Kiffmeister’s #Fintech Daily Digest (20221120)

Grayscale’s Bitcoin Trust hits record-Low 45% discount

The market value of Grayscale’s $10.5 billion Bitcoin Trust (GBTC) is trading at record low discounts to the price of Bitcoin (BTC). Launched in 2013, GBTC pools money from institutional investors and uses it to buy BTC, which is then held in a Grayscale fund. GBT usually traded at a premium above its net asset value (NAV) but it has traded at a discount below NAV after several other alternative Bitcoin exchange-traded funds (ETFs) launched, like the Canadian Exchange-Traded Funds (ETFs) and several BTC futures ETFs. GBTC is currently trading at a discount of about 45% according to data from YCharts. [Read more at Decrypt]

Grayscale has been trying to convert the fund into an exchange-traded fund (ETF) which would enable investors to redeem their shares, which would result in GBTX market valuations tracking its NAV more closely. When ETFs trade at a premium (or discount) to NAV, authorized participants (APs) step in to arbitrage the gap away. APs are designated by the ETF issuer to acquire the securities that the ETF wants to hold, in exchange for ETF shares priced at their NAV (not the ETF’s market value). Also, APs can remove ETF shares from the market by purchasing and delivering them to the ETF issuer, in exchange, for the same value in the underlying securities.

Hence, for example, if GBTC were an ETF trading at a premium to NAV the APs would buy Bitcoin on the open market, and deliver them to Grayscale (the ETF issuer) in return for overpriced ETF shares, which the APs then sell on the market. This should drive the premium toward zero, while the AP earns a risk-free arbitrage profit. If the ETF were trading at a discount, the APs buy the underpriced ETF shares on the market and delivers them to Grayscale in return for the underlying Bitcoin, which can then be sold at a risk-free profit. However, GBTC is a close-ended fund, meaning the underlying BTC deposits are locked in, and GBTC shares can only be sold on the market after a six-month lockup imposed by the US Securities and Exchange Commission SEC Rule 144). Grayscale has applied to the SEC to convert GBTC into an ETF, but the SEC has rejected it and all such “spot” ETF applications, allowing only futures-based BTC ETFs. 

Years ago, when GBTC was trading at a massive premium to NAV, some pointed to a scheme by which the premium could be arbitraged. It involved buying GBTC from Grayscale at NAV and shorting free-trading GBTC. Six months later, the investor close the two positions out for a risk-free profit, although this glosses over risks like not being able to borrow and fund GBTC for up to six months. There’s no equivalent “risk-free” arbitrage trade for when GBTC is trading at a discount to NAV because it would have to involve redeeming the shares for the underlying BTC, which is impossible because GBTC is a closed-end investment fund.

Meanwhile,  with crypto firms being pressed to show more information about their reserves after FTX filed for bankruptcy protection, Grayscale won’t be showing any proof of reserves. “Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.” [Read more on Grayscale’s Twitter feed]

Is Silvergate Capital facing a bank run?

Crypto bank Silvergate Capital’s stock is down about 47% since the news about FTX started to break, and there is chatter that Silvergate could be facing a run. Its Silvergate Exchange Network (SEN) operates as a real-time dollar and euro payments network for crypto exchanges and institutions (see graphic below). At the end of the third quarter, Silvergate had 1,677 customers, including all of the major crypto exchanges and more than 1,000 institutional investors, using SEN and about $12 billion of non-interest-bearing deposits. Silvergate doesn’t charge clients fees to use the SEN network so its main source of revenue is the carry on those deposits.

What’s probably driving the stock decline are investor concerns about deposit outflows from its exchange clients, as the crypto market slows down, including roughly $1.2 billion from FTX. However, Silvergate has a highly liquid balance sheet. At the end of the third quarter, the bank had nearly $1.9 billion of cash and cash equivalents and another $8.3 billion of available-for-sale securities that can be quickly converted into cash. Also, as a federally regulated bank, Silvergate could also tap the Federal Home Loan Bank or the Federal Reserve. Nevertheless, the situation bears watching. [Read more at the Motley Fool]

Intellectual property rights and DLT with a focus on art NFTs and tokenized art

The European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs published a study that aims to provide an overview over intellectual property (IP) rights and distributed ledger technology (DLT) with a focus on IP issues relating to art non-fungible tokens NFTs and tokenized physical art works. [Read more on the European Parliament website]

Digital Euro Association Digital Money Academy

I will be discussing global central bank digital currency (CBDC) developments at the Digital Euro Association’s Digital Money Academy on November 29. If you want to get into CBDCs, register for the Academy here!

Kiffmeister’s Global Central Bank Digital Currency Monthly Monitor

Just a reminder that I produce a monthly digest of central bank digital currency (CBDC) developments exclusively for the official sector. So for any of you out there who work for a central bank, ministry of finance or international financial institution who would like to receive it by email on the first business day of every month, please DM me on LinkedIn or email me at chronicles@kiffmeister.com.

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