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Genesis meltdown: Why investors are worried about bigger problems for crypto

Genesis meltdown: Why investors are worried about bigger problems for crypto

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Investors are worried that liquidity problems at crypto financial services firm Genesis could spill over to its parent company, Digital Currency Group, further damaging the already battered crypto market after Genesis’ lender suspended withdrawals last week.

Genesis has been trying to raise at least $1 billion from investors and has warned that it may have to file for bankruptcy if the companies fail, according to a Monday report from Bloomberg. The company has hired investment bank Moelis & Co to explore possible options, Genesis said.

Founded by billionaire Barry Silbert, DCG is one of the largest crypto companies in the world. In addition to Genesis, it also owns Grayscale, which is, among other things, a supporter of the world’s largest bitcoin fund, the crypto news publication CoinDesk and the digital asset exchange Luno.

A letter Silbert sent to investors on Tuesday, obtained by MarketWatch, partly revealed the connection between DCG and Genesis. DCG owes about $575 million to Genesis due in May 2023, Silbert said in the letter. He also cited a $1.1 billion note due in 2032 that stemmed from DCG’s takeover of Genesis for the default of crypto hedge fund Three Arrows earlier this year.

A spokesperson for Genesis said on Monday that the company does not plan to file for bankruptcy in the near future. “Our goal is to resolve the current situation amicably without filing for bankruptcy,” a spokesperson told MarketWatch.

“We have started discussions with potential investors and major creditors and borrowers, including Gemini and DCG, to agree on a solution that will support the overall liquidity of our loan business and meet customer needs,” Genesis Interim CEO Derar Islim. , wrote to clients on Wednesday, according to a letter obtained by MarketWatch. “We expect to expand these discussions in the coming days,” Islim wrote. According to Islami, Genesis’ spot and derivatives trading and custody businesses are still fully operational.

Without outside funding, however, Genesis’ lending unit is likely to see more withdrawals once the freeze is lifted and could face bigger problems and even bankruptcy, said Eric Snyder, a bankruptcy attorney at Wilk Auslander.

At the same time, the current fundraising environment for crypto is challenging, with digital asset prices plummeting following the bankruptcy of crypto exchange FTX earlier this month, shaking some investors’ confidence in the space, Crowell & Moring attorney Rich Lee noted. Genesis previously said it had about $175 million in funds locked up in FTX.

If Genesis files for bankruptcy, DCG could suffer greatly because the value of its equity in Genesis could drop to close to zero, said James Van Horn, a bankruptcy attorney at Barnes & Thornburg. “Most of the time in any industry, often unless all the other creditors get paid 100 percent with interest, the equity is worth nothing,” Van Horn said.

In addition, typically when a company files for bankruptcy, it may expose the parent companies to various lawsuits, said Jonathan Pasternak, a bankruptcy attorney at Davidoff Hutcher & Citron. “They’re all being investigated, and it could entangle the parent company, force it to join the subsidiary in bankruptcy.”

One key question in DCG’s case is whether it has provided guarantees for Genesis’ unpaid debts to other companies, Snyder noted.

Also, if Genesis files for bankruptcy, its bankruptcy estate will have to collect the $575 million liability from DCG and collect it as efficiently as possible, adding pressure on DCG, Van Horn said.

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