Key Takeaways
- Genesis has over $3 billion in debt and 100,000 creditors
- Gemini, the exchange founded by the Winklevoss twins, has threatened legal action over an unpaid $900 million loan
- The SEC has also filed a suit against Genesis for unregistered securities trading
- Genesis’ parent company is DCG, the same company which runs the Grayscale Bitcoin Trust, the world’s biggest Bitcoin fund
- Contagion continues to ripple through the industry, with investors hoping that the washout is nearly complete
- DCG has stakes in over 200 crypto companies, including Circle, Kraken and the media company CoinDesk, which is now seeking a sale
In the move that precisely everybody saw coming, the lending arm of crypto platform Genesis has finally filed for bankruptcy.
It’s another victim on the list for Sam Bankman-Fried, as Genesis becomes the latest firm to succumb to the contagion triggered by the FTX collapse. But crypto investors are now concerned about the subsequent damage that could ripple out from this filing, as Genesis’ parent company is Digital Currency Group (DCG) – the same company which owns the Grayscale Bitcoin Trust, the biggest Bitcoin fund in the world.
Let’s analyse what it all means.
Enormous bankruptcy filing
Looking at bankruptcy documents, Genesis listed over 100,000 creditors. It reportedly has debt greater than $3 billion.
The filing had long been mooted. It suspended withdrawals on November 16th, in the aftermath of the stunning FTX collapse. However, it affirmed that it had “no plans” to file for bankruptcy and would seek to resolve the situation “consensually”.
It then scrambled to raise funds to stave off the inevitable. It reportedly sought investment from Binance, which declined due to a conflict of interests. It also approached several private equity firms but has ultimately filed for Chapter 11 bankruptcy protection.
What happens Gemini?
The filing comes in the same week that the SEC filed a suit against Genesis and its former partner, Gemini, over unregistered dealings with securities.
Gemini is a crypto exchange founded by the Winklevoss twins and offered a similar “Earn” product to a lot of these crypto lenders. The problem was, it was in partnership with Genesis. Under the terms of Earn, customers sent crypto to Gemini in the hopes of earning a yield. Gemini, in order to capture yield to pay to these customers, transferred the deposits to Genesis, who invested those deposits.
The Winklevoss twins say that Gemini owes it $900 million through the Earn product. Withdrawals from the Gemini Earn product are currently suspended.
Cameron Winklevoss responded to news of the Genesis bankruptcy filing on Twitter, threatening legal action unless “a fair offer to creditors” was made by DCG and CEO Barry Silbert. He has accused Silbert of “fraud” and demanded he step down as CEO.
6/ Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.
— Cameron Winklevoss (@cameron) January 20, 2023
DCG in the thick of it
For the wider market, it is the involvement of DCG that is the real concern.
The digital assets company has a stake in over 200 crypto companies, including the crypto exchange Kraken and stablecoin issuer Circle. Most high-profile is the fact is the parent of the Grayscale Bitcoin Trust, which is the largest Bitcoin fund in the world. It has come under increasing scrutiny over the safety of its reserves following the FTX collapse and the turmoil facing DCG.
The fund has been trading at a steep discount to its net asset value, with the divergence spiking to 50% post-FTX. I wrote an analysis of the trend two weeks ago after it bounced back, at that point trading at a 37% discount. The discount is currently 40%.
DCG also own CoinDesk, the crypto news publication. It is currently exploring a potential sale. Ironically, it was the news site that initially published the scoop on FTX, which triggered the hardship for DCG.
“Over the last few months, we have received numerous inbound indications of interest in CoinDesk”, CEO Kevin Worth said this week.
As for Silbert, the embattled CEO wrote on Twitter last week that “it has been challenging to have my integrity and good intentions questioned after spending a decade pouring everything into this company (DCG and the space with an unrelenting focus on doing things the right way”.
DCG responded to the chaos by cutting its dividend, telling shareholders it is focusing on strnegthening its own balance sheet.
“In response to the current market environment, DCG has been focused on strengthening our balance sheet by reducing operating expenses and preserving liquidity. As such, we have made the decision to suspend DCG’s quarterly dividend distribution until further notice,” DCG announced on Tuesday.
What does this mean for crypto?
As for the market at large, this is a continuation of the disaster that was the FTX collapse. Contagion was always inevitable, given an $8 billion hole on FTX’s balance sheet. In truth, it is somewhat surprising how well the crypto industry has held up through this.
Bitcoin is up 25% on the year, ETH is up 27%, with both trading at around the same level they were prior to the insolvency. The macro climate is looking a little more optimistic than a couple of months ago, as softer inflation readings have led investors to bet that central banks will pivot off their high interest policy sooner than previously anticipated.
Going back to the thick of the crisis, Bitcoin wobbled but held firm above $15,000.
Perhaps the biggest fallout here is the continued hammering of crypto’s reputation. The pullback of institutional adoption will likely be severe, the mending process ahead long.
The world economy is teetering on the brink of a recession, as the burden of high interest rates continues to suck liquidity out of markets. In addition to this, inflation remains elevated with a cost-of-living crisis worldwide, despite the picture looking more positive over the last couple of months. Then there is the small matter of a war in Europe.
These are massive challenges for markets and suppressing prices across the board. Uncertainty is as high as it has been since the Great Financial Crash of 2008. And yet, in addition to these huge headwinds, crypto keeps hurting itself, adding to the mess.
Investors will hope that the washout from the scandals of 2022 will throw up no more surprises. With how dire the macro situation is, it doesn’t need any more self-inflicted wounds.