On January 19th, 2023, Genesis announced its filing of Chapter 11 restructuring. As a former top-tier lender and broker in the cryptocurrency space, Genesis has suffered an aggressive fall from grace. Now the question is how this will affect the rest of the industry and when the contagion will stop.

Genesis Has Over $3 Billion in Liabilities

On January 20, Genesis Global Holdco, LLC filed for Chapter 11 bankruptcy reorganization in the U.S. Bankruptcy Court for the Southern District of New York.

This all comes after recent revelations that Genesis owes creditors over $3 billion. According to filings, Genesis’ largest creditors are Gemini Lenders with $765M, Bybit’s Mirana with $151M, Babel Finance with $150M, and Coincident Capital for $110M. Genesis has more than $150 million in cash on hand to finance operations while they resolve issues, but that’s not nearly enough.

Owned by Digital Currency Group (DCG), Genesis is a major player in the cryptocurrency space. So where did it go wrong?

The roots of their problems come from a $2.36B loan they made to 3 Arrows Capital (3AC), which has resulted in a $1.2B loss to Genesis to date.

Although DCG has never had any direct dealings with 3AC, Genesis assigned DCG its claims against 3AC by creating a $1.1B promissory note. This helped reassure Gemini and other creditors of Genesis’ ability to pay.

As the controlling investor of Genesis, Gemini views DCG as bearing responsibility for their problem. Many thought that as one of the largest cryptocurrency groups in the world, DCG was untouchable and would come out of this without issue.

Digital Currency Group is an Ecosystem Behemoth

Although the demise of Genesis is bad enough on its own, the question is whether this will spread to DCG and its holdings. There is a $1.65B promissory note from Genesis in DCG’s possession, and creditors are claiming that this indicates their culpability and indebtedness.

DCG’s Founder and CEO, Barry Silbert, insists that everything has been done aboveboard and the promissory note doesn’t represent a real lending relationship.

DCG’s core holdings include Grayscale, Coindesk, and Foundry (the world’s largest Bitcoin mining pool). We already know that at the very least DCG is considering selling Coindesk and investment bankers have been retained.

It’s clear that Digital Currency Group doesn’t want to sell Grayscale because of the $200M+ of annual income they earn from it. In this, it’s in DCG’s interest to delay as long as possible with the hopes that they can cover any debts with cash flow and not have to sell off any assets.

In addition, they are on the cap table for Brave, Ledger, ZCash, Coinbase, Coindesk, Decentraland, Kraken, Lightning Network, Ripple, Etherscan, and Blockstream. The list goes on, but the idea is that the ecosystem has become incestuous to the point where equity positions may need to be dumped, potentially affecting the underlying companies. This is why upstart companies in volatile industries need to be careful about who they let invest in them.

Of course, less than a year ago, DCG would have been considered the gold standard of investors, and every company would have been excited to have them on their cap table.

Signs of weakness are showing, and DCG-owned crypto exchange Luno just announced plans to cut 35% of staff, blaming it on market turbulence. DCG recently announced they would be suspending dividends to shareholders in order to preserve liquidity and maintain low operational expenses. This is the first sign that being embroiled in all the madness is hurting the core business.

DCG’s response indicated that Genesis had separate management and was not involved in the decision to declare bankruptcy. Additionally, they said:

“DCG will continue to operate business as usual, as will its other subsidiaries, including Grayscale Investments LLC, Foundry Digital LLC, Luno Group Holdings Ltd., CoinDesk Inc., and TradeBlock Corporation. Notably, Genesis Global Trading, Inc., Genesis’ spot and derivatives trading business, will also continue to operate business as usual.”

Will the Contagion Spread to Gemini?

The contagion from previous collapses still hasn’t slowed down, as shown by recent news that BlockFi is selling over $160M in loans on Bitcoin mining rigs.

As the largest creditor of Genesis, Gemini is in a particularly poor position right now. Gemini co-founder Cameron Winklevoss took to Twitter to air his grievances with DCG and Barry Silbert.

[Insert https://twitter.com/cameron/status/1609913051427524608]

Gemini has recently announced plans to lay off 10% of staff, and now the survival of the company is in question. The problem really comes down to the partnership that Gemini and Genesis struck around Gemini’s “Earn” product in 2020. This retail-facing product allowed investors to deposit their cryptocurrency in Gemini and receive interest on it through Gemini’s relationship with Genesis.

It gets worse for Gemini. On January 12th, the SEC charged Gemini and Genesis for the unregistered offer and sale of securities to retail investors in the form of their “Earn” product.

According to the complaint, in December 2020, Genesis, part of a subsidiary of Digital Currency Group, entered into an agreement with Gemini to offer Gemini customers, including retail investors in the United States, an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. Beginning in February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors,

Additionally, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement said:

“The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws.”

Avoiding Blow-Up Risk as a Lender

Secure Digital Markets’ trading and lending businesses remain unaffected by the events of the last year. Companies have been so eager to seize market share in the last few years that they neglected to implement many of the risk controls that would have helped them survive the second half of 2022.

Counterparty risk is something that Secure Digital Markets is very cognizant of. We have numerous TradFi veterans in-house, many of whom lived through the Lehman collapse and know how quickly a market shift can lead to a company blow-up.

SDM Lending is dedicated to reducing counterparty risk. We work with a reliable, SEC-regulated family office with no leverage or external lines of credit. Our services offer a secure, compliant way to acquire, store, and liquidate digital assets. We help our clients take advantage of market opportunities, unlocking liquidity and protecting their funds. Learn more about how SDM can help you maximize your digital assets by visiting our website or booking a free consultation.

To speak to our lending team and get a full understanding of the quality of our offering, book a free consultation today.

About Secure Digital Markets

Secure Digital Markets (SDM) is a digital asset brokerage operating on a global scale providing OTC cryptocurrency spot trading and crypto-backed lending services to institutional, high net-worth, and corporate clients across 60+ international markets. We offer a custom pathway to digital asset liquidity and off-exchange transactions. SDM streamlines the acquisition, storage, and liquidation of digital assets in a secure and compliant manner.

Our clients use our services to unlock liquidity and take advantage of current opportunities in the market. Visit our website today to learn more about our services and how SDM can help you to maximize your digital assets.

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