Crypto Lender Genesis Files for Bankruptcy. It Could Be Far Worse for Bitcoin.
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Bitcoin prices have been little moved amid news of Genesis’s bankruptcy.
Dreamstime
The lending businesses of
Genesis
have filed for bankruptcy, making the institutional digital asset powerhouse the latest casualty in a yearlong crash in cryptocurrencies.
Genesis Holdco and two subsidiaries—distressed lender Genesis Global Capital and an Asia-Pacific arm—filed for Chapter 11 bankruptcy protection in the Southern District of New York, the group said Friday. Genesis Holdco owes its top 50 creditors about $3.4 billion, according to bankruptcy filings, including $53 million to a VanEck fund for accredited investors. VanEck is one of the few mainstream fund companies to have made a push into digital assets.
An arm of Digital Currency Group (DCG)—the crypto conglomerate that also owns asset manager Grayscale and media outlet CoinDesk—Genesis stands at the heart of institutional digital assets, providing critical trading and lending services. Its failure represents the latest casualty of the Bitcoin bear market, which has wiped out some $2 trillion in crypto market cap since the peak of prices in November 2021.
“While we have made significant progress refining our business plans to remedy liquidity issues caused by the recent extraordinary challenges in our industry, including the default of Three Arrows Capital and the bankruptcy of FTX, an in-court restructuring presents the most effective avenue through which to preserve assets and create the best possible outcome for all Genesis stakeholders,” Derar Islim, the interim CEO of Genesis, said in a statement.
Sliding prices in early 2022 snowballed into an avalanche, as the meltdown of stablecoin ecosystem Terra hit a huge hedge fund, Three Arrows Capital, causing a credit crisis as it defaulted on lenders in the interconnected crypto space. The collapse of FTX and Alameda Research proved too much for Genesis, which now follows the likes of Voyager Digital and Celsius into bankruptcy
“While the fallout will be rough, the bankruptcy will go a long way towards breaking the chain of lending created by 2021’s bull market,” said Suneet Muru, an analyst at data and analytics group
GlobalData
.
“The industry won’t be able to properly focus on building up again until this is flushed out, but it will take a long time.”
The greatest casualty of Genesis’s troubles is Gemini, a crypto platform founded by Tyler and Cameron Winklevoss of
Facebook
fame. Genesis is the lending partner for Gemini’s “Earn” program, which allowed hundreds of thousands of predominantly retail investors to lend their crypto for high interest rates. When Genesis’s lending business ground to a halt in November, following FTX’s bankruptcy, Gemini was forced to do the same. Genesis owes Gemini almost $766 million, according to filings.
The Securities and Exchange Commission earlier this month filed charges against both Gemini Trust and Genesis Global Capital, alleging that the firms sold unregistered securities to retail investors. SEC Chair Gary Gensler said the groups bypassed disclosure agreements designed to protect investors.
Genesis has proposed a plan to exit Chapter 11 through the creation of a trust that will distribute assets to creditors and provide an optimal outcome for Gemini Earn users. The plan includes a possible sale, capital raising, or equitization transaction that would let Genesis emerge under new ownership. The company is starting a marketing and sale process to monetize its assets and pay creditors fairly and equitably, it said.
News of the bankruptcy was welcomed by Cameron Winklevoss, who has feuded publicly with DCG CEO Barry Silbert, himself a titan of the digital assets industry. “This is a crucial step towards us being able to recover your assets,” Winklevoss said via Twitter. “Genesis will be subject to judicial oversight and be required to provide discovery into the machinations that brought us to this point.”
But it might not stop there. Winklevoss said Gemini has been preparing to take direct legal action against Silbert, DCG, “and others who share responsibility for the fraud that has caused harm to the 340,000+ Earn users and others duped by Genesis and its accomplices.” Winklevoss said that unless a “fair offer” is made to creditors, they will file a lawsuit imminently.
VanEck, one of the few Wall Street firms to be caught up in the bankruptcy as a creditor, said in a statement to Barron’s that it was aware of the filing and that the group “hope and expect that DCG is stepping up to support Genesis creditors.”
Digital Currency Group didn’t immediately respond to a request for comment from Barron’s.
There remains a silver lining for the industry, and crypto market, more broadly.
Genesis said it has more than $150 million in cash on hand to fund ongoing operations and facilitate restructuring, and that its subsidiaries engaged in trading and custody—holding customer assets—are not included in the bankruptcy.
Genesis Global Trading, its trading arm, is a dominant force in crypto markets, providing critical liquidity as one of only a handful of major market makers. Crypto markets have suffered from a lack of liquidity since FTX’s collapse, and if Genesis were to cease trading operations it could worsen this liquidity problem and exacerbate what has already been a volatile stretch for
Crypto prices seem little moved by the news. Bitcoin slipped lower on Thursday amid fears about Genesis’s fate, but has held on to gains from a rally over the past week that has seen it reclaim the key $20,000 level and hit the highest point since FTX’s collapse.
“The market priced this event in months ago, so we won’t see a plunge in market cap as we did following the FTX collapse,” said GlobalData’s Muru.
For better or worse, another bankruptcy is almost just another day in crypto.
Write to Jack Denton at jack.denton@barrons.com
