Bankrupt trading affiliate Alameda has filed a lawsuit against crypto conglomerate Digital Currency Group (DCG) and its asset management business Grayscale over the structure of their cryptocurrency trusts, according to a press release from FTX on Monday. 

See related article: Digital Currency Group plans restructuring to pay creditors of bankrupt Genesis unit

Fast facts

  • John J. Ray III, chief restructuring officer of FTX and the majority of its affiliates, said: “we will continue to use every tool we can to maximize recoveries for FTX customers and creditors. Our goal is to unlock value that we believe is currently being suppressed by Grayscale’s self-dealing and improper redemption ban.”
  • Alameda’s lawsuit alleges that Grayscale and its management have breached existing trust agreements and fiduciary duties by refusing to allow redemptions for trust shareholders and charging high fees. 
  • Grayscale operates several large Bitcoin and Ethereum trusts from which it earns fees for managing cryptocurrencies. Investors can buy shares in the trusts through their brokerage accounts but cannot redeem those shares for the actual underlying token assets.
  • In light of declining crypto prices and the fall of Sam Bankman-Fried’s FTX last year, share prices in the trusts have fallen to substantial discounts compared to the underlying crypto they hold as the company has. DCG’s lending unit of its crypto broker, Genesis, also filed for bankruptcy earlier this year.
  • According to FTX, Alameda holds shares in Grayscale trusts that were worth about US$290 million on Monday but would be worth “approximately 90% more” if Grayscale reduced its fees and allowed investors to redeem their shares in the value of the underlying crypto assets. 
  • The lawsuit includes claims against Grayscale chief executive officer Michael Sonnenshein, Grayscale owner Digital Currency Group and the conglomerate’s chief executive officer Barry Silbert.
  • Grayscale has long argued that converting its trusts into exchange-traded funds would benefit investors and allow for easier redemptions. The asset manager is suing the US Securities and Exchange Commission over blocking the creation of a spot bitcoin ETF, with oral arguments set to begin in a federal appeals court on Tuesday.
  • In an email to Forkast, a spokesperson from Grayscale said: “the lawsuit filed by Sam Bankman-Fried’s hedge fund, Alameda Research, is misguided. Grayscale has been transparent in our efforts to obtain regulatory approval to convert GBTC into an ETF – an outcome that is undoubtedly the best long-term product structure for Grayscale’s investors.”

See related article: DCG to sell Grayscale holdings at a discount to pay creditors: report