Grayscale faces lawsuit from rival Osprey over long-awaited ETF conversion

Digital asset manager Grayscale faces a lawsuit from its much smaller competitor, Osprey Funds, as seen in a Connecticut court filing dated Jan. 30.

According to Osprey, Grayscale falsely promised to turn its Grayscale Bitcoin Trust (GBTC) into a Bitcoin spot exchange-traded fund (ETF).

Osprey said that Grayscale portrayed that outcome as a “foregone conclusion” even though the conversion may never occur. Osprey also complained about Grayscale’s promises regarding transparency, level of risk, and security. It said that those claims, which the firm made in advertisements and promotions, were “false and deceptive.”

Grayscale’s behavior allegedly constitutes unfair competition. Osprey claimed that Grayscale controls 99.5% of the market for a certain type of Bitcoin trust. Osprey claimed to be the only other participant in that market, asserted that Grayscale’s overwhelming success is due to its unfair practices, and said it had lost revenue.

Grayscale itself is based in Delaware. However, Osprey and Grayscale Bitcoin Trust are based out of Connecticut, furthering competition between the two parties.

The validity of Osprey’s complaint partially depends on whether Grayscale can convert GBTC into a Bitcoin spot ETF. Despite Grayscale’s efforts to advance its ETF conversion plan, the U.S. Security and Exchange Commission (SEC) has rejected ETF proposals from Grayscale and many other companies in recent years.

Grayscale responded to Osprey’s accusations by stating that it is awaiting a decision from the DC Court of Appeals that could overrule the SEC’s previous rejections. If the judge decides in Grayscale’s favor, that development should allow the company to launch the first Bitcoin ETF. The case is still ongoing and should conclude this fall.

Grayscale additionally called Osprey’s lawsuit “frivolous.” It suggested that pursuing an ETF will produce the best outcome for investors and competitors.

This is at least the second lawsuit of its type. Fir Tree Capital Management filed a lawsuit in Delaware over Grayscale’s alleged mismanagement of GBTC in December.

Grayscale’s Bitcoin Trust is currently performing poorly and trading at a significant discount, even accounting for recent gains. Investors can trade shares of GBTC freely but cannot currently redeem them through the company itself.

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