Valkyrie Investments has laid out a proposal to become the new sponsor and manager of Grayscale’s troubled bitcoin trust (GBTC) and fix its large discount.

Valkyrie Investments has laid out a proposal to take up the reins of troubled bitcoin trust GBTC.

“We understand that Grayscale has played an important role in the development and growth of the bitcoin ecosystem with the launch of GBTC, and we respect the team and the work that they have done,” Valkyrie’s co-founder and CIO, Steven McClurg, said in a statement posted to the company’s website. “However, in light of recent events involving Grayscale and its family of affiliated companies, it is time for a change. Valkyrie is the best company to manage GBTC to ensure its investors are treated fairly.”

McClurg told Bitcoin Magazine that the proposal would be for current GBTC shareholders to vote on via proxy. If chosen by the shareholders, Valkyrie would become the sponsor.

The process isn’t as straightforward as it seems, however. As highlighted on a Bloomberg report, “Grayscale filings state that shareholders take no part in the management or control of the trust, and have limited voting rights. In addition, no amendments to the trust agreement that could materially affect the interests of shareholders can be made with a vote of at least a majority — meaning 50% — of the shares.”

McClurg explained to Bitcoin Magazine that Valkyrie is aware of those issues, and has planned ahead. He declined to comment on any specifics of what that plan might entail, but hinted that this wouldn’t be their first time achieving such a goal. When it comes to the plans for after an eventual takeover, McClurg has it laid out.

The first action Valkyrie would take in the event that it becomes GBTC’s sponsor and manager would be to “immediately file for Reg M exemption,” the executive explained. Grayscale CEO Michael Sonnenshein told Yahoo Finance earlier this month that the trust not allowing redemptions is a result of a U.S. Securities and Exchange Commission (SEC) shutdown in 2014, who found GBTC redemptions to be in violation of Reg M. According to FINRA, the SEC’s Regulation M “is designed to prevent manipulation by individuals with an interest in the outcome of an offering, and prohibits activities and conduct that could artificially influence the market for an offered security.”

“If approved by the SEC, [the exemption] would allow us to redeem shares at par value for shareholders who want to redeem,” McClurg told Bitcoin Magazine.

The move would allegedly help alleviate what might currently be GBTC’s most pressing issue: a whopping 47% discount of its shares compared to the value of the underlying assets held.

“Redemptions typically cause a discount to narrow due to ability of market makers to arbitrage,” Valkyrie’s executive added.

McClurg said the firm would also reduce the management fee to 75 basis points, down from the 200 basis points currently levied by Grayscale.

It isn’t clear whether Grayscale has sought Reg M exemption yet, and McClurg told Bitcoin Magazine that “nothing is stopping Grayscale from doing this themselves.” GBTC’s current manager is seeking a conversion of the trust into a spot bitcoin exchange-traded fund –– something it claims would eliminate the discount given the ability of an ETF to create and redeem shares on demand. It has gone as far as to sue the SEC under the basis that the regulator allowed the listing of futures-based products and doesn’t have the grounds to deny similar spot offerings. This could seemingly help explain the firm’s reluctance to apply for Reg M exemption, as an eventual exemption from the SEC could reduce the discount to near zero and kill its leverage for the ETF move. It isn’t clear whether that is the case, however. Valkyrie would still pursue the conversion if turned GBTC’s manager.

“We would still attempt a conversion, but would work with regulators for an orderly conversion on their time,” McClurg said.

Find more details of Valkyrie’s proposal here.

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Filed under: Bitcoin - @ December 30, 2022 11:02 pm