Barry Silbert is out as chairman of Grayscale Investments, the latest blow in the downward spiral of the once mighty Digital Currency Group (DCG) founder.
In a December 26 filing, Grayscale informed the U.S. Securities and Exchange Commission (SEC) that Silbert and DCG president Mark Murphy had resigned their seats on Grayscale’s board of directors. As of January 1, Silbert’s role as Grayscale chairman will be filled by Mark Shifke, a financial services veteran who currently serves as DCG’s chief financial officer. Grayscale also announced the appointment of two new board members: DCG’s senior VP of operations, Matt Kummell, and Grayscale CFO Edward McGee.
Silbert has so far said nothing publicly regarding the motives behind his decision to resign, including whether he jumped or was pushed out the window. But the news came the same day Grayscale filed an amended version of its application to convert its Grayscale Bitcoin Trust (GBTC) into a spot-based exchange traded fund (ETF).
The two Grayscale filings on Boxing Day followed a flurry of meetings between the company and SEC representatives in recent weeks. It’s unclear whether the SEC put the squeeze on Grayscale to purge Silbert from its ranks as a precondition for consideration of its latest ETF application. But given the hits that Silbert’s reputation has taken over the past couple of years, it’s not beyond the realm of possibility.
In October, New York Attorney General Letitia James charged Silbert, DCG, DCG’s bankrupt digital asset lender Genesis Global Capital, and the Gemini digital asset exchange with defrauding 230,000 investors out of $1.1 billion. The charges came following the early 2022 collapse of ‘crypto’ hedge fund Three Arrows Capital (3AC), to which Genesis had lent hundreds of millions of dollars of its customers’ funds.
Genesis was also loaning hundreds of millions to its parent company, DCG, that the latter firm couldn’t repay when 3AC’s collapse put a major squeeze on Genesis. Genesis was ultimately forced to file for bankruptcy protection, and creditors have been battling DCG’s efforts to restructure its tortured finances in a way that benefits Silbert at everyone else’s expense.
In September, the Federal Bureau of Investigation (FBI) was said to be interviewing Gemini co-founder Cameron Winklevoss regarding allegations that Silbert lied about the state of Genesis’s finances before the company went belly-up.
September also saw the SEC serve a subpoena against Genesis to force the company to produce documents relating to the SEC’s securities fraud suit against Terraform Labs, the defunct issuer of the Luna/UST ‘algorithmic stablecoin’ token pair.
GBTC has been loudly criticized by investors for its failure to honor redemption requests while continuing to bleed investors via annual management fees of 2%. These fees are based on assets under management, not GBTC’s lagging share price, leading Grayscale to stonewall redemption requests in order to keep its fee revenue high. These fees account for as much as 2/3 of DCG’s overall revenue and, with other DCG assets either bankrupt or failing, suggest that DCG is a dead man walking the minute investors are able to withdraw their funds from Silbert’s clutches.
Grayscale needs to create some cash
Grayscale’s amended application includes the ‘cash creation’ language that other would-be ETF issuers recently added to their own SEC applications. This language restricts the actual handling of any BTC involved in an ETF to the issuer itself (aka BlackRock, Fidelity, Vanguard, etc.) as opposed to an ‘in kind’ model for the creation and redemption of ETF shares.
Cash creation is not only more cumbersome in terms of time and paperwork, but each transaction also creates taxable events that wouldn’t occur under an ‘in kind’ model. But the SEC is reportedly determined to prohibit market-makers and unregistered broker-dealers from handling BTC, with the ultimate goal of preventing sketchier intermediaries from gaming this system.
Given the fact that the SEC has previously rejected all ‘crypto’ ETF applications, the applicants appear unwilling to risk further rejections by pushing too hard for the in-kind option at present. For now, they will take what they can get and press for conversion to in-kind down the road.
The SEC has a January 10 deadline for responding to the ETF application by Cathie Wood’s ARK 21Shares, while deadlines for around a dozen other applications fall after that date. The prevailing market sentiment is that the SEC could announce the approval of multiple ETF applications simultaneously to avoid giving any one entity a ‘first mover’ advantage.
However, previous SEC rejections have cited the ease with which the fiat price of major tokens like BTC can be manipulated on exchanges such as Binance via wash trading with stablecoins such as Tether (USDT). With those concerns still very much a reality, there’s always the possibility that SEC chairman Gary Gensler could keep his Grinch costume around through January. So watch this space.
‘Sell on the news’
Expectation of ETF approvals has been credited with the recent spike in the price of prominent tokens such as BTC. Some observers are convinced that the SEC approval of ETF applications is already ‘priced in’ to the fiat value of BTC, and thus, confirmation of the approvals won’t necessarily spark a major price rally.
Wood said Wednesday that SEC approval of spot-based ETFs will likely lead some major BTC investors to “sell on the news.” This will spur a “very short-term” decline in BTC’s fiat value, but Wood insisted that institutional investors will subsequently pile in on crypto ETFs despite the lack of such activity in other markets (including Canada) where ETFs have been available for some time.
For one thing, as centralized exchange trading volume indicates, retail interest in crypto remains moribund. This month, a survey of registered investment advisors said only around 5-10% of their clients might buy into a BTC ETF, and most of these would consist of existing token holders shifting from one product to another. This led Needham analysts to warn that “[i]t is unlikely that anyone who has not already purchased BTC will purchase a Bitcoin ETF right now.”
In a further sign of masked pessimism regarding the ETF impact, the Wood’s Ark family of investment funds has been dumping tens of millions worth of shares in the profit-challenged digital asset exchange Coinbase (NASDAQ: COIN). This dumping occurred despite the exchange’s deals with many ETF applicants to custody the BTC tokens representing their ETF shares.
Others have suggested that Coinbase could actually lose money from custodying ETF issuers’ BTC tokens because institutional investors could transfer their affection to ETFs to avoid the high fees they pay to transact on the exchange.
Airdropping truth bombs
There’s one other tweak to Grayscale’s SEC application that bears mentioning. In the same ‘risk factors’ section that warns of the downsides of the ‘cash creation’ model, the filing states that GBTC shareholders “will not receive the benefits of any forks or airdrops.”
The filing notes the history of ‘hard forks’ of the Bitcoin blockchain following intervention by developers in control of the protocol. Such changes result in ‘airdrops’ of tokens that are traded on the chain that diverges from the main network. Grayscale calls this type of airdrop an ‘incidental right’ (IR) and the new token an ‘IR virtual currency.’
Grayscale says in the result of some future fork of BTC, it will “irrevocably abandon the Incidental Rights and any IR Virtual Currency associated with such event.” GBTC shareholders “will not receive the benefits of any forks, and the Trust is not able to participate in any airdrop.”
The inclusion of this language has puzzled many, given its absence from rival ETF applications. It’s possible that Grayscale is just ahead of the curve, although it would be odd for other applicants to revise their applications just last week to include the ‘cash creation’ language while omitting the airdrop language.
DCG properties weren’t always so discerning with airdrops, particularly the one in 2017 that resulted in the BTC token on which GBTC relies. That fork saw the ‘small blocker’ faction permanently split from the main Bitcoin network, which exists today as the BSV Blockchain and is devoted more to enterprise solutions and data management than speculative ‘number go up’ gambling.
DCG is the owner (in whole or in part) of numerous entities involved in the Crypto Open Patent Alliance (COPA) that is suing Dr. Craig Wright for daring to hold on to Bitcoin’s original promise as peer-to-peer electronic cash. COPA and Wright are due to square off in an English court early in February 2024, and if current momentum is any guide, the COPA crypto bullies are due for a reckoning.
As this site has detailed at length, most of those who have attacked Dr. Wright in the past have eventually been outed as criminals engaged in fraud, theft, and countless other unethical ways of lining one’s pockets. Silbert’s inglorious exit from Grayscale is but the latest example of this trend. As Auld Lang Syne suggests, the day may soon come when these ‘old acquaintances’ are never brought to mind.
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