- The existing assets just aren’t enough
- Earn, an unsuccessful lending product, was the final straw
- SEC also contributed to the crisis
- Conclusion
On January 19, Genesis Global Capital filed for bankruptcy which came as the result of the FTX and BlockFi meltdown.
The existing assets just aren’t enough
Genesis Global Capital is a unit of Genesis and a major crypto lender. The company suspended customer redemptions on November 16 after the FTX shook the financial world with its bankruptcy and fueled the concerns that other firms may follow. The owner of Genesis is Digital Currency Group (DCG), a venture capital company.
In its filing with the United States Bankruptcy Court for the Southern District of New York, the lender indicated that it had both assets and debts in the amount between 1 and 10 billion US dollars.
The lender’s parent company Genesis Global Holdco and its another lending unit Genesis Asia Pacific also filed for bankruptcy. Genesis Global Holdco released a statement saying it considers selling its subsidiary or conducting a stock transaction, to pay creditors. According to the statement, the company has 150 million US dollars in cash for the restructuring procedure. Genesis Global Holdco also indicated that the derivatives, spot trading, broker, dealer, and custody businesses were not subject to the bankruptcy procedure. They will continue providing services to their clients.
Earn, an unsuccessful lending product, was the final straw
Genesis was engaged in a conflict with Gemini Trust Co founded by Cameron and Tyler Winklevoss. The two companies had a dispute over Earn, a lending product that they offered to customers together.
According to the Winklevoss brothers, Genesis owes over 900 million US dollars to 340 thousand Earn investors. On January 10, Cameron Winklevoss stated that Barry Silbert should be removed from his position as the executive director of Digital Currency Group.
SEC also contributed to the crisis
On January 12, the Securities and Exchange Commission (SEC) accused Genesis and Gemini of the unregistered sale of securities to investors via the Earn program. According to the commission’s website, Genesis brokered digital assets for financial institutions, such as hedge funds and asset managers, and its total active loans amounted to approximately 3 billion US dollars compared to 11.1 billion US dollars a year earlier.
The company’s two main borrowers were Three Arrows Capital, a crypto hedge fund from Singapore, and Alameda Research, a cryptocurrency trading firm affiliated with FTX. Digital Currency Group assumed the hedge fund’s debt to Genesis and filed a claim against Three Arrows. The Digital Currency Group’s portfolio also includes Grayscale, digital currency asset management company, and the digital media CoinDesk.
Conclusion
Acting as the de facto banks, crypto lenders experienced a surge during the COVID-19 pandemic. However, unlike traditional banking institutions, they are not required to have capital stock. In 2022, the lack of collateral caused severe losses for some crypto lenders and their clients.
However, the crypto gold rush has come to an end. The Genesis crisis has proved it once again – the bankruptcy became inevitable as soon as the Winklevoss brothers started leveling accusations and counting their money.
Perhaps, if crypto firms joined their forces and supported each other in restructuring and finding new services, this series of bankruptcy filings could have been prevented. However, the reality is quite different: everyone tries to stay afloat by sinking former partners.
