Until the summer of 2022, Genesis Global Capital (GGC) was the premier crypto lending firm in the world. The New Jersey-based lending and borrowing giant filed for Chapter 11 bankruptcy protection on Thursday the 19th of January 2023 with two of DCG’s other subsidiaries; Genesis Global Holdco (GGH), and Genesis Asia Pacific (GAP), listing debts of roughly $3.5 billion to its top 50 creditors.
Among Institutions smeared in this financial fiasco are FTX exchange, The Now defunct Three Arrows Capital (3AC), Gemini earn, The Grayscale Trust, GGC and its parent company Digital Currency Group, inc. DCG.
This article is orchestrated to help readers understand the chronology of these events, to know the institutions involved in the contagion spread, where said contagion emanated from and most importantly how it spread to help grasp the entire picture of the myriad of crashes in the crypto Industry today.
July 7 2022, 3AC files for Chapter 15 bankruptcy.
Three Arrows was the first major crypto firm to go bankrupt in 2022, brought down by the collapse of cryptocurrencies Luna and TerraUSD in May. It filed for bankruptcy in the British Virgin Islands in early July.
The main cause of 3AC's collapse was excessive leverage on long positions across various cryptocurrencies and related derivatives.
How does genesis tie into 3AC's unprecedented collapse?
According to Cameron Winklevoss, the aggrieved founder of the Gemini cryptocurrency exchange in an open letter to the DCG board, claimed that the narration of events by DCG CEO and founder Barry Silbert on the 3AC shambles weren’t exactly non-perjury material.
He explained in his letter to the DCG board that Genesis Global Capital had lent $2.36 billion of assets to 3AC, a company that had later went "belly up" liquidating its collateral it paid to genesis in the process.
"Genesis was then left with a loss of $1.2 billion as its loan to 3AC was under-collateralised. At this point Barry Silbert had two legitimate options: restructure the Genesis loan book (inside or outside of bankruptcy court) or fill the $1.2 billion hole. He did neither.
At that point in time, the Genesis loan book was approximately $8 billion which means that the $1.2 billion loss from 3AC would account for roughly 15% of the loan book’s assets”.
Cameron emphasized however that Barry silbert, DCG CEO never actually filled the $1.2 billion hole, never gave a penny to Genesis to make up for the 3AC losses contrary to the public announcement it made on the matter but instead pretended to by entering a 10-year promissory note with Genesis at an interest rate of 1%— due in 2032".
In the same letter, Cameron winklevoss explained how and why Genesis Capital was willing to recklessly accept such low standard collateral from 3AC.
According to him 3AC was using the money for the “kamikaze” Grayscale net asset value (NAV) trade— a recursive trade that ballooned the AUM of the Grayscale Bitcoin Trust ie GBTC and as a result, the fees earned by its sponsor, Grayscale Investments, LLC (Grayscale), another subsidiary of DCG.
He added in this letter that Genesis made these interactions with 3AC look like collateralised loans but it wasn’t the case after all as 3AC was acting as "a mere conduit for Genesis, allowing it to enter into what were effectively swap transactions of bitcoin for GBTC shares with the Grayscale Trust”. In this transaction, Genesis was betting that the shares would be worth more than bitcoin in the future. The 3AC loan was the bitcoin leg of the swap and the 3AC collateral was the GBTC leg of the swap. 3AC was a mule shuttling the assets between the parties and as a result Genesis ended up owning massive risk.
Up until 2021, Genesis won this zero sum trade because the GBTC shares were worth more than bitcoin.
Starting in 2021, however Genesis began loosing this trade as the shares were worth less than bitcoin.
Funnily enough, Genesis never really enjoyed the winning part of this trade as it always ceeded its GBTC share premium to 3AC.
The implication of this is that genesis only accrued losses from this trade and even when this NAV trade inverted to losses, it continued to lend to 3AC on attractive terms and accept GBTC as collateral.
The fact that genesis had ostensibly kept the GBTC shares from being sold into the open market and consequently causing its price to plummet, further widening the discount to NAV (Net asset value of BTC) and depressing it’s share price, it had as a result consistently deepened the debt hole for genesis.
This trade continued until it didn’t as the GBTC shares started trading at a discount to NAV— a discount that has widened ever since. This effectively meant that the GBTC collateral posted by 3AC to genesis was degrading and as a result was not sustainable.
Cameron winklevoss also labeled the above trade as accounting fraud.
He opined in his letter;
"Instead of booking these swaps as risky derivatives, Genesis hid them by mischaracterizing the first and last legs of these swap transactions as collaterized loans on its balance sheet. This made the Genesis balance sheet appear healthier than it actually was, fraudulently inducing lenders to continue making loans”.
That’s not all Genesis capital was up to though…
November 10 2022; Genesis admits exposure to FTX
Genesis reported in a twitter thread that its derivatives arm, Genesis Global Trading inc. (GGT), had about $175m in locked funds in its FTX account and had no concurrent relationship with FTX and it's sister company Alameda, in a bid to be transparent amidst the unending uncertainty and fear in the crypto industry at the time. In the same breath, they also clarified explicitly that the locked funds would not in any way impact their "market making activities".
The aim of this twitter thread was to distance themselves from the fallout of the FTX exchange collapse and also to emphasize the strength of their finances in order to prevent a potential bankrun as the once gargantuan exchange, FTX had suffered.
Genesis even went as far as declaring that it had "printed record volumes" amidst the FTX fallout after claiming on Wednesday November 9 that investors turn to them when market conditions are volatile to manage their risks.
For context, their total active loans had fallen 74.8% throughout the crypto bear market, with its latest Q3 report in 2022, showing that active loans outstanding were at a sum of $2.8Billion compared to $11.1 billion at the same time the previous year according to cointelegraph.
Call it psyops if you will.
November 11, 2022; DCG reportedly bails out Genesis
Crypto investment firm DCG, gave an "equity infusion" of $140m to genesis global trading as reported by another DCG wholly owned subsidiary, coindesk.
This was done to "bolster our position as a global leader in crypto capital markets and allow us to support our clients and the growing demand for our services,” Genesis added in its client note.
Shortly after FTX's Chapter 11 bankruptcy filing in November, Genesis was forced to suspend withdrawals in its lending unit (GGC), a major customer of which was Gemini, the crypto exchange owned by brothers Cameron and Tyler Winklevoss. CEO Cameron Winklevoss has since waged a public campaign against Genesis, DCG and its CEO, Barry Silbert.
Meanwhile a string of events were taking place elsewhere…
November 9, 2022; Gemini Denies FTX Exposure
Gemini explicitly claims to not have exposure of any sort to the FTX and Alameda fiasco.
“Gemini is a full-reserve platform. This means that all customer funds held on Gemini are held 1:1 and available for withdrawal at any time. We do not do anything with your funds unless explicitly authorized and directed to do so by you”
November 16, 2022; Gemini Reports That Partner Genesis, Has Halted Withdrawals
Gemini made the announcement on its twitter handle in a twitter thread;
“We are aware that Genesis Global Capital, LLC (Genesis) — the lending partner of the Earn program — has paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days.
We are working with the Genesis team to help customers redeem their funds from the Earn program as quickly as possible. We will provide more information in the coming days. The past week has been an incredibly challenging and stressful time for our industry”
The full story;
There are two facets to Gemini in the context of this article — Gemini Earn and Gemini exchange. Whilst the latter was completely unaffected as all assets on Gemini exchange were all held 1:1, it was the former, Gemini Earn that bore the brunt of Genesis’ irresponsibility.
Gemini Earn users loan out their money and earn accrued income in exchange and hence Genesis helped Gemini exchange in carrying out these lending activities.
Put explicitly, the crypto owned by these Gemini users were lent to Genesis and Gemini exchange would get a commission for ensuring the "connexion".
These transactions continued to go through smoothly until Gemini Earn users learned they won’t be getting their crypto at the specified date (SLA).
This bridge in transmission was due to the fact that genesis was technically insolvent as a result of FTX’s collapse. Gemini owners also believed that DCG, Genesis' parent company misled gemini users into believing that DCG had absorbed massive losses from the 3AC implosion and consequent loan defaults.
The Gemini owners also accused DCG of lying in a document titled “Gemini Risk Metric Request” where it made Genesis look like it was solvent and hence make Gemini to persist in trading with an insolvent company.
This led to a public spat on twitter as
Owners of the Gemini exchange, the winklevoss brothers, specifically cameron winklevoss, demanded Barry Silbert step down as DCG CEO due to these plethora of reasons.
January 5, 2023 ; Genesis Layoffs
Genesis cut staff by 30% as woes from the FTX fallout continued to persist.
Genesis owes Gemini a staggering $900 million, and Gemini believes Genesis parent company DCG is to blame.
Notably, Genesis Global Trading, Inc.(GGT), Genesis’ spot and derivatives trading entity, continued to operate business as usual.
January 13,2023; The SEC Files Action Against Gemini
Tyler winklevoss, CEO of Gemini took to Twitter to express his displeasure at the action;
“It’s disappointing that the @SECGov Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. They chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive. As a matter of background, the Earn program was regulated by the @NYDFS and we’ve been in discussions with the SEC about the Earn program for more than 17 months. They never raised the prospect of any enforcement action until AFTER Genesis paused withdrawals on November 16th. Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us — super lame”.
February 6, 2023; DCG shareholder letter from Barry silbert, founder & CEO
Key takeaways from this letter:
- Digital Currency Group Owes Subsidiary Genesis Global Over $1.65B
- DCG’s debt to Genesis includes loans of $575 million due in May of this year (2023) and a $1.1 billion promissory note due June 2032, according to a Friday declaration filed with the bankruptcy court of the Southern District of New York.
- GGC’s unsecured loan stands at approximately $850 million to the DCG Entities.
DCG claims it contributed $340 million of new equity across the genesis entities after the 3AC default.
The DCG had always maintained there were no comingling of funds between its wholly owned subsidiaries ie gray-scale, genesis etc emphasizing that they all had seperate bank accounts, securities account, crypto accounts and separate books/records.
In DCG’s Letter to shareholders, DCG also denied any connection to the events of FTX.
DCG has also stated that its move in assisting genesis capital was exacerbated by the FUD and fear of contagion in the crypto industry to avoid genesis getting hit more than it should have been after its default to 3AC.
The letter stated that this was done in the hope that institutional demand and brokerage services would return as the market stabilised.
February 6, 2023; Genesis, Gemini, DCG Reach Agreement To Recover Assets In Bankruptcy Court.
On monday, the same day DCG released a statement, an agreement was reached by all parties in bankruptcy court. This was announced by Cameron Winklevoss, co-founder of Gemini Exchange in a Twitter thread.
Sean O’Neal who is a lawyer representing the debtors in court had said that the sides had agreed in "principle" and were working to finish the term sheet with plans to officially file them as soon as they could.
It is noteworthy to point out that the deal involved Genesis Global Capital themselves,DCG, 2 creditors being owed approximately $2B and the Gemini Exchange Company.
The Deal goes further; that DCG would contribute its equity interest in Genesis Global Trading to Genesis Global Holdco, bringing all the Genesis entities under the same holding company.
Gemini had pledged to contribute a $100million sum to the proposed plan in the words of Anson B. Frelinghuysen, a lawyer representing the Gemini lenders.
Gemini’s Cameron Winklevoss called the plan a “critical step forward,” and is also confident of "having a framework in place to execute on".
Digital Currency Group (DCG), is selling off its holdings at a heavy discount according to Investing.com The beleaguered Softbank-backed giant is looking for buyers and offloading shares in its numerous ventures as its bankrupt crypto lender Genesis reached an agreement with Gemini exchange.
Among suitors for the DCG shares are Majority shareowner in Huobi Cryptocurrency Exchange,Justin Sun and asset management firm, Valkyrie.
These include Grayscale, which operates the Grayscale Bitcoin Trust and CoinDesk. The venture firm is also offloading shares in its crypto funds.
The resolution between all companies involved could bring an end to the public shit toss between companies Gemini and DCG.
Disclaimer: This article represents the author’s personal opinion. It is only for informational and educational purposes only, and the aforementioned should not be treated as financial advice.
