FTX’s trading affiliate Alameda sues Grayscale over crypto investments

FTX trading affiliate Alameda has sued crypto investment company Grayscale and its owner Digital Currency Group over the structure of their large bitcoin and Ethereum trusts, dealing a further blow to the SoftBank-backed crypto conglomerate.

Alameda, which is being run by restructuring expert John Ray alongside other FTX affiliates, accused Grayscale and DCG’s management of being “possessed by self-interest” and enriching themselves “at the expense of trust shareholders”, by refusing to allow redemptions and charging exorbitant fees.

Grayscale, DCG’s asset management business, operates several cryptocurrency trusts from which it earns lucrative fees for managing bitcoin, ether and other tokens for customers. Investors can buy shares in the trusts through their brokerage accounts, rather than holding direct exposure to the coins.

Alameda owns more than 22mn shares in Grayscale’s flagship bitcoin trust, the complaint said, and a further 6mn shares of the company’s Ethereum trust, which equate to more than 3 per cent and 2 per cent of the overall shares outstanding, respectively.

Those holdings were worth $290mn on the secondary markets as of the end of last week, the complaint added, and could be worth almost double that if Grayscale reduced its fees and allowed investors to redeem their shares for the equivalent value in the underlying crypto assets.

Since the collapse last year of FTX — which was founded by Sam Bankman-Fried, who was forced to step aside when the exchange and affiliates, including Alameda, filed for bankruptcy — shares in the trusts have fallen to substantial discounts compared to the underlying crypto they hold. Grayscale’s bitcoin trust is trading at a 45 per cent discount to the price of bitcoin.

Grayscale does not allow investors to redeem their shares for the coins held in the trusts, which would help close the significant net asset value gaps.

“Due to [Grayscale and DCG’s] malfeasance . . . the only way for shareholders to exit their investments is by selling their shares in the trusts in the secondary market, where shares are trading at a fraction of their proportionate interest in trust assets,” FTX alleged in its filing to a Delaware court on Monday.

In a statement, FTX’s John Ray said: “We will continue to use every tool we can to maximise recoveries for FTX customers and creditors.”

The lawsuit marks the latest problem for Connecticut-based DCG, which is one of the largest and oldest crypto investors. DCG’s chief executive, former Houlihan Lokey banker Barry Silbert, and Grayscale’s chief executive, Michael Sonnenshein, are also named in the complaint.

DCG has been battling the fallout from plunging crypto prices and the collapse of FTX since last year.

The lending unit of its crypto broker, Genesis, filed for bankruptcy earlier this year. The group is seeking to sell its news site CoinDesk in an attempt to raise money and repay creditors.

Grayscale’s flagship bitcoin trust holds about 3 per cent of all bitcoin, worth $14.7bn, from which the asset manager earns a 2 per cent fee. It earns a 2.5 per cent fee for the 3mn of ether in its ethereum trust.

The asset manager has long argued that the trusts should be converted into exchange traded funds. Grayscale is suing the US Securities and Exchange Commission over blocking the creation of a spot bitcoin ETF, arguing that this would benefit investors and allow redemptions. Oral arguments in that case are scheduled to be heard by a federal appeals court on Tuesday.

“The lawsuit filed by Sam Bankman-Fried’s hedge fund, Alameda Research, is misguided,” Grayscale said, adding that the company “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”.