Genesis Wins Court Ruling to Sell Tranche of GBTC Shares

Genesis has been determined the sole owner of millions of GBTC shares. Their intended sale to reimburse creditors will likely take steps to safeguard Bitcoin’s price.

Genesis Global, a defunct cryptocurrency brokerage firm, has won a legal dispute and received approval to sell 31.2 million shares of Grayscale Bitcoin Trust (GBTC), worth more than $1.2 billion.

Shares of GBTC have been a topic of critical interest to the entire Bitcoin economy over the last several weeks, particularly since the SEC approved the Bitcoin Spot ETF. Grayscale, an early leader in the ETF saga, won a special dispensation that they would not need to create their ETF as a wholly new product. Instead, a pre-existing trust fund –– GBTC — would be converted into an ETF. This unique situation, however, has created a certain difficulty for Grayscale: large portfolios of their new ETF are held by various companies that went bankrupt long before the ETF was a reality.

The sphere of Bitcoin has always been marked by a chaotic nature, and businesses have been known to experience a moment in the sun before various circumstances and changing market conditions collide, and a rapid collapse ensues. For a defunct exchange like FTX, then, it was a no-brainer to liquidate its entire supply of GBTC as soon as the ETF approval was formalized. The company had to reimburse substantial amounts to its creditors, and this asset on the books had ballooned overnight to the point where FTX held more than $1 billion worth.

Whether or not FTX had intentions of handicapping Grayscale with this sale, the facts remained the same: not only did this sale trigger a general rout for GBTC, but it also led the price for bitcoin as a whole to suffer. Grayscale had been one of the main leaders for the ETF battle, after all. If it begins losing massive amounts of money during a moment of supposed triumph, wouldn’t that cast doubt on the whole industry?

Even though Bitcoin has stabilized itself, another massive sale of GBTC may soon take place under very similar circumstances. In early February, the bankrupt Genesis Global Capital requested that they be allowed to sell off a tranche of shares in GBTC worth more than $1.2 billion, for the express purpose of reimbursing their creditors. The only issue that would require the intervention of a judge is a dispute from Gemini, which claimed that the GBTC shares were promised as collateral in a prior agreement. The shares, Gemini argued, were already claimed by their company, and Genesis reneged on their responsibility to surrender them when they declared bankruptcy. 

Naturally, the prospect of another billion-dollar GBTC sale within a month of the ETF approval has ruffled feathers all around the Bitcoin community. Will Bitcoin’s valuation suffer again if Grayscale has another setback like this? To mitigate some of these fears, Genesis had sought out permission from the court to reimburse their creditors in bitcoin instead of fiat. In other words, the firm would ideally sell off a huge quantity of GBTC and buy an equally huge amount of bitcoin, using those to settle its debts. Hopefully, a major inflow like this would prevent Bitcoin as a whole from being rattled like during the FTX sale. This particular maneuver, however, has yet to gain explicit approval from the courts. 

Although this particular motion has not been answered, there are nevertheless several developments in the legal proceedings. First of all, it’s of particular relevance that Gemini and Genesis had signed an agreement concerning tens of millions of shares, almost immediately before Genesis declared bankruptcy. On February 8, the two companies both settled a lawsuit against them by the New York Attorney General’s office, which alleged that the two had deliberately defrauded investors with the Gemini Earn program, which the two firms partnered to enact. In fact, the GBTC shares in question were a component of this partnership agreement, and the whole business deal has been placed in the crosshairs. Although the terms of the settlement permitted Genesis and Gemini from admitting any legal liability, the Attorney General nevertheless filed a subsequent complaint the following day. As far as the alleged GBTC deal is concerned, nobody in the legal system evidently wants to hear it. 

This attitude was shared by Judge Sean Lane of the US Bankruptcy Court in White Plains, NY, who wrote on February 9 that Genesis has the ownership of these shares. In his original memorandum, Judge Lane took on an almost contemptuous tone as he concluded that “the contractual terms here are unambiguous” and that Gemini “does not have a security interest” in any of the GBTC shares, since the initial transfer never actually took place. He granted Genesis’ Motion to Dismiss “against all defendants”, although he neither directly addressed the firm’s responsibility in turn to reimburse its creditors nor their intention to carry out this reimbursement with Bitcoin.

So, from where we’re sitting, it looks like another major sale of GBTC is very likely to be in the cards. There is, however, a silver lining to these decisions: Although there is evident hostility from the NY Attorney General’s office against both Genesis and Gemini, the AG nevertheless extended an offer to “sit behind Genesis creditors in the Chapter 11 repayment line, regardless of whether the bankrupt lender repays its debt in crypto or cash.” Although a judge could require that these payments only use the dollar, the legal system may be amenable to Genesis’ plan to buoy bitcoin’s price. 

Still, as always, there are no guarantees of a continued rosy future in the world of Bitcoin. Although Grayscale played a leading role in the actual fight to approve the ETF, these continued outflows and other setbacks have definitely taken their toll on GBTC in terms of market share. Between these massive flights of capital and higher fees, the bitcoin-native Grayscale and its ETF have lagged behind their competitors in the financial establishment, like Fidelity and BlackRock. A J.P. Morgan study claimed that these two are firmly outcompeting GBTC’s liquidity, and suggested that Grayscale is likely to lose further funds in the near future. What would a future of establishment domination look like? BlackRock’s Chair and CEO Larry Fink was happy to elucidate his vision for Bitcoin in an interview: “I don’t believe it’s ever going to be a currency. I believe it’s an asset class.” Fink went on to describe a future where tokenization and financialization are a core component of many facets of life, and new classes of fractionalized investment products are all part of the same “universal ledger.”

This may cast a very dim view on Bitcoin’s ability to revolutionize the currency system worldwide, but a future like this is still an extremely distant possibility. For right now, it’s enough to see that Bitcoin has been doing well, and Genesis is taking active steps to ensure that it doesn’t experience another setback like the FTX selloff. The financial establishment has long underestimated Bitcoin, and the world’s leading digital asset has had far tougher opponents than even the most profitable investment firm. As we can see from the ETF approval itself, we’ve come a long way since the entire world could turn their nose up at Bitcoin. Looking forward, we’ll just have to trust that the innovation and determination from Bitcoiners worldwide can keep us moving forward. 

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Not financial advice.