Will Genesis meet its maker amid creditors closing in?

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In this issue

  1. Gen­e­sis: End times?
  2. FTX: From the ashes
  3. Dig­i­tal yuan: Smart money

From the Editor’s Desk

Dear Read­er,

It’s iron­ic that one of the main attrib­ut­es the dig­i­tal asset indus­try has used to pro­mote itself is its trust­less nature.

In a trust­less sys­tem, decen­tral­iza­tion and tech­nol­o­gy are sup­posed to do away with the need for third-par­ty inter­me­di­aries between peo­ple and their mon­ey. Yet, para­dox­i­cal­ly, the indus­try needs all the trust it can get if it’s ever to recov­er from the cas­cade of dis­as­ters that have dri­ven it per­ilous­ly close to the edge in recent months.

Trust is cer­tain­ly some­thing that FTX chief John Ray III must be hop­ing he’ll be grant­ed in ample mea­sure as he looks at the pos­si­bil­i­ty of reviv­ing Sam Bankman-Fried’s bank­rupt brainchild.

Whether Mr. Ray — whose lengthy career in insol­ven­cy pro­ceed­ings has includ­ed such high-pro­file cas­es as col­lapsed ener­gy trad­er Enron — will be able to gain a suf­fi­cient lev­el of trust to reboot FTX remains to be seen.

How­ev­er, over the course of at least the past nine months since the crash of Ter­ra, it has become painful­ly appar­ent that the indus­try as a whole can­not sur­vive in trust’s absence. Put sim­ply, that’s because no mat­ter how puta­tive­ly decen­tral­ized the dig­i­tal asset space is, it’ll always depend on the enti­ties that bro­ker its func­tion­ing. Yes, you heard that right: broker.

Although that word may have a whiff of Wall Street and Trad­Fi, it’s best under­stood in the con­text of dig­i­tal assets as the com­po­nents of the industry’s ecosys­tem — an ecosys­tem built most fun­da­men­tal­ly on infor­ma­tion such as that we will be pro­vid­ing in greater depth and at a larg­er scale through Forkast Labs, the for­ma­tion of which we announced last week.

As we have seen, trust­less­ness may be one of the nec­es­sary enablers of the tech­nol­o­gy that under­pins the dig­i­tal asset sec­tor, but it’s not a sub­sti­tute for trust, per se.

Trust is built on knowl­edge, it must be earned, and it’s at the cen­ter of Forkast Labs’ mis­sion to restore to an indus­try in which it has too fre­quent­ly been abused, too rarely earned, and often only flim­si­ly verified.

Watch this space as Forkast Labs rolls out a brand-new type of knowl­edge infra­struc­ture that we believe will help to change all that.

Until the next time,

Ang­ie Lau,
Founder and Edi­tor-in-Chief
Forkast


1. Genesis seeks exodus

Genesis
Gen­e­sis’ future has been a sub­ject of spec­u­la­tion due to the company’s liq­uid­i­ty prob­lems. Image: Genesis/Canva

By the num­bers: Gen­e­sis — over 5,000% increase in Google search volume.

Gen­e­sis Glob­al Cap­i­tal, the cryp­to bro­ker­age arm of Dig­i­tal Cur­ren­cy Group (DCG), is hop­ing to auc­tion off assets, reor­ga­nize itself, and emerge from bank­rupt­cy by May 19, accord­ing to a Reuters report. 

  • The bank­rupt­cy peti­tion list­ed the company’s lia­bil­i­ties at between US$1 bil­lion and US$10 bil­lion, and count­ed more than 100,000 cred­i­tors. Gen­e­sis has esti­mat­ed that the val­ue of its assets is in a sim­i­lar range.
  • Accord­ing to its bank­rupt­cy fil­ing last week, Gen­e­sis owes US$3.5 bil­lion to its top 50 cred­i­tors, includ­ing cryp­to exchange Gem­i­ni, for which it list­ed US$766 mil­lion in liabilities.
  • On-chain data show that on Jan. 19, the day of the bank­rupt­cy hear­ing, Gen­e­sis’ spot and deriv­a­tives trad­ing busi­ness sent 50,000 ETH to Coin­base, 20,000 ETH to Bit­stamp and 5,000 ETH to Kraken.
  • On the first day of pro­ceed­ings in the South­ern Dis­trict of New York’s Bank­rupt­cy Court, Gen­e­sis inter­im Chief Exec­u­tive Der­ar Islim said the com­pa­ny had lia­bil­i­ties of US$5.1 bil­lion in mid-Novem­ber, when it froze cus­tomers’ with­drawals after the col­lapse of cryp­to exchange FTX, cit­ing “abnor­mal with­draw­al requests” that exceed­ed its liquidity.
  • The com­pa­ny also said it had US$175 mil­lion of dig­i­tal assets locked up in FTX.
  • DCG — a con­glom­er­ate that also owns cryp­to invest­ment man­age­ment firm Grayscale and news site Coin­Desk — tweet­ed that it would, in the mean­time, “con­tin­ue to oper­ate busi­ness as usual.”
  • Gen­e­sis’ finan­cial issues were ampli­fied by its expo­sure to cryp­to hedge fund Three Arrows Cap­i­tal, which filed for bank­rupt­cy in July 2022 after the col­lapse of Ter­ra. DCG said it had assumed part of the lia­bil­i­ty for a US$1.2 bil­lion loan to Three Arrows.

Forkast.Insights | What does it mean?

The col­lapse of Gen­e­sis should not come as a sur­prise. Dig­i­tal Cur­ren­cy Group, the Soft­Bank-backed cryp­to con­glom­er­ate that owns Gen­e­sis, had been in nego­ti­a­tions with its cred­i­tors since mid-Novem­ber

Although Gen­e­sis’ col­lapse has been writ­ten off as sim­i­lar to oth­er recent cryp­to com­pa­ny fail­ures, there’s a marked dif­fer­ence in how it is being handled. 

First and fore­most, it doesn’t appear that the com­pa­ny was loot­ed upon declar­ing bank­rupt­cy, as hap­pened at FTX. The founders of Gen­e­sis also all appear to be present and com­ply­ing with the legal pro­ceed­ings rather than flee­ing, unlike when Three Arrows Cap­i­tal collapsed. 

No one likes to see a com­pa­ny fail. How­ev­er, what Gen­e­sis’ bank­rupt­cy shows is that some­times, cryp­to com­pa­nies can do the right thing even in dif­fi­cult times. Gen­e­sis was caught short by both the FTX and Three Arrows Cap­i­tal deba­cles but appears to be try­ing to do the right thing. 

Although some lament that Gen­e­sis and its par­ent DCG should have known bet­ter, at the very least it appears that they are try­ing to make the cred­i­tors whole, and the company’s remain­ing US$175 mil­lion appears des­tined for use in keep­ing the lights on as the com­pa­ny reor­ga­nizes. Whether Gen­e­sis can turn itself around and emerge out of bank­rupt­cy less than four months from now remains to be seen, but the company’s con­duct so far sig­nals its inten­tion to stay in busi­ness for the long haul. 


2. Second life?

Considering a comeback
CEO John Ray appears to be pon­der­ing all options as he over­sees FTX’s bank­rupt­cy strat­e­gy. Image: Get­ty Images/FTX

By the num­bers: SBF — over 5,000% increase in Google search volume.

John J. Ray III, the chief exec­u­tive of bank­rupt cryp­to exchange FTX, is mulling plans to revive Sam Bankman-Fried’s strick­en com­pa­ny, argu­ing that some of its cus­tomers still see val­ue in restart­ing its oper­a­tions even as its for­mer top exec­u­tives face accu­sa­tions of crim­i­nal misconduct.

  • Ray is report­ed­ly weigh­ing whether FTX’s revival would com­pen­sate users bet­ter than sell­ing the busi­ness or liq­ui­dat­ing its assets, accord­ing to a Wall Street Jour­nal report.
  • FTX and its lawyers at Sul­li­van & Cromwell said in a legal dis­clo­sure this week that the Bahamas-based exchange had lost around US$415 mil­lion in cryp­to assets to hacks after it filed for bank­rupt­cy, and that Bahami­an author­i­ties were hold­ing US$426 mil­lion for creditors.
  • FTX said it had iden­ti­fied a total of US$5.5 bil­lion of liq­uid assets for recov­ery, which includ­ed US$1.6 bil­lion of cryp­to assets.
  • FTX’s founder and for­mer Chief Exec­u­tive Sam Bankman-Fried tweet­ed that the fig­ures relat­ing to FTX US were inac­cu­rate, that Sul­li­van & Cromwell had for­got­ten to include bank bal­ances of around US$428 mil­lion, and that “FTX US is sol­vent, as it always has been.”
  • Cus­tomer bal­ances “are like­ly” around US$199 mil­lion, and “cer­tain­ly less” than the US$497 mil­lion on the day before the “mas­sive with­drawals,”  Bankman-Fried wrote in a Sub­stack post last week. Thus FTX US had at least US$111 mil­lion, and like­ly around US$400 mil­lion, “of excess cash on top of what was required to match cus­tomer bal­ances,” he added.
  • Bankman-Fried has tweet­ed his sup­port for Ray’s plans to revive the exchange, adding that he was “still wait­ing for him to final­ly admit FTX US is sol­vent and give cus­tomers their mon­ey back.”
  • FTX liq­uida­tors told a U.S. bank­rupt­cy judge in mid-Jan­u­ary that the exchange had recov­ered at least US$5 bil­lion of liq­uid assets, includ­ing cryp­tocur­ren­cies and securities.
  • Bankman-Fried is fac­ing eight crim­i­nal charges in the U.S., includ­ing wire fraud and con­spir­a­cy to com­mit mon­ey laun­der­ing. He has plead­ed not guilty.

Forkast.Insights | What does it mean?

Cryp­to is the land of sec­ond chances, and FTX’s new CEO appears to be ask­ing for just that for the dis­graced company. 

Fol­low­ing John Ray’s com­ments, the exchange’s FTT token — which had been lan­guish­ing around the US$2 mark — soared, although it remains far below its record high of almost US$80 in Jan­u­ary last year.

Talk of the revival for FTX should be tak­en with a pinch of salt. Com­pa­nies involved in bank­rupt­cy pro­ceed­ings typ­i­cal­ly explore many options as they attempt to find the best out­comes for cred­i­tors — includ­ing a restart. 

For FTX, how­ev­er, recom­menc­ing oper­a­tions — even if it is enti­tled to do so under the law — would be a mis­take for the com­pa­ny. Even though Sam Bankman-Fried con­tin­ues to insist that FTX US remains sol­vent, the rep­u­ta­tion of the exchange — which has been roiled by jaw-drop­ping dis­clo­sures of mis­man­age­ment and whose exec­u­tives have already plead­ed guilty to crim­i­nal wrong­do­ing — is in tat­ters, and that is not good for doing busi­ness. It would also fur­ther set back an indus­try already suf­fer­ing from a lack of trust. 


3. Where the smart money is

China's central bank is aiming to add to the digital yuan's appeal by giving it increased functionalities. Image: Meituan/Canva
China’s cen­tral bank is aim­ing to add to the dig­i­tal yuan’s appeal by giv­ing it increased func­tion­al­i­ties. Image: Meituan/Canva

Chi­na has added smart-con­tract func­tion­al­i­ty to its cen­tral bank dig­i­tal cur­ren­cy (CBDC) — the dig­i­tal yuan, or e‑CNY — via the e‑commerce app Meitu­an, which is among the country’s largest food deliv­ery applications.

  • The upgrade took place last week, near­ly five months after the People’s Bank of Chi­na announced plans to deploy smart con­tracts for the country’s CBDC.
  • Aim­ing to attract more users, Meituan’s smart con­tract offers a dai­ly prize of 8,888 yuan (US$1,312) — the num­ber eight is con­sid­ered lucky in Chi­nese cul­ture — to be divid­ed among users of the dig­i­tal cur­ren­cy, accord­ing to Chi­nese media out­lets.
  • Each order paid for in dig­i­tal yuan prompts Meituan’s smart-con­tract algo­rithms to look for spe­cif­ic key­words on a list of pur­chased goods. If a user’s shop­ping list match­es some of the key­words, the app’s smart con­tract allo­cates a por­tion of the dai­ly prize to his or her dig­i­tal yuan wal­let. The key­words are changed on a dai­ly basis.
  • The smart-con­tract upgrade comes a month after the cen­tral bank gave e‑CNY a “red pack­et” fea­ture that enables users to send cash gifts to fam­i­ly or friends.
  • Last week, the bank said it would work close­ly with pay­ment giants WeChat Pay and Ali­pay to boost adop­tion of the dig­i­tal yuan.
  • An e‑CNY app was made pub­licly avail­able in cities where the CBDC was being tri­aled a year ago. China’s state-backed dig­i­tal cur­ren­cy is regard­ed as one of the most devel­oped CBDC projects for a major economy.

Forkast.Insights | What does it mean?

The addi­tion of smart-con­tract func­tion­al­i­ty to China’s CBDC is a sig­nif­i­cant mile­stone in its devel­op­ment, but Beijing’s new­ly accom­moda­tive stance towards the country’s tech giants is at least as important. 

A recent announce­ment by the People’s Bank of Chi­na that it would work with pay­ment com­pa­nies WeChat Pay and Ali­pay to boost e‑CNY adop­tion marks a depar­ture from the cen­tral bank’s posi­tion just two years ago. Chi­nese author­i­ties had spent years attempt­ing to com­bat the dom­i­nance of the pay­ments sec­tor by the tech titans, as their duop­oly posed a threat to the dig­i­tal yuan and was deemed to be polit­i­cal­ly unde­sir­able. Those days appear to be over, but the rea­son for the author­i­ties’ change of heart may have lit­tle to do with any ide­o­log­i­cal shift. 

Adop­tion of the dig­i­tal yuan has been slug­gish, and author­i­ties are real­iz­ing that the ubiq­ui­tous Ali­pay and WeChat Pay are here to stay, at least for now. At the end of last year, Chi­nese offi­cials said that e‑CNY account­ed for just 0.13% of all the mon­ey in cir­cu­la­tion in the coun­try. For a CBDC that has been in devel­op­ment for near­ly a decade and has already been intro­duced to dozens of Chi­nese cities, e‑CNY hasn’t caught on as much as Bei­jing might have hoped. 

The upgrad­ing of e‑CNY to give it smart-con­tract func­tion­al­i­ty is anoth­er attempt to boost its use. If China’s ambi­tion to cre­ate an alter­na­tive to the U.S. dol­lar in the world econ­o­my has any chance of being real­ized, author­i­ties know they will need to do a bet­ter job of con­vinc­ing folks at home to use their CBDC before they can sell it beyond the country’s borders. 



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