On December 8, Genesis, a crypto trading and lending agency, issued an email to customers stating that it will take more time to resolve liquidity issues, and that resuming withdrawals may still take weeks rather than days. Previously, it was reported that Genesis owed Gemini users about $900 million.
Genesis, which is on the verge of bankruptcy, is the first and only full-scale brokerage service provider in the crypto field in the United States. Its main business includes derivatives transactions, cryptocurrency lending and custody. Like Grayscale and blockchain media Coindesk, it is a brand subsidiary of the famous venture capital company DCG (Digital Currency Group).
There are more than 20 crypto trust products such as GBTC and ETHE issued by Grayscale, and Genesis is responsible for selling them. In 2021, Genesis will complete spot transactions of over US$116 billion, loan issuance of over US$130 billion, and derivatives transactions of over US$53 billion. Its lending business has as many as 165 institutional clients.
Some observers said that if Genesis goes bankrupt, the negative impact may be greater than the collapse of FTX and LUNA.
Genesis, Grayscale, and DCG
On November 16, Genesis’s loan department announced that it would stop customer withdrawals. There are rumors in the market that Genesis may have solvency problems and may sell ETHE and GBTC to repay lenders. How big is the funding gap of Genesis, whether Grayscale’s trust products will be sold off, and whether DCG has the ability to save the market, related topics have become the focus of attention of the crypto industry recently.
As of December 5, according to CoinDesk citing sources, in addition to the previously owed debts of USD 900 million to Gemini, the second batch of Genesis creditors represented by the law firm Proskauer Rose also had a total loan amount of USD 900 million. The total amount of disclosed debt so far is $1.8 billion, and the third group may owe even more.
At the same time, the negative premium of its sister company Grayscale’s Bitcoin trust product once set a historical record. On December 9, the GBTC premium rate was as low as -47.84%, and the ETH trust premium dropped to around -50%. Grayscale said that for security reasons, it will not produce a reserve certificate. He also said that although he knew that investors would be disappointed by this, in order to protect investors, he had to do so.
The parent company DCG may also have financial difficulties. It is rumored that DCG has concealed a promissory note of US$1.1 billion belonging to Genesis from investors, and Genesis is currently facing bankruptcy. Plus DCG will have to raise $1 billion in financing before. It is easy to think that if Genesis is thunderstorm, DCG will also be affected.
Ryan Selkis, founder of blockchain analysis company Messari, said, “According to the analysis of public documents, it is very likely that the Grayscale Bitcoin Trust Fund GBTC is held by the parent company DCG, but it is also reasonable that most of these collaterals are actually It is also possible that it is held by Genesis instead of DCG. DCG has about $600-800 million in cryptocurrency collateral, most of which are GBTC and ETHE shares purchased in 2021 and early 2022; if these assets are indeed Genesis collateral, then It means that DCG’s fund net value has been reduced by 50%. This also means that in the next two and a half years, Genesis will be forced to sell millions of GBTC stocks every month to repay creditors, which will also hinder DCG from launching ETFs.”
The price of Grayscale’s trust products fell again and again, and the net worth of its parent company DCG may have been halved. Genesis’ resumption of withdrawals is nowhere in sight, and the three companies have fallen into industry difficulties together.
FTX’s bankruptcy crushes Genesis
How did Genesis, the top lender in the crypto industry, suddenly fail? It can be said that the thunder of the FTX exchange pushed Genesis, which had lost billions of dollars in the bear market, to the brink of bankruptcy.
Genesis was once the largest creditor of Three Arrows Capital. In May this year, the bankruptcy of Three Arrows Capital caused Genesis to suffer a loss of 1.2 billion. Fortunately, the parent company DCG provided rescue funds to allow it to avoid disaster. But at this time, investor interest has begun to weaken. The Genesis Q3 report shows that its loan origination and spot transaction volume in the third quarter fell sharply. Loan origination fell from US$40 billion in the second quarter to US$8.4 billion in the third quarter, a drop of nearly 79%. , the spot trading volume fell from $26.6 billion to $9.6 billion, a drop of 63%.
On November 11, DCG injected another $140 million into Genesis to optimize its balance sheet and strengthen its position in the crypto market. On the same day, Genesis stated that its derivatives department had $175 million locked in its FTX trading account.
Unexpectedly, FTX directly declared bankruptcy. Industry analysts said that from the blockchain browser, it can be found that Genesis has long-term capital exchanges with FTX and Alameda Research. In November and December 2021, Alameda sent a total of $1.7 billion worth of FTT to Genesis, and in June and July 2022, Genesis returned $1.4 billion in FTT to Alameda Research. Genesis is likely to be Alameda Research’s lead lender.
Genesis received more than $1 billion worth of FTT tokens from FTX and its sister company Alameda Research in the past three months, according to data analytics platform Arkham. Genesis is likely to make substantial loans to FTX and Alameda Research using FTT tokens as collateral.
Therefore, many people believe that the bankruptcy of FTX will be the last straw that crushes Genesis.
Arthur Hayes, the former CEO of the BitMEX exchange, stated that among the consequences of SBF’s apparent epic fraud, perhaps the most important casualty is that the cryptocurrency lender Genesis may be unable to repay and may go bankrupt. The consequences of this possibility are huge, Enough to also bring down its parent company, the well-known venture capital firm Digital Currency Group (DCG).
The farce of Genesis/DCG – which also includes Genesis’s particularly influential sister company – Digital Asset Fund Grayscale, because it directly affects GBTC, the current largest Bitcoin investment product. The reason why GBTC is important to many cryptocurrency traders is that it holds the largest reserves of Bitcoin. Whether investors want to be allowed to redeem GBTC shares in BTC or USD, it could trigger a series of brutal declines in the fiat price of Bitcoin and other altcoins.
According to analysts, if Genesis is unable to raise funds in the near future to ease the crisis, in extreme cases, DCG may liquidate Grayscale GBTC and distribute the realized funds to investors, which will lead to further changes in the crypto market. Violent fluctuations, crypto assets including Bitcoin will be sold on a large scale, and the impact will be no less than the collapse of the FTX empire.
There are also opinions that even if Genesis goes bankrupt, it does not mean that Grayscale and DCG will definitely be pulled down. Crypto KOL degentrading believes that if DCG really owes Genesis $1 billion, the empire of DCG founder Barry Silbert will be directly threatened, because Grayscale is a subsidiary of DCG, and if the subsidiary defaults, all subsidiary assets can be confiscated.
The only way for DCG to solve it is to dissolve its relationship with Grayscale, which DCG owns about 28 million shares of Grayscale. By selling Grayscale, they can directly raise cash, buffer their damage, and reduce the chain of crisis contagion.
Of course, the best-case scenario is that Genesis gets acquired, or finds a cheap and reliable source of funding. Ram Ahluwalia, founder of crypto investment advisor LumidaWealth, wrote in a tweet, “As an institution, Genesis has brought a lot to the crypto space, which cannot be ignored, and Genesis could be a gem in the right hands.”