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

Investors are worried that liquidity problems for crypto financial-services firm Genesis could spill over to its parent company, Digital Currency Group Read More...

Investors are worried that liquidity problems for crypto financial-services firm Genesis could spill over to its parent company, Digital Currency Group, and damage the already battered crypto market even further, after Genesis’s lending arm paused withdrawals last week. 

Genesis has been trying to raise at least $1 billion from investors and warned that it may need to file for bankruptcy if the efforts fail, according to a Bloomberg report Monday. The company has hired investment bank Moelis & Co. to explore potential 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, backer of the world’s largest bitcoin fund, crypto news publication CoinDesk and digital asset exchange Luno, among others. 

A letter to investors by Silbert on Tuesday, obtained by MarketWatch, partly revealed the interconnectedness between DCG and Genesis. DCG has a liability to Genesis of about $575 million, due in May 2023, Silbert said in the letter. He also mentioned a $1.1 billion promissory note due in 2032, which was the result of DCG assuming Genesis’s liabilities from the default of crypto hedge fund Three Arrows earlier this year. 

A Genesis spokesperson said Monday that the company has no plans to file bankruptcy imminently. “Our goal is to resolve the current situation consensually without the need for any bankruptcy filing,” the spokesperson told MarketWatch.

“We’ve begun discussions with potential investors and our largest creditors and borrowers, including Gemini and DCG, to agree on a solution that shores up our lending business’ overall liquidity and addresses clients’ needs,” Derar Islim, interim chief executive at Genesis, wrote to clients on Wednesday, according to a letter obtained by MarketWatch. “We expect to expand these conversations in the coming days,” Islim wrote. Genesis’s spot and derivatives trading and custody businesses remain fully operational, according to Islim.

However, without outside funding, Genesis’s lending unit will likely see increasing withdrawals once the freeze is lifted, and might be facing bigger problems and even be forced into bankruptcy, said Eric Snyder, a bankruptcy attorney at Wilk Auslander. 

Meanwhile, the current fundraising environment in crypto is challenging, as digital-asset prices have crashed following the bankruptcy of crypto exchange FTX earlier this month and shaken some investors’ confidence in the space, noted Rich Lee, a lawyer at Crowell & Moring. Genesis earlier said it had about $175 million in funds locked in FTX. 

If Genesis files for bankruptcy, DCG could be hit hard as the value of its equity in Genesis might drop to close to zero, noted James Van Horn, a bankruptcy lawyer at Barnes & Thornburg. “Most of the time across any industry, oftentimes unless every other creditor is going to get paid 100% in full with interest, the equity is worth nothing,” Van Horn said.

What’s more, in general, when a company files for bankruptcy, it might expose parent companies to various court claims, said Jonathan Pasternak, a bankruptcy attorney at Davidoff Hutcher & Citron. “Those will all be scrutinized, and it could entangle the parent, force it to join the subsidiary in the bankruptcy.” 

In DCG’s case, one key question is whether it has provided guarantees for Genesis’s outstanding debt to other companies, noted Snyder. 

In addition, if Genesis files for bankruptcy, its bankrupt estate will be obligated to pursue the $575 million liability from DCG and collect it as efficiently as possible, bringing more pressure to DCG, said Van Horn.

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