Notes 11/21: GBTC Discount, FTX Customers

The Proof of Reserves (PoR) train – a supposed panacea to crypto’s transparency problem – has gathered momentum among cryptocurrency exchanges in recent times. But it seems to have run out of steam at the Grayscale Bitcoin Trust (GBTC).

The world’s biggest bitcoin trading vehicle cited “security concerns” and refused to divulge the contents of its trust in a Proof of Reserves report. Discounts to bitcoin price on the Trust’s shares, already steep, widened further to a record 45% over the weekend.

Possible Reasons for GBTC Discount

We don’t have a reason for those discounts because GBTC, as I have mentioned earlier, has a unique structure that makes it difficult to determine its course. The absence of a Proof of Reserves report could be one reason. Another could be concerns about the solvency of Genesis Global Capital, a sister company, that paused lending and loan originations on its platform and is reportedly discussing a $1 billion loan.

On Twitter, the platform where facts and restraint go to die, there is speculation that Genesis could be an instigator of the downfall because it might have broken laws for some lending products. Others are suggesting fears of a possible insolvency for the Digital Currency Group (DCG) – the parent company for both GBTC and Genesis – as reason for the discount.  

Grayscale’s “Security” Problem

Grayscale could, of course, anonymize or scramble addresses and publish a PoR report to satisfy those who doubt the contents of its reserves. That idea doesn’t seem to have occurred to it.

GBTC’s hesitation in publishing a report about its reserves is understandable. And it might have nothing to do with security. The firm’s simple business model – it buys and custodies cryptocurrency and charges a management fee to do so – means that its PoR report will lay bare the innards of its operations and open them to scrutiny.

That situation is unlike the one at other crypto entities, such as exchanges, who can exercise discretion and self-select information for the same report. For example, they can choose to leave out backroom dealings from the report or delete information about toxic assets or holdings in self-custody wallets.  

What Happens if GBTC Unwinds?

What happens if GBTC becomes crypto’s latest crisis? Its bitcoin stash will be liquidated to pay back customers. The most well-known name in that list is Cathie Woods’s ARK Investment, which snapped up a sizable chunk of the trust’s shares recently.

The sale of Grayscale’s large reserves will apply further downward pressure on the price of Bitcoin, and it could head towards a catastrophic bottom that could capsize the ship of many big crypto operations.  

FTX Owes Customers More Than $3.1 Billion

According to its latest bankruptcy filing, FTX owes more than $3.1 billion to its top 50 customers. The biggest claimant is owed $226.2 million. Because this is cryptocurrency, we don’t know the identities of these customers. One thing is for certain, however. That figure will increase in the coming days. This is because “more than a million” customers are reported to be affected by the FTX crash.

This was also supposed to the case in lending firm Celsius’s bankruptcy. Later filings revealed that an overwhelming majority had invested less than $100 in its products. That may very well turn out to be the case for FTX as well.  

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