Digital Currency Group (DCG) has filed a motion objecting to the bankruptcy plan proposed by Genesis Global Capital, its subsidiary, citing violations of the Bankruptcy Code.
The objection – lodged on February 5th – asserts that Genesis’ plan exceeds the legal entitlements of its customers, potentially favoring a select group of creditors while stripping DCG of its rights. Instead of adhering to US bankruptcy laws, the venture capital firm said that Genesis has suggested offering its customers extra payouts to compensate for the increasing value of cryptocurrencies.
“Epitome of Bad Faith”
In the official filing, DCG argued that while it would support a plan to pay creditors their full claims, Genesis’ proposal falls short of this standard. DCG maintained that Genesis should compensate its clientele and creditors no more than the assessed value of the crypto assets at the point of итс bankruptcy declaration in January 2023.
The objection highlighted the disproportionate benefits granted to unsecured creditors, potentially violating fundamental principles of bankruptcy law.
According to DCG, the proposed plan fails to comply with Section 502(b) of the Bankruptcy Code, which requires claims valuation in US dollars as of the petition date. By allowing certain claims to inflate based on asset appreciation post-petition, the plan allegedly facilitates an unlawful diversion of assets to favored creditors.
“On top of all of this, a small group of particularly powerful creditors have also inserted favorable setoff provisions that allow them to minimize their obligations to the Debtors while maximizing their recoveries. Put simply, the influential creditors controlling the UCC and Ad Hoc Group have sought to enrich themselves by literally taking value from other stakeholders, and the Debtors caved to their demands in violation of their fiduciary duties.”
The latest development comes exactly a month following DCG’s announcement that all short-term loans from Genesis have been successfully paid off. As reported earlier, DCG settled over $1 billion in debts to numerous creditors within the last twelve months, allocating close to $700 million to its bankrupt subsidiary.
Genesis: The Bankruptcy Proceedings So Far
Genesis filed for bankruptcy in January 2023 after suspending withdrawals amidst a liquidity crisis in mid-November 2022.
Fast forward to 2024, Genesis and its subsidiaries disclosed settling with the United States Securities and Exchange Commission (SEC) in a lawsuit associated with its Gemini Earn lending program for $21 million.
More recently, it petitioned the United States Bankruptcy Court for authorization to sell shares in the Grayscale Bitcoin Trust (GBTC), Grayscale Ethereum Trust (ETHE), and Grayscale Ethereum Classic Trust (ETCG), totaling approximately $1.6 billion. The lending entity stated that the objective is to maximize the funds available for distribution to creditors.
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The Digital Currency Group (DCG) has announced completing a payoff of all short-term loans from its bankrupt subsidiary Genesis, according to its official announcement on January 6th.
Over the past year, DCG has paid off more than $1 billion of debt to various creditors. The venture capital giant directed nearly $700 million towards Genesis, thereby fulfilling all its current obligations.
DCG Completes $700 Million Payoff
Confirming the development, Barry Silbert the founder and CEO of Digital Currency Group (DCG) stated,
“I’m happy to share that @DCGco completed a full pay down of the money borrowed from Genesis. We have now repaid over $1 bn of debt, including this ~$700 mm, despite the headwinds faced by the industry. I’m excited about the industry’s next chapter and DCG’s leadership role in it.”
After ceasing withdrawals in November 2022, Genesis officially filed for bankruptcy in January 2023. In the following September, Genesis initiated legal action against its parent company to recover an overdue loan amount exceeding $610 million, which was set to mature in May 2023. Court documents revealed that DCG had a total debt exceeding $1.7 billion owed to the lender and other creditors.
In a complaint filed in the same month, Genesis also aimed to reclaim 4,550 BTC, valued at approximately $199 million. However, in November, Genesis and DCG struck a repayment deal, wherein the parent company committed to paying $200 million.
Meanwhile, the outstanding loan amount must be settled with Genesis by April 2024, according to the terms outlined in the plan approved by the federal bankruptcy court.
DCG to Retain Stake Until Bankruptcy Resolved
The DCG is set to maintain its current ownership structure until the conclusion of Genesis’ bankruptcy proceedings. The venture capital firm’s ownership stake in Genesis is required to remain above 80% until the lender’s Chapter 11 plan receives approval or undergoes conversion into a Chapter 7 proceeding.
This decision enables Genesis to maintain its safeguard within DCG’s tax consolidated group, preserving the potential value of federal net operating loss carryforwards (NOLs). This tax advantage allows Genesis to offset losses against future profits, potentially preserving benefits on $700 million in NOLs.
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In a surprising turn of events, Barry Silbert, the founder and CEO of Digital Currency Group (DCG) – the parent company of Grayscale – has resigned from the asset manager’s board of directors.
Silbert, a key figure in the cryptocurrency industry, has played a crucial role in shaping the growth of Grayscale Investments. His departure from the board signals a significant shift in leadership and strategy for the firm.
The official 8-K filing with the US Securities and Exchange Commission (SEC) on December 26 confirmed the resignation.
Besides Silbert, Mark Murphy, the president of Digital Currency Group (DCG), has also announced his resignation from the Grayscale board.
Both the former execs’ resignations will take effect on January 1, 2024. Mark Shifke, 64, the chief financial officer of DCG, will be taking over Silbert’s role.
The newly appointed members joining Grayscale’s board include Matt Kummell, 47, the Senior Vice President of Operations at DCG, and Edward McGee, 40, who holds the position of Chief Financial Officer at Grayscale, as outlined in the submitted document.
As a result of these changes, Grayscale’s board composition now includes Shifke, Kummell, McGee, and Michael Sonnenshein, the CEO of the company. The filing did not provide specific details regarding the reasons behind these alterations.
The change in leadership at Grayscale comes at a time when the asset manager is seeking approval from the SEC to convert its GBTC into a spot Bitcoin ETF.
Grayscale Investments’ CEO, Michael Sonnenshein, recently expressed optimism regarding the ongoing discussions with the securities watchdog about the potential approval of a spot Bitcoin ETF. He further added that if greenlighted, this could pave the way for an influx of $30 trillion in wealth into the crypto market.
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Sam Bankman-Fried takes the stand on FTX’s collapse
Sam “SBF” Bankman-Fried testified this week in his ongoing criminal trial in the Southern District of New York, denying any wrongdoing between FTX and Alameda Research while acknowledging making “big mistakes” during the companies’ explosive growth. Highlights of his testimony include denying directing his inner circle to make significant political donations in 2021, as well as claims that FTX’s terms of use covered transactions between Alameda and the crypto exchange. Additionally, Bankman-Fried testified that he requested additional hedging strategies for Alameda in 2021 and 2022, but they were never implemented. The trial is expected to conclude within the next few days.
‘Buy Bitcoin’ search queries on Google surge 826% in the UK
Google searches for “buy Bitcoin” have surged worldwide amid a major crypto rally, with searches in the United Kingdom growing by more than 800% in the last week. According to research from Cryptogambling.tv, the search term “buy Bitcoin” spiked a staggering 826% in the U.K. over the course of seven days. In the United States, data from Google Trends shows that searches for “should I buy Bitcoin now?” increased by more than 250%, while more niche searches, including “can I buy Bitcoin on Fidelity?” increased by over 3,100% in the last week. Zooming out further, the search term “is it a good time to buy Bitcoin?” saw a 110% gain worldwide over the last week.
US court issues mandate for Grayscale ruling, paving way for SEC to review spot Bitcoin ETF
The United States Court of Appeals has issued a mandate following a decision requiring Grayscale Investments’ application for a spot Bitcoin exchange-traded fund (ETF) to be reviewed by the Securities and Exchange Commission (SEC). In an Oct. 23 filing, the “formal mandate” of the court took effect, paving the way for the SEC to review its decision on Grayscale’s spot Bitcoin ETF. The mandate followed the court’s initial ruling on Aug. 29 and the SEC’s failure to present an appeal by Oct. 13. To date, the SEC has yet to approve a single spot crypto ETF for listing on U.S. exchanges but has given the green light to investment vehicles linked to Bitcoin and Ether futures.
Coinbase disputes SEC’s crypto authority in final bid to toss regulator’s suit
The U.S. Securities and Exchange Commission overstepped its authority when it classified Coinbase-listed cryptocurrencies as securities, the exchange has argued in its final bid to dismiss a lawsuit by the securities regulator. In an Oct. 24 filing in a New York District Court, Coinbase chastised the SEC, claiming its definition for what qualifies as a security was too wide, and contested that the cryptocurrencies the exchange lists are not under the regulator’s purview. The SEC sued Coinbase on June 6, claiming the exchange violated U.S. securities laws by listing several tokens it considers securities and not registering with the regulator.
Gemini sues Genesis over GBTC shares used as Earn collateral, now worth $1.6B
Cryptocurrency exchange Gemini filed a lawsuit against bankrupt crypto lender Genesis on Oct. 27. At issue is the fate of 62,086,586 shares of Grayscale Bitcoin Trust. They were used as collateral to secure loans made by 232,000 Gemini users to Genesis through the Gemini Earn Program. That collateral is currently worth close to $1.6 billion. According to the suit, Gemini has received $284.3 million from foreclosing on the collateral for the benefit of Earn users, but Genesis has disputed the action, preventing Gemini from distributing the proceeds. Genesis filed for bankruptcy in January. It had suspended withdrawals in November 2022, which impacted the Gemini Earn program.
Winners and Losers
At the end of the week, Bitcoin (BTC) is at $34,143, Ether (ETH) at $1,789 and XRP at $0.54. The total market cap is at $1.26 trillion, according to CoinMarketCap.
Among the biggest 100 cryptocurrencies, the top three altcoin gainers of the week are Pepe (PEPE) at 72.08%, Mina (MINA) at 55.47% and FLOKI (FLOKI) at 53.33%.
The top three altcoin losers of the week are Bitcoin SV (BSV) at -10.27%, Toncoin (TON) -3.14% and Trust Wallet Token (TWT) at -0.82%.
“I should say, I am not a lawyer, I am just trying to answer based on my recollection. […] At the time [at] FTX, certain customers thought accounts would be sent to Alameda.”
“Without prejudging any one asset, the vast majority of crypto assets likely meet the investment contract test, making them subject to the securities laws.”
Gary Gensler, chair of U.S. Securities and Exchange Commission
“I do not believe there has been a single serious conversation regarding a settlement between Ripple […] and the SEC. The SEC is pissed and embarrassed and wants $770M worth of flesh.”
“He [Sam Bankman-Fried] thought he was going to take that money, and […] he would out-trade the market and put the money back and end up as a half-a-trillionaire, but it never works like that.”
Bitcoin beats S&P 500 in October as $40K BTC price predictions flow in
Bitcoin surfed $34,000 at the end of the week as attention turned to BTC price performance against macro assets. Data from Cointelegraph Markets Pro and TradingView showed BTC/USD holding steady, preserving its early-week gains.
The largest cryptocurrency avoided significant volatility as the weekly and monthly closes — a key moment for the October uptrend — drew ever nearer.
“I think Bitcoin will hang around this range for some time,” popular pseudonymous trader Daan Crypto Trades told X subscribers in one of several posts on Oct. 27. “Roughly $33-35K is what I’m looking at as a range. Eyes on potential sweeps of any of these levels for a quick trade,” he wrote.
FUD of the Week
UK passes bill to enable authorities to seize Bitcoin used for crime
Lawmakers in the United Kingdom have passed legislation allowing authorities to seize and freeze cryptocurrencies like Bitcoin if used for illicit purposes. Introduced in September 2022, the passed legislation aims to expand authorities’ ability to crack down on the use of cryptocurrency in crimes like cybercrime, scams and drug trafficking. One of the provisions of the bill permits the recovery of crypto assets used in crimes without conviction, as some individuals may avoid conviction by remaining remote.
Scammers create Blockworks clone site to drain crypto wallets
Phishing scammers have cloned the websites of crypto media outlet Blockworks and Ethereum blockchain scanner Etherscan to trick unsuspecting readers into connecting their wallets to a crypto drainer. A fake Blockworks site displayed a fake “BREAKING” news report of a supposed multimillion-dollar “approvals exploit” on the decentralized exchange Uniswap and encouraged users to visit a fake Etherscan website to rescind approvals. The fake Uniswap news article was posted on Reddit across several popular subreddits.
Kraken to suspend trading for USDT, DAI, WBTC, WETH and WAXL in Canada
Kraken will suspend all transactions related to Tether, Dai, Wrapped Bitcoin, Wrapped Ether and Wrapped Axelar in Canada in November and December. The suspensions may not surprise many Canadian cryptocurrency users, as they come on the heels of several other notable exchanges taking similar actions throughout 2023. OKX ceased operations in Canada in June after Binance announced its intention to do so in May.
5,050 Bitcoin for $5 in 2009: Helsinki’s claim to crypto fame
Grayscale files for new spot Bitcoin ETF on NYSE Arca
Major cryptocurrency investment firm Grayscale Investments has filed a new application with the U.S. Securities and Exchange Commission for a new spot Bitcoin exchange-traded fund (ETF). The new filing aligns with Grayscale’s ongoing effort to convert its Grayscale Bitcoin Trust into a spot Bitcoin ETF, according to a statement from the firm. The news comes weeks after Grayscale won an SEC lawsuit for its spot Bitcoin ETF review, with a court of appeals ordering the SEC to explain why it rejected Grayscale’s application in June 2023. The company also filed with the SEC to list an Ether futures ETF in September.
New York Attorney General sues Gemini, Genesis, DGC for allegedly defrauding investors
New York’s attorney general has filed a lawsuit against cryptocurrency firms Gemini, Genesis and Digital Currency Group (DCG) for allegedly defrauding more than 23,000 investors through the Gemini Earn investment program. The suit claims that Gemini assured investors that the program was a low-risk investment, while investigations carried out by the office of New York State Attorney General Letitia James found that Genesis’ financials “were risky.” The lawsuit also charges Genesis’ former CEO, Soichiro Moro, and its parent company’s CEO, Barry Silbert, with defrauding investors by attempting to conceal more than $1.1 billion in losses. In addition, the court case looks to ban Gemini, Genesis and DCG from operating in the financial investment industry in New York.
Former FTX engineering director faces up to 75 years in prison following guilty plea
Nishad Singh, the former engineering director at now-defunct crypto exchange FTX, faces up to 75 years in prison for charges related to defrauding users of the crypto exchange. He pleaded guilty to fraud charges as part of his cooperation agreement with the U.S. prosecutors. During his testimony this week, Singh said that when liquidity issues at FTX began in November 2022, he felt “suicidal for some days” while dealing with alleged inconsistencies between the exchange’s public statements and its activities behind the scenes. Singh also claimed that Bankman-Fried had the habit of deciding on purchases through Alameda Research by himself.
Binance shutting down European Visa debit card in December
Elon Musk, Mark Cuban team up to contest SEC trial strategies
Elon Musk, Mark Cuban and others have collaboratively submitted a shared amicus brief to the Supreme Court of the United States to raise concerns about the U.S. Securities and Exchange Commission’s (SEC) approach to conducting internal proceedings without the inclusion of juries. The context of this legal challenge centers around the SEC vs. Jarkesy case. George Jarkesy argues that the SEC’s internal adjudication process, which lacks a jury and is overseen by an administrative law judge appointed by the commission, contradicts his Seventh Amendment rights. Effectively resulting in a single entity fulfilling the roles of judge, jury and enforcer.
Winners and Losers
At the end of the week, Bitcoin (BTC) is at $29,590, Ether (ETH) at $1,607 and XRP at $0.52. The total market cap is at $1.12 trillion, according to CoinMarketCap.
Among the biggest 100 cryptocurrencies, the top three altcoin gainers of the week are Bitcoin SV (BSV) at 59.00%, Stacks (STX) at 25.91% and MX TOKEN (MX) at 25.26%.
The top three altcoin losers of the week are Conflux (CFX) at -8.03%, Frax Share (FXS) and Sui (SUI) at -6.35%.
“Using publicly available information to learn is not stealing. Nor is it an invasion of privacy, conversion, negligence, unfair competition, or copyright infringement.”
“After extensive DAO forum discussion followed by community vote, the sunsetting of the Lido on Solana protocol was approved by Lido token holders and the process will begin shortly.”
BTC price hits 2-month high amid bet Bitcoin will break $32K ‘soon’
On Oct. 20, data from Cointelegraph Markets Pro and TradingView captured new two-month Bitcoin highs of $30,233 on Bitstamp. BTC price showed continued strength during the Asia trading session on the same day, with a slight comedown taking the spot price back below $29,500.
With volatility still evident, market participants argued that a weekly candle close was needed in order to establish the rally’s true staying power. For Keith Alan, co-founder of monitoring resource Material Indicators, the 100-week moving average (MA) at $28,627 was of particular importance.
“This move is one to watch, but what I’m watching for right now is to see if this Weekly candle closes above the 100-Week MA and if next week’s candle can stay above it with no wicks below,” Alan wrote in part of an X post on the day. “Some might consider that a confirmation of a bull breakout, but this market is known for squeezes and fake outs so I’m looking for more confirmations. For me BTC will also need to take out prior resistance at $30.5k, $31.5k and ultimately $33k to call a bull breakout confirmed and validated.”
FUD of the Week
Fantom Foundation hot wallet hacked for $550K
The Fantom Foundation, the developer of the Fantom network, has been hacked for over $550,000 worth of cryptocurrency. The foundation confirmed the attack on X, claiming that most of the funds stolen belonged to other users and that 99% of the foundation’s funds remain safe. Blockchain security researchers initially reported that the attacker stole approximately $7 million in crypto. The Fantom Foundation later released an official statement saying that some of the wallets labeled “Fantom: Foundation wallet” were mislabeled by block explorers and that not all the stolen funds were from the foundation.
TrueCoin’s third-party vendor breach potentially leaks TUSD user data
TrueUSD (TUSD) announced a potential leak of certain Know Your Customer (KYC) and transaction history data after one of TrueCoin’s third-party vendors was compromised. The company was the operator of the TUSD stablecoin until July 13, 2023. The impact of the attack and the resultant data leak is yet to be identified, as the total number of users’ data was not revealed during the announcement. Data collected from such breaches — names, email addresses and phone numbers, among others — are typically used for phishing attacks. Attackers reach out to unwary investors by mimicking various crypto services, often promising high profits in short amounts of time.
Web3 game project allegedly hired actors to pose as executives in $1.6M exit scam
The development team for gaming project FinSoul carried out an alleged exit scam, siphoning away $1.6 million from investors through market manipulation, according to a recent report from blockchain security platform CertiK shared with Cointelegraph. The FinSoul team allegedly hired paid actors to pretend to be its executives, then raised funds for the sole purpose of developing a gaming platform. However, instead of actually creating the platform, the FinSoul team allegedly transferred $1.6 million in bridged Tether from investors to itself. Blockchain data indicates developers then laundered the funds through cryptocurrency mixer Tornado Cash.
Big Questions: What did Satoshi Nakamoto think about ZK-proofs?
What was once a passing interest of Bitcoin inventor Satoshi Nakamoto, zero-knowledge-proof technology is now a major part of the crypto world.
Ethereum restaking: Blockchain innovation or dangerous house of cards?
“Restaking” involves reusing staked Ether to earn fees and rewards. The restaked tokens can then help secure and validate other protocols. But many fear restaking could disrupt Ethereum’s chain itself.
Bitmain’s revenge, Hong Kong’s crypto rollercoaster: Asia Express
Bitmain allegedly fires staff for speaking out against salary cuts, Hong Kong investors lose faith in crypto after JPEX scandal, Bitget gets a new crypto credit card and more.
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Genesis’s two lending subsidiaries, Genesis Global Capital and Genesis Asia Pacific, have filed for Chapter 11 bankruptcy.
According to the announcement, the firm aims to enact “a global resolution to maximize value for all clients and stakeholders and strengthen its business for the future.”
In November 2022, Genesis Global Capital halted their operations, freezing withdrawals amidst a liquidity crisis that came as a result of the implosion of the FTX cryptocurrency exchange. The lending arm was FTX’s largest unsecured lender, with claims amounting to more than $226 million.
Bitcoin Magazine PRO described how the firm needed a liquidity injection of at least $1 billion dollars in order to save itself — but this did not happen. In January 2023, Genesis’ parent company, Digital Currency Group, was accused by Gemini President Cameron Winklevoss of using Genesis in an elaborate high-yield scheme which transferred the high-risk of these yield generating investments to Gemini’s Earn product users. Gemini Earn was earning this yield via Genesis, which, according to the statements made by Winklevoss, Gemini believed to be a reputable counterparty.
“Genesis has proposed a roadmap to an exit including a Chapter 11 plan that calls for a framework for a global resolution of all claims through, and the creation of, a trust that will distribute assets to creditors,” the filing describes. “All aspects of the restructuring process will be overseen by an independent special committee of the company’s board of directors.”
Genesis’ Interim CEO, Derar Islim, stated that “While we have made significant progress refining our business plans to remedy liquidity issues caused by the recent extraordinary challenges in our industry, including the default of Three Arrows Capital and the bankruptcy of FTX, an in-court restructuring presents the most effective avenue through which to preserve assets and create the best possible outcome for all Genesis stakeholders.”
According to the filing, Genesis has more than $150 million cash on hand, “which will provide ample liquidity to support its ongoing business operations and facilitate the restructuring process.”
The below is an excerpt from a recent edition of Bitcoin Magazine PRO, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
Although it feels like a lifetime ago, only two months have passed since Genesis announced their need for a $1 billion liquidity injection in the aftermath of the FTX and Alameda fallout. As weeks dragged on without a resolution, details of the story have become more public, building up to fraud allegations against Digital Currency Group (DCG) that were announced by Gemini co-founder and president, Cameron Winklevoss. Gemini is still trying to recover $900 million in assets from Genesis that were used to generate yield for their Earn customers.
Left unresolved and only growing larger, DCG and Genesis problems weigh heavily on the bitcoin market as there are many answers needed and various possible outcomes that have yet to play out.
The biggest question of all is what will happen to the Grayscale Bitcoin Trust (GBTC) and how these issues will potentially impact the bitcoin price. GBTC has been the preferred vehicle for many to obtain regulated bitcoin exposure and it has also been a breeding ground for speculative arbitrage strategies throughout the previous swings going from a premium to a discount to net asset value (NAV). An approved bitcoin spot ETF in the United States would have likely solved these issues, but we’re still far from that happening.
It’s easiest to start with the GBTC shares on DCG’s balance sheet which are estimated to be around 9.67% of the entire supply. In the event that DCG needs to raise cash or goes down the path of Chapter 11 bankruptcy, selling these shares is potentially an option. Selling into an already illiquid market puts more pressure on the historically low GBTC discount. DCG holds approximately 67 million shares in a market that trades less than 4 million shares a day. However, a more important factor is that by law, DCG can sell no more than 1% of shares outstanding every quarter. It would take them around 2.5 years of constant selling to sell their entire stake.
Another path — the most likely one — is that the GBTC, along with Grayscale’s other trusts, find their way into the hands of a new sponsor and manager. Valkyrie has already proposed to do exactly this:
Give an option for investors to redeem shares at NAV through a Regulation M filing request (although it’s not clear a Regulation M request would get approved by the SEC).
Lower fees from 200 basis points to 75.
Attempt to offer investors redemptions in both cash and spot bitcoin.
The option for a new manager gives investors an opportunity to get out of investments at NAV.
The GBTC product is still a cash cow for Grayscale and DCG, raking in 2% management fees — in perpetuity. Across all major trust products, Grayscale is collecting over $300 million this year from management fees alone. Rather than liquidate the entire trust in the worst case scenario, there will be many willing buyers to take on management of the vehicle without a U.S. spot bitcoin ETF available in the market.
However, liquidation is not a non-zero possibility. In the event of a Grayscale insolvency or bankruptcy, voluntarily liquidation could be pursued unless 50% of shares vote to transfer to a new sponsor. There is upside to DCG liquidating the trust as there’s money to be made from their shares closing to NAV, but that likely results in selling bitcoin on the open market. No one wants to see 632,000 bitcoin — approximately 3.3% of current supply — become selling pressure in the market. In the unlikely scenario where complete liquidation of the trust is undertaken with USD cash being returned to shareholders, one could presume that much of the selling would be absorbed through OTC deals with interested investors. At this point, this is purely hypothetical.
New information is coming to light that has the potential to change the superstructure in regard to the dynamic between Grayscale and the shareholders of Grayscale products. We will continue to write about developments in the coming weeks.
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The Co-Founder of Gemini, Cameron Winklevoss, has released an extensive letter alleging that Genesis and its parent company, Digital Currency Group (DCG), defrauded Gemini and more than 340,000 Gemini Earn users. The letter also levies substantial claims of fraud against Barry Silbert and other key personnel at the companies.
The letter alleges that after Genesis Global Capital LLC, Genesis Trading’s $2.8 billion crypto lending arm, realized losses of at least $1.2 billion in the wake of cryptocurrency hedge fund Three Arrows Capital’s collapse, instead of taking action to restructure and protect users, the fund tried to defraud others into believing that $1.2 billion of working capital had been injected into the company.
Instead of doing this, however, the firm allegedly marked a 10-year promissory note down as a current asset, which normally “refers to cash, cash equivalents, or other assets that can be exchanged into cash within one year,” according to the letter. However, Winklevoss writes that, “A promissory note with a principal repayment due in 10 years falls outside the definition of a ‘current asset’ by a country mile.”
Winklevoss also describes how Genesis was allegedly lending to Three Arrows Capital without regard to the risk of these loans, as the crypto hedge fund was apparently redirecting investment into Grayscale Investments’s GBTC, which limited the growing discount of the Trust. This risk was then passed on to the users of Gemini Earn.
The letter claims that greed is ultimately what has driven these investment decisions and apparently, the loss of Gemini Earn users’ funds. The letter concludes with a paragraph which reads, “There is no path forward as long as Barry Sibert remains CEO of DCG. He has proven himself unfit to run DCG and unwilling and unable to find a resolution with creditors that is both fair and reasonable. As a result, Gemini, acting on behalf of 340,000 earn users, requests that the Board remove Barry Silbert as CEO effective immediately, and install a new CEO, who will right the wrongs that occurred under Barry’s watch.”
While bitcoin that is held in custodians can be frozen and stolen, it is worthy of noting that bitcoin which is properly self-custodied in cold storage cannot be, as alleged in this letter. The users of Gemini Earn introduced third-party risk and unnecessary trust when they kept their funds on that platform, which then brazenly lent out said entrusted funds. Bitcoiners should clarify to those who are unaware the differences between these platforms and their risks and proper self-custodial storage of bitcoin.
In response to the letter, DCG’s Twitter account released an official statement, embedded below.
The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
Genesis Looks For Liquidity Injection
If you don’t know about Genesis Trading perhaps you should. They represent the backbone infrastructure of the institutional investor base in the bitcoin and broader crypto markets. For lending, trading, hedging, exchange yields and more, Genesis Trading was the brokerage to facilitate all of this activity in the space. Remember those juicy yields from the BlockFi and Gemini Earn products in the space? Genesis is the middleman between those platforms and hedge funds to generate that yield.
Genesis held a short client call to announce the suspension of redemptions, withdrawals and new loan originations. With exposure to FTX and Alameda Research, the company now needs another liquidity injection after having nearly $175 million locked in a trading account with FTX. As an initial response, parent company Digital Currency Group (DCG, the parent company of Grayscale), injected $140 million into the business to keep operations running smoothly. Yet, Genesis is now scrambling to find more capital. It’s the reason Gemini Earn had to halt withdrawals.
Although Gemini has been vocal that the rest of their operations are working normally, limiting the Gemini Earn product and having service outages across the platform seem to have sparked a small rush to get bitcoin off the exchange: 13% of the total bitcoin balance has left over the last 24 hours. As we’ve highlighted before, exchanges are not the place for your bitcoin, especially when there’s a high probability that there is another exchange (or even multiple) left to fall.
To give you an idea of size, Genesis had $50 billion in loan originations in one quarter and a $12.5 billion active loan book at the peak of the market back in 2021. Yet, loan originations and the active loan book both took a hefty haircut, falling to $8.4 billion and $2.8 billion respectively, as of the third quarter of this year. Back in July, Genesis filed a $1.2 billion claim against Three Arrows Capital that was picked up by DCG to keep the hit off Genesis’ books. Loans were partially collateralized with shares of GBTC, ETHE, AVAX and NEAR tokens.
We know from on-chain activity that Genesis had tons of interactions with Alameda, Gemini and BlockFi through their OTC trading desk; FTT was also a top token received and sent in that activity. Without Genesis sharing more details, we don’t know the extent of the exposure and capital needed to make customers whole. Yet, the fact that the parent company DCG hasn’t already stepped in to provide another liquidity injection is a warning sign on where this might end up. News surfaced that Genesis is seeking a $1 billion credit facility immediately. Not good.
In the worst-case scenario, the lack of funding supplied by DCG could spark questions around accessible liquid assets. DCG and Grayscale have dissolved trusts before and that option is not off the table. It’s an unlikely path but certainly one to highlight since Grayscale is the largest holder of bitcoin via the Grayscale Bitcoin Trust, holding nearly 633,600 bitcoin. Easily, this could be a regulatory issue or another limitation (that we don’t know about) where DCG cannot supply the capital to Genesis.
Circle, the issuer of the stablecoin USDC, also has ties to Genesis. Yet, they highlight that their Circle Yield product only accounts for $2.6 million in collateralized loans outstanding which, if true, is fairly insignificant.
We will likely hear more about the state of Genesis in the coming days since they want/need the capital injection by Monday. This would be a massive hit to a laundry list of institutions in the industry if withdrawals remain suspended and funds tied up. Genesis reflects the exact reason why the overall contagion of the FTX and Alameda Research collapse has yet to play out. Defaults and insolvencies come in waves, not all at once. It takes weeks and months to see where the biggest holes are and who is having liquidity, counterparty and/or insolvency troubles.
On top of that, nearly every major player and market maker has pulled their cash from exchanges to shore up their own balance sheets and decrease counterparty risk. Liquidity in the market is thin and the time is ripe for volatility to ensue. Although the market has seemed to find a temporary bottom amid all of the negative news headlines over the last week, the unknown downside risk still far outweighs the upside potential in the short term.
