Crypto’s Shakespearian drama has yet to cease, the latest resulting in an open feud between Gemini crypto exchange founder Cameron Winklevoss and Digital Currency Group (DCG) Chief Executive Barry Silbert. The turbulence could wash out recent crypto price gains.
The Players
The New York-based crypto exchange Gemini is run by the Winklevoss twins. DCG, one of the industry’s largest and earliest investors in crypto projects and coins, plays a key market role in the crypto industry. The group was founded in 2015 by Silbert, a former Houlihan Lokey banker, and is the parent company of Genesis and Grayscale Investments, as well as CoinDesk and other companies. Genesis, one of the largest lenders in the crypto market, allowed customers to lend out their digital assets in return for yields.
As one of crypto’s largest venture portfolios, DCG has backed well-known crypto exchanges, including Coinbase, Kraken, Blockchain.com, and the now-defunct FTX, in which it invested $250,000 in July 2021. DCG also funded U.S. bank Silvergate, digital wallet company Circle, and others. DCG was valued at $10bn in 2021 and backed by blue-chip investors including SoftBank, Ribbit Capital and Alphabet’s venture arm Capital.
Gemini Earn
Gemini Earn, Gemini’s lending platform, allowed users to lend out their crypto holdings in exchange for interest payments. Gemini used Genesis as the lender. Genesis functions like a bank, taking short term liquid deposits, and making long term illiquid loans to hedge funds which sometimes go bankrupt, like Three Arrows Capital (3AC).
The Financial Times reported that Digital Currency Group (DCG) was the largest single creditor to Three Arrows Capital, and therefore suffered the largest loss. Reports posit Genesis lent $2.36 billion to 3AC. Concerns over Genesis’ solvency might have begun there, albeit behind the scenes. Genesis also made loans to its parent company DCG, and financed the purchase of digital assets.
The now-defunct 3AC borrowed billions of dollars from Genesis to fund its own trading, before filing for bankruptcy in July after making risky and overleveraged bets. According to its July 2022 bankruptcy filings, 3AC faces $3.5 billion in creditors’ claims. The fund lost more than $3 billion over 2021 and 2022, making its collapse one of the largest hedge-fund losses in history.
Wall Street Journal reported that the exposure of the Genesis Lend program to 3AC was approximately $2.4 billion. And whereas a bank holds approximately 10% of its holding in so-called Tier 1 capital, the typical non-bank lender will have a capitalization rate of just 5%.
Some analysts believe that with a loss of such magnitude, Genesis would have been insolvent, their liabilities exceeding their assets, therefore triggering issues around any representations of solvency in loan agreements. Those loans were funded by clients of Gemini Earn and other retail programs.
Gemini’s vetting process clearly failed, even though the firm was relying on representations and warranties, which is legal jargon for when a claim is asserted as true. For instance, Genesis maintained its solvency until this week. Gemini and Genesis have both been charged by the Securities Exchange Commission with issuing an unregistered security.
An Open Feud On Twitter
In an open letter to DCG’s board, which he also posted to Twitter, Cameron railed against Silbert’s leadership due to the liquidity issues at Genesis, which ceased in November loan originations and redemptions, citing the FTX meltdown. Gemini was forced to pause withdrawals on its interest-bearing product—$900 million of customer money was frozen and unpayable to customers.
“He has proven himself unfit to run DCG and unwilling and unable to find a resolution with creditors that is both fair and reasonable,” Winklevoss wrote. “As a result, Gemini, acting on behalf of 340,000 Earn users, requests that the Board remove Barry Silbert as CEO, effective immediately, and install a new CEO, who will right the wrongs that occurred under Barry’s watch.”
Cameron did not stop there. “For the past six weeks, we have done everything we can to engage with you in a good faith and collaborative manner in order to reach a consensual resolution for you to pay back the $900 million that you owe, while helping you preserve your business,” Winklevoss wrote.
“We appreciate that there are startup costs to any restructuring, and at times things don’t go as fast as we would all like. However, it is now becoming clear that you have been engaging in bad faith stall tactics.” Cameron says Silbert is cowering behind “lawyers, investment bankers, and process.” The long-time Bitcoiner calls Silbert’s behavior “not only completely unacceptable, it is unconscionable.”
Cameron believes Silbert has two legitimate options. “Restructure the Genesis loan book (inside or outside of bankruptcy court) or fill the $1.2 billion hole. He did neither.” Cameron lamented that lenders to Genesis, among which Earn users are included, have been “seriously harmed and deserve a resolution for the recovery of their assets.”
He added: “Beginning in early July 2022, Barry, DCG, and Genesis embarked on a carefully crafted campaign of lies to make Gemini, Earn users, and other lenders believe that DCG had injected $1.2 billion of actual support into Genesis.”
DCG tried to hide Genesis’ loss for months, Winklevoss contends, accusing the parties involved of accounting fraud. “It’s not lost on us that you’ve been working desperately to try and firewall DCG from the problems that you created at Genesis,” Winklevoss wrote. “You should dispense with this fiction because we all know what you know — that DCG and Genesis are beyond commingled.” At one point, he gave DCG a January 8 deadline to settle the issue. The deadline came and went without resolution.
“The idea in your head that you can quietly hide in your ivory tower, and that this will all just magically go away, or that this is someone else’s problem is pure fantasy. To be clear, this mess is entirely of your own making. Digital Currency Group, of which you are the founder and CEO, owes Genesis and its wholly owned subsidiaries approximately $1.675 billion, which is money Genesis in turn owes to Earn users and other creditors. You took the money of school teachers to fuel greedy share buybacks, illiquid venture investments and kamikaze grayscale net asset value trades that ballooned the fee generating AUM of your trust all at the expense of creditors and all for your own personal gain. It is now time for you to take responsibility for this and do the right thing.”
Cameron links Silbert personally to the same activities that caused the demise of Celsius and BlockFi: taking in a retail deposit money to go finance hedge funds, and trades such as buying GBTC on leverage. Cameron has stopped short of calling Barry out for a violation of contract law.
Silbert in a tweeted response refuted many of Cameron’s claims. “DCG did not borrow $1.675 billion from Genesis” and “never missed an interest payment to Genesis and is currently on all loans outstanding.” Silbert also revealed DCG sent a proposal for resolving the dispute to Genesis and Winklevoss on Dec. 29. He said he received no reply.
In a November letter to shareholders, Silbert noted that loans from Genesis to DCG were made “in the ordinary course of business,” disclosing that DCG has a liability of $575 million to Genesis. In the letter, he also highlighted a $1.1 billion promissory note, due June 2032. According to Silbert, the loan was needed as DCG assumed liabilities from Genesis’ losses in the aftermath of the 3AC meltdown. Genesis has also commented on the situation.
Silbert wrote to investors that the crypto industry had in 2022 “been all but destroyed by a wave of unprecedented fraud and criminal behaviour” and that DCG was “making meaningful changes to position the firm for long-term success.”
Genesis also commented on the situation. “While we obviously do not agree with everything that Gemini has said, and we are disappointed that Gemini is waging a public media campaign despite ongoing productive private dialogue between the parties, we remain focused on finding a solution for our borrowing and lending intermediation business and reaching the best outcome for all affected Genesis lending and Gemini Earn clients,” a Genesis spokesperson told Insider.
The spokesperson added: “We continue working with our advisors, in collaboration with DCG and advisors appointed by various client groups, to evaluate options to preserve client assets and move the business forward.”
Repercussions
On January 5, WSJ reported that Genesis laid off 30% of its staff and was mulling bankruptcy. Genesis was working with investment bank Moelis & Co. to determine its options for the future, including a potential chapter 11 filing. Yahoo reported Jan. 18 that the bankruptcy filing was already in the works.
Genesis reportedly owes creditors more than $3bn. Silbert is reportedly considering selling off assets in its large venture portfolio to raise money, and raising cash. CoinDesk has already enlisted Lazard’s to help find investors or a buyer. Fundraising efforts thus far have failed. Among DCG’s assets are 200 crypto-related projects, including exchanges, banks, and custodians spread across approximately 35 countries. It is estimated to be worth $500 million, according to people familiar with the matter.
Beyond the $900 million owed to Gemini, Genesis owes €280mn to Dutch exchange Bitvavo, as well as money to customers of crypto savings company Donut. An unrelated group of Genesis creditors have employed lawyers from Proskauer Rose, according to Bloomberg’s anonymous sources.
American holding company Eldrige also lent money to Genesis, and DCG faces an immediate repayment of a loan to the investment house, owned by U.S. financier Todd Boehly, new owner of the Chelsea Football Club.
Eldridge led a DCG debt raise in November of last year, entailing a $600 million loan from Eldridge and a group of other investors, including California asset manager Capital Group, private equity firm Francisco Partners and investment manager Davidson Kempner Capital Management.
In the event of Genesis failing, a $350 million still outstanding loan immediately falls due. The senior secured loan would have to be repaid first due to preference rights, according to sources familiar with the matter. Genesis said it had “no plans to file bankruptcy imminently.”
DCG says its relationship with Eldridge “is entirely separate from Genesis’ restructuring strategy and has no bearing on any outcome at Genesis.” Eldridge has declined to comment, though reports suggest the firm believes Genesis’s suspension of withdrawals means it cannot repay debts and is thus in default. Not wanting to lose its investment, Eldridge is working with DCG to help it raise capital and pay Genesis’s investors, clients and customers. Creditors have formed a committee to help regain funds.
DCG has been losing key staff throughout its crisis. Glenn Hutchins, the billionaire co-founder of private equity group Silver Lake, stepped down from DCG’s board last year, the Financial Times reported, and Former US Treasury secretary Larry Summers has also stopped advising the group.
What’s Next
Despite DCG’s high valuation, it seems investors have been uneasy over DCG’s debt for a while. According to securities filings, Capital Group marked down $1.26 million in holdings of DCG debt by 17 percent. It’s perhaps been a longer road to bankruptcy than the public has been made aware.
In recent weeks, both Genesis and DCG have retained separate investment banks, and separate counsel, to attempt to adhere to the standard of arm’s length negotiations. This will be difficult, however, because
Silbert is the largest shareholder of both these institutions. His consent will be required for any proposed restructuring.
With Genesis moving towards bankruptcy, and CoinDesk looking for suitors, Silbert is likely trying to hold on to his prized jewel, Grayscale Trust, where there’s around $10 billion worth of Bitcoin. It’s not been a smooth ride for Grayscale. Over the course of several years, there was so much demand to buy bitcoin, GBTC’s premium relative to the underlying net asset value of Bitcoin was 30 to 50%, until the Coinbase IPO, when the premium went flat, and then traded at a discount of 45%.
If Grayscale trust holdings were liquidated, and Bitcoin delivered, GBTC owners would enjoy nearly a 100% gain, because the net asset value of the trust is nearly twice as much as the value of GBTC. It’s likely Silbert might face pressure to sell off Grayscale, perhaps to Valkyrie, which has already made a proposal for Grayscale. Sharks are circling.
Genesis’ most liquid assets on its balance sheet are GBTC and crypto assets. It is perhaps only a matter of time before the bankruptcy trustee says it’s time to liquidate these holdings. That’s the bear case for GBTC. There is, to be sure, a bull case, as well. DCG will likely be forced to sell Grayscale to generate cash flow to pay off creditors.
Instead of accepting the creditor committee terms, and paying out from free cash flow to creditors (thereby diluting shareholders), it seems DCG will file Chapter 11 bankruptcy, which could lead to another unwinding of the crypto industry not unlike the 3AC, Celsius, and FTX meltdowns. While creditor committee terms would have been the best way for DCT to strengthen the ecosystem, preserve jobs, avoid the potential collapse of DCG and unwinding of Grayscale, chapter 11 is likely the best way of protecting Silbert.
Meanwhile, retail customers have been caught in the middle of the situation, with some customers of Gemini whose funds are trapped at Genesis having invested hundreds of thousands of dollars each, and the US Department of Justice and The U.S. The Securities and Exchange Commission have reportedly launched an investigation of DCG.
While the crypto markets could certainly shrug off what’s coming (a considerable amount of crypto holdings have been sold off already), the bankruptcy of Genesis could kick off a series of events which bring Bitcoin down to the $9,000 support level.
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