Grayscale Probably Is Solvent, but Is Its Owner?

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  • Grayscale refused to provide proof of its reserves last week after suggestions it was in financial trouble
  • The group offered contracts and promises to show it had the BTC it says it does
  • The truth is that Grayscale probably is safe, but its parent company might not be

At a time when trust in crypto exchanges is at an all time low and coins are flying out of them quicker than a fruit machine win, institutional giant Grayscale has taken a novel approach to dealing with the issue of degrading trust – by asking users to trust it. In a blog post ironically entitled ‘Safety, Security, and Transparency’, Grayscale laid out why it is not joining the proof-of-reserves movement, urging its customers and the wider crypto space to simply trust it and its custodians that all is well and it can fully back its commitments. The post was in response to concerns over the solvency of crypto giant Genesis, which many believe will have a knock on effect to Grayscale.

Grayscale Concerns Linked to Digital Currency Group

Concerns over Grayscale began last week when Crypto brokerage firm Genesis Global Trading, which, like Grayscale, is owned by Digital Currency Group (DCG), revealed that its lending arm, Genesis Global Capital, halted redemptions and stopped new loans while it assessed the impact of the FTX collapse.

This was augmented on Friday by the news that Genesis allegedly needed to raise $1 billion in investment by today to avoid catastrophe. It should also be remembered that Genesis is in the hole for $2.36 billion it loaned to Three Arrows Capital.

At the same time, the premium on the Grayscale Bitcoin Trust vehicle hit -45%, a new low since it began its collapse in February 2021, leading some to suspect that this was reflective of sentiment in the DCG group of companies.

Grayscale Offers Proof of Contracts

As the fear piled up, Grayscale received calls to join the proof-of-reserves movement and post its collateral. However, in its blog post, Grayscale reported how it didn’t have to:

Custody of the digital assets underlying Grayscale’s digital asset products is unaffected, and our products’ digital assets remain safe and secure.

The source? Grayscale.

Grayscale went on to add that its balances are “reflected in historical public filings and have been evaluated by our third-party auditors”, adding that Coinbase was holding all its BTC and that the deal in place with Coinbase “prohibit the digital assets underlying the products from being lent, borrowed, or otherwise encumbered.”

Grayscale also pointed to a bunch of agreements in its various contracts with Coinbase to prove that everything was above board and that nothing could happen to its bitcoin without investors being the ones who requested a move. This didn’t appease the doubters however, who saw this lack of visible proof as evidence that it was hiding something.

Grayscale Probably is Safe…For Now

While nothing would surprise anyone in this space anymore, the fact is that Grayscale is very different to a crypto exchange – it is governed by the kinds of rules and regulations that apply to all other institutional investment houses, so it probably isn’t able to hide such a massive secret.

The kind of audits Grayscale undertakes aren’t the kind of slipshod nonsense that blockchain firms try and say they’ve had – these are the kind of audits that you can’t buy off or fake, the kind that can send you down if you’re found to have cooked the books, so Grayscale very likely can back its Bitcoin.

While Grayscale itself probably is safe, the same cannot be said for Genesis, especially if the $1 billion raise is true and it doesn’t achieve this. Any collapse may take Grayscale with it, although the most profitable businesses will be snapped up in the wake of any such event.