The Genesis Crisis: Why Investors Worry About Bigger Problems for Cryptocurrencies

Investors worry that liquidity problems facing crypto financial services company Genesis could spread to its parent company, Digital Currency Group, and cause further damage to the crypto market. capital was battered, after Genesis’ lending arm Withdrawal is paused last week.

Genesis has managed to raise at least $1 billion from investors and warned it could file for bankruptcy if these efforts fail, according to a Bloomberg report Monday. Genesis said the company hired investment bank Moelis & Co. to explore potential options.

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

A letter sent to investors by Silbert on Tuesday, obtained by MarketWatch, partially revealed the connection between DCG and Genesis. Silbert said in the letter that DCG owes Genesis about $575 million, due in May 2023. He also mentioned a $1.1 billion promissory note due in 2032, that was the result of DCG assuming Genesis debts due to the default of crypto hedge fund Three Arrows earlier this year.

A spokesperson for Genesis said Monday that the company has no immediate plans to file for bankruptcy. A spokesperson told MarketWatch: “Our goal is to resolve the current situation by consensus without filing for bankruptcy.

“We have begun discussions with our largest potential investors, creditors and borrowers, including Gemini and DCG, to agree on a solution that enhances overall liquidity. for our lending operations and to meet the needs of our customers,” Derar Islim, interim managing director at Genesis, wrote to clients Wednesday, according to a letter obtained by MarketWatch. “We hope to expand these conversations in the coming days,” Islim wrote. According to Islim, Genesis’ derivatives and spot trading and custody businesses are still operating as normal.

However, without outside funding, Genesis lenders are likely to see increased withdrawals once the freeze is lifted and may face larger and even bigger problems. was forced into bankruptcy, said Eric Snyder, bankruptcy attorney at Wilk Auslander.

Meanwhile, the current fundraising environment in crypto is fraught with challenges, as digital asset prices have fallen following the bankruptcy of crypto exchange FTX earlier this month and shaken confidence. information from some investors in the sector, noted Rich Lee, an attorney at Crowell & Moring. Genesis previously said it has about $175 million in funds locked up in FTX.

If Genesis files for bankruptcy, DCG could be hit hard because the value of their equity in Genesis could drop to near zero, noted James Van Horn, bankruptcy attorney at Barnes & Thornburg. “Most of the time in any industry, sometimes unless every other creditor will be paid 100% in full with interest, equity is worth nothing,” says Van Horn.

Furthermore, in general, when a company files for bankruptcy, it can expose parent companies to a variety of court requests, said Jonathan Pasternak, bankruptcy attorney at Davidoff Hutcher & Citron, said. “All of that is going to be scrutinized, and it could get the parent company in trouble, forcing it along with the subsidiary to go bankrupt.”

In the case of DCG, a key question is whether it will secure Genesis’ outstanding debt to other companies, Snyder noted.

Additionally, if Genesis were to file for bankruptcy, its bankrupt assets would be obligated to pursue $575 million in debt from DCG and collect the debt as efficiently as possible, which would put additional pressure on the company. DCG, said Van Horn.


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