omnibus accounts “from time to time.”
This is according to a letter sent to all GBTC shareholders, that was filed with the Securities and Exchange Commission (SEC). Grayscale would like this bitcoin commingling discretion despite the New York Attorney General’s (NYAG) lawsuit against Barry Silbert and Grayscale’s parent company for concealing over $1 billion in losses from investors.
Despite Silbert’s misstatements about over a billion dollars as documented by NYAG, he assures GBTC investors that Grayscale will only commingle bitcoin at its discretion in order to use “the prime brokerage services of an affiliate of the custodian.”
Some people thought Grayscale’s filing was simply a step in converting GBTC into an ETF. Not so. Indeed, the filing specifically admits that permission to commingle bitcoin in omnibus accounts is simply “to provide operational efficiencies that we believe are beneficial.”
Grayscale explicitly admits this permission will not help GBTC convert into an ETF. “None of these proposals are prerequisites to the Trust receiving approval or operating as an exchange-traded fund (ETF).”
The proposed change will also allow Grayscale’s trust management fee to be paid daily instead of monthly.
Trusting Grayscale to commingle GBTC bitcoin
Grayscale claims GBTC is a 1:1-backed trust that has more than $23 billion under management.
Independent researchers cannot find the wallets for all GBTC bitcoin — something Grayscale handwaves away as customary security measures.
Analytics firm Arkham found as many as 1,750 bitcoin addresses that might belong to Grayscale. None of them had more than 1,000 bitcoin apiece. Arkham’s page on Grayscale indicates that it has slightly over $29.7 billion in digital assets and holds over 623,000 bitcoin (worth $24 billion at press time).
6) Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.— Grayscale (@Grayscale) November 18, 2022
Read more: Lawsuit puts pressure on Grayscale to open GBTC books
So what’s the big deal? Well, it’s not like Barry Silbert and Grayscale haven’t been dishonest before. Grayscale initially understated how much it lost when FTX and Alameda Research went under. It finally had to admit that it had $175 million locked on the FTX platform.
NYAG also alleges that Grayscale parent company Digital Currency Group mislead investors and Gemini Earn customers.
One saving grace is that Grayscale gives GBTC shareholders a chance to vote on the two proposals. Of course, it recommends that shareholders vote in favor. However, shareholders still have a chance to reject the proposal.
In summary, Grayscale is proposing two questionable changes to GBTC. If approved, Grayscale will charge management fees daily (not monthly). It will also commingle the trust’s bitcoin in shared, omnibus accounts “from time to time” in order to use “the prime brokerage services of an affiliate of the custodian.”
Shareholders should consider Grayscale’s, Barry Silbert’s, and Michael Sonnenshein’s motives while voting on the proposal.