Notes 3/7: Grayscale ETF, OKB Again

The Grayscale Bitcoin Investment Trust’s (GBTC) bid to overturn the SEC’s rejection of its spot bitcoin ETF last year received a shot in the arm from a US Appellate Court today. Questioning by Judge Neomi Rao and Judge Sri Srinivasan made news and upped the odds that Grayscale might prevail against the agency.

Fraud in Futures and Spot Markets

The SEC has rejected numerous applications for a spot bitcoin ETF over the years even as it has allowed ETFs based on bitcoin futures traded at the Chicago Mercantile Exchange (CME). The agency has cited the fraud and manipulation rampant at spot cryptocurrency exchanges to justify its rejections.   

In its case against the agency, Grayscale zeroed down on this reasoning. The Trust’s filing states that the exchanges it intends to use to calculate spot bitcoin price are compliant with U.S. securities laws.

In fact, the list of cryptocurrency exchanges – Gemini, Coinbase, itBit, and Kraken are some – used to calculate the Bitcoin Reference Rate at the CME overlaps with the one proposed by Grayscale in its ETF proposal.

“Thus, every spot bitcoin market contributing data to the Index price (used to value the Trust) also contributes data to the Bitcoin Reference Rate (used to value bitcoin futures ETPs). If someone could successfully manipulate bitcoin prices in the spot bitcoin markets that contribute to the Index, then bitcoin futures ETPs would face precisely the same exposure to those manipulated prices as would the Trust,” the filing states.

The questioning by judges today was along the same lines. They asked SEC lawyers why fraud in spot markets would not be reflected in futures markets, which derive their spot prices from the former. “It (fraud and manipulation) is just going to follow like the night follows the day,” Judge Sri Srinivasan told an SEC lawyer.

A Long and Unpredictable Road

While today’s developments were encouraging, the road to a spot bitcoin ETF remains a long and unpredictable one. A decision on the case is expected by early summer, according to Bloomberg.

Even if the court rules against the SEC, Grayscale will have to go back to the drawing board and submit a fresh application for approval. What’s more, the regulatory agency can still reject future proposals for a spot bitcoin ETFs using a different line of argument. With the season of scandals and mayhem, some of them involving the exchanges used to calculate bitcoin’s spot price at the CME, on in full swing in the cryptocurrency ecosystem, they should not have to search far.

Another possible scenario put forward on Twitter is a rollback of current futures products being traded in the markets.

It has happened before.

CME competitor Cboe Global Markets discontinued its bitcoin futures offering in 2019 due to low trading volumes. Even at the CME, bitcoin futures are hardly racking up volumes comparable to their more successful products. The current drawdown in crypto markets has translated to an exit of institutional investors, the main clients for CME’s product, from the market. For bitcoin to survive as a tradeable product, then, it will have to survive the current cataclysm in its ecosystem.

Meanwhile, investors will have to contend with the massive discount in GBTC’s share price until the case is resolved and a future for GBTC becomes clear. It edged higher today on the back of positive news about the case but continues to trade at a discount of more than 35% to its net asset value (NAV).   

Revisiting OKB  

My post on OKB, OKX’s native token, yesterday was off. The problem with OKB’s circulating supply is not the mismatch in figures between various data services. At its core, it is simply another case of crypto greed.

OKB resides in a Proof of Stake (PoS) network, that was launched in December 2020. In a PoS network, Validators, or full nodes, stake coins on nodes to bolster security. That means the token’s supply was pre-mined and made available to stakeholders. However, the timeline for distribution was not made public.

To recap, OKB has a total supply of 1 billion. Out of that figure, 300 million is available for trading while the remaining 700 million was distributed between users on the exchange and insiders, such as executives and developers.

A Token Release

According to this post, 700 million OKB tokens were expected to be “released” in June 2022. That is when OKB’s price began climbing last year. It bucked dominant declines in crypto prices to post a peak earlier this year. That spike in prices prompted a nonsensical explanation from OKX’s management about investors being excited about the launch of an OKB chain, similar to Binance’s BNB chain, in the first quarter of this year. [There have been no new explanations since].

Are the supposedly dormant tokens coins that are staked on validator nodes? If yes, that should mean the entire narrative of OKB’s circulating supply and market cap is false. What about the supposed release of 700 million tokens? Did the release cause a rise, and subsequent spike, in prices of the token? OKB does not have a whitepaper and its issuer has disappeared. That would constitute fraud in mainstream and regulated markets. It is par for the course for crypto.

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