Genesis

DCG losses top $1B on the back of 3AC collapse in 2022

The crypto conglomerate reported that falling crypto prices and the fallout from Three Arrows Capital’s loan default to Genesis affected its results.

Cryptocurrency venture capital conglomerate Digital Currency Group (DCG) has reported losses of over $1 billion in 2022 due largely to the contagion relating to the collapse of the crypto hedge fund Three Arrows Capital (3AC).

DCG reportedly lost $1.1 billion last year, according to its Q4 2022 investor report, and said the results “reflect the impact of the Three Arrows Capital default upon Genesis” along with the “negative impact” from falling crypto prices.

Genesis is the lending arm of DCG and the firm filed for Chapter 11 bankruptcy in late January. Genesis is 3AC’s largest creditor, as the company loaned the now-bankrupt hedge fund $2.36 billion. 3AC filed for bankruptcy in July 2022.

DCG’s fourth-quarter losses came to $24 million, while revenues came in at $143 million.

Full-year 2022 revenues for DCG came in at $719 million. The firm held total assets of $5.3 billion with cash and liquid holdings of $262 million and investments — such as shares in its Grayscale trusts — amounted to $670 million.

The remaining assets were held by divisions of its asset management subsidiary Grayscale and DCG’s Bitcoin (BTC) mining business Foundry Digital.

Its equity valuation came in at $2.2 billion with a price per share of $27.93, which the report said was “generally consistent with the sector’s 75%-85% decline in equity values over the same period.”

DCG declared on Nov. 1, 2021, that its valuation was more than $10 billion, following the sale of $700 million worth of shares to companies like Alphabet Inc., Google’s parent company.

However, the company said it “hit a milestone” with the restructuring of Genesis.

The agreement proposed earlier in February would see DCG contribute its equity share in Genesis’ trading entity and bring all Genesis entities under the same holding company and see its trading entity sold off.

DCG would also exchange an existing $1.1 billion promissory note due in 2032 for convertible preferred stock. Its existing 2023 term loans with an aggregate value of $526 million would also be refinanced and made payable to creditors.

A Genesis creditor said the plan “has a recovery rate of approximately $0.80 per dollar deposited, with a path to $1.00” for those owed money by the firm.

What creditors can expect from Genesis’ bankruptcy — and what others can learn

Gemini Earn participants are among the many groups likely to be disappointed with the outcome of Genesis’ Chapter 11 bankruptcy filing.

The holding company of troubled crypto lender Genesis Global Capital, Genesis Global Holdco LLC, filed for Chapter 11 bankruptcy protection in New York on Jan. 19. Genesis is the latest crypto platform to file for bankruptcy, joining Celsius, Voyager, BlockFi and FTX.

The application of Chapter 11 provisions to the crypto industry raises a series of new issues for courts. Here’s a preview of what creditors can expect, and what casual observers can learn about the implications of a Chapter 11 process for an entity in the crypto industry.

The Chapter 11 process is going to threaten “crypto anonymity”

Preserving the anonymity of creditors — a key feature of crypto — is at odds with the transparency of the Chapter 11 process, where creditor identities are generally disclosed. Requiring the disclosure of customer names and certain account information presents risks for the creditor and the crypto entity: Individuals may be subject to hacking that exposes their wallet, while the crypto entity may be subject to scams, privacy law violations and client poaching attempts from rivals.

*Top 10 Genesis creditors. Source: Genesis bankruptcy filing & Bloomberg*

When confronted with this issue, courts have taken divergent approaches. Take Celsius and Voyager, for example. With Celsius, the court rejected its request to seal the identities of European customers covered by United Kingdom and European Union data protection regulations, finding that those rules did not take precedence over United States bankruptcy law. However, with Voyager, the same court allowed it to redact customer information under the same European regulations.

Despite this disparate treatment, a clear trend emerging is toward preserving anonymity — creditor names in the FTX and BlockFi cases remain under seal too — which is illustrative of how the Chapter 11 process is changing to adapt to the crypto space.

Individuals make an unusual appearance among unsecured creditors

An unsecured creditors’ committee (UCC) comprises creditors holding uncollateralized claims whose role is to advocate on behalf of the interests of unsecured creditors. A UCC has wide latitude to investigate and advocate on key issues in the case, including the sale of assets and the creation of a restructuring plan.

A UCC is typically made up of three to seven holders of the debtor’s largest unsecured claims. In a large bankruptcy, the members are usually entities. The ongoing crypto bankruptcies are unusual in that despite their enormous size, the UCC members are primarily individuals. Only Celsius and FTX have entities on their committees, while Voyager’s and BlockFi’s UCCs are composed entirely of individuals. The composition of the Genesis UCC will likely follow a similar pattern.

This deviation in UCC composition is illustrative of crypto exchange clientele — retail investors rather than big institutions. Individuals, however, may not have the same experience and resources as institutional investors when it comes to fulfilling their role in the UCC.

Screenshots of account balances provide support for claims

Chapter 11 creditors can submit a proof of claim — an official form indicating the amount of debt owed and the basis for the claim — with supporting documentation, which normally takes the form of promissory notes, invoices and contracts.

Interestingly, crypto creditors have been attaching screenshots of their account balances to their proofs of claim. Aside from the unusual nature of this supporting documentation, some creditors may not have any documentation whatsoever. For instance, FTX creditors cannot access their account balances because the platform is offline. Reviewing unsealed proofs of claim reveal that prudent creditors took screenshots of their accounts before FTX became inaccessible, a step Genesis creditors would be advised to take as a precaution.

Creditors of interest-bearing accounts will find it harder to recover

Once a debtor files for Chapter 11, all of its property as of the date of the filing becomes part of what is known as the “bankruptcy estate.” Determining what is part of the bankruptcy estate is crucial, as that is the property subject to administration in the case, which may be part of a sale, liquidation or reorganization.

In these crypto bankruptcies, the determination of what account a creditor has — interest-bearing or custodial — is likely dispositive on the issue of recovery. The Bankruptcy Code makes a distinction between assets that are held in a customer’s name alone (a typical crypto account) and those assets that have been commingled with other assets, as happens when assets are pooled and loaned out to generate income, which ostensibly was to be used to pay “interest” to crypto account holders.

Just a few weeks ago, the Celsius court ruled that the assets held in interest-bearing customer accounts belong to the bankruptcy estate, meaning recovery for those creditors is dependent on the outcome of the bankruptcy case. Conversely, BlockFi filed a motion to allow its custodial “Wallet” account holders to withdraw funds because they are not the property of the debtor or bankruptcy estate. A ruling has not been issued.

Genesis creditors who participated in the Gemini Earn program will likely face difficulty recovering their assets in light of the Celsius decision. Customers of Genesis wallet products may face a different fate if BlockFi’s motion is successful.

Kaitlyn Devenyns is an attorney at Curtis, Mallet-Prevost, Colt & Mosle LLP. She holds a law degree from Brooklyn Law School. Elisa Botero is an attorney for the firm and holds a law degree from Universidad de los Andes and an LLM from Columbia Law School.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Genesis creditors to expect 80% recovery under proposed restructuring plan

Digital Currency Group (DCG) plans to hand its equity stake in Genesis’ trading arm to Genesis Global, which will then be sold, pending court approval.

A Genesis creditor has revealed the new proposed restructuring plan between Genesis, Digital Currency Group and creditors will see creditors getting back at least 80% of their funds.

On Feb. 6, Genesis Global announced it reached an “agreement in principle” with Digital Currency Group (DCG) and its creditors, which will eventually see its crypto trading and market-making arm sold as part of restructuring efforts.

DCG would contribute its share of equity in Genesis Global Trading — Genesis’ brokerage subsidiary business — to Genesis Global Holdco, the holding entity for Genesis.

The transaction would bring all Genesis-related entities under the same holding company.

The terms of the agreement will see DCG exchanging an existing $1.1 billion promissory note due in 2032 for convertible preferred stock. It will also refinance its existing 2023 term loans with an aggregate value of $526 million and make them payable to creditors.

The agreement will also see crypto exchange Gemini contribute $100 million for its Gemini Earn users who have funds frozen with the bankrupt firm.

Pending the close of these transactions, which need the necessary court approval, Genesis will seek to put its then-owned Genesis Global Trading entity up for sale.

UPDATE: DCG/Genesis creditors have been told to expect capital returns of 80%.

**beyond that number depends on a convertible preferred equity note and “realized liquidation prices” based on DCG/Genesis assets.

— Andrew (@AP_Abacus) February 6, 2023

A Feb. 6 user update from the Genesis creditor and crypto yield platform Donut said the plan “has a recovery rate of approximately $0.80 per dollar deposited, with a path to $1.00” for Genesis creditors.

It added the recoverable amount depends on the “equity note, realized liquidation prices and considers the unknown costs associated with the remainder of this bankruptcy.”

Genesis is currently restructuring as part of its Chapter 11 bankruptcy proceedings stemming from a liquidity crisis in November brought on by the bankruptcy of crypto exchange FTX.

Genesis Global Trading was not included in the company’s Chapter 11 filing at the time, with Genesis Global Holdco saying the business would “continue client trading operations.“

At an initial bankruptcy hearing in January, Genesis lawyers said that the firm was looking for a quick resolution to its creditor disputes and expressed optimistic that the company would come out of Chapter 11 proceedings by late May.

Total crypto market cap rises above $1T, and data suggests more upside is in store

Bad news continues to dominate crypto media headlines but Bitcoin and the wider market appear to not care.

Despite the recent negative crypto and macroeconomic newsflow, the total cryptocurrency market capitalization broke above $1 trillion on Jan. 21. An encouraging sign is that derivatives metrics are not showing increased demand from bearish traders at the moment.

*Total crypto market cap in USD, 1-day. Source: TradingView*

Bitcoin (BTC) price gained 8% on the week, stabilizing near the $23,100 level at 18:00 UTC on Jan. 27 as the markets weighed the potential impact of Genesis Capital’s bankruptcy on Jan. 19.

One area of concern is Genesis Capital’s largest debtor is Digital Currency Group (DCG), which happens to be its parent company. Consequently, Grayscale funds management could be at risk, so investors are unsure if the Grayscale Bitcoin Trust (GBTC) assets could face liquidation. The investment vehicle currently holds over $14 billion worth of Bitcoin positions for its holders.

A United States appeals court is set to hear the arguments relating to Grayscale Investment’s lawsuit against the Securities and Exchange Commission (SEC) on March 8. The fund manager questioned the SEC’s decision to deny their asset-backed exchange-traded fund (ETF) launch.

Regulatory concerns also negatively impacted the markets after South Korean prosecutors requested an arrest warrant for Bithumb exchange owner Kang Jong-Hyun. On Jan. 25, the Financial Investigation 2nd Division of the Seoul Southern District Prosecutor’s Office sentenced Kang and two Bithumb executives on charges of conducting fraudulent illegal transactions.

The 7% weekly increase in total market capitalization was held back by Ether’s (ETH) 0.3% negative price move. Still, the bullish sentiment significantly impacted altcoins, with 11 of the top 80 coins gaining 18% or more in the period.

*Weekly winners and losers among the top 80 coins. Source: Messari*

Aptos (APT) gained 91% after the smart contract network total value locked (TVL) reached a record-high $58 million, fueled by PancakeSwap DEX.

Fantom (FTM) rallied 50% after the announcement of its new database system, Carmen, and a new Fantom Virtual Machine, Tosca.

Optimism (OP) faced 21% gains after a sharp increase in transaction volumes during an NFT incentive program called Optimism Quest.

Leverage demand slightly favors bulls

Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

*Perpetual futures accumulated 7-day funding rate on Jan. 27. Source: Coinglass*

The 7-day funding rate was positive for Bitcoin and Ethereum, meaning the data points to slightly higher demand for leverage longs (buyers) versus shorts (sellers). Still, a 0.25% weekly funding cost is not enough to discourage leverage buyers.

Interestingly, Aptos was the only exception as the altcoin presented a negative 0.6% weekly funding cost — meaning short sellers were paying to keep their positions open. This movement can be explained by the 91% rally in 7 days and it suggests that sellers expect some sort of technical correction.

The options put/call ratio shows no signs of fear

Traders can gauge the market’s overall sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, whereas put options are for bearish ones.

A 0.70 put-to-call ratio indicates that put options open interest lag the more bullish calls by 30% and is therefore bullish. In contrast, a 1.40 indicator favors put options by 40%, which can be deemed bearish.

*BTC options volume put-to-call ratio. Source: laevitas.ch*

Even though Bitcoin’s price failed to break the $23,300 resistance, the demand for bullish call options has exceeded the neutral-to-bear puts since Jan. 6.

Presently, the put-to-call volume ratio stands near 0.50 as the options market is more strongly populated by neutral-to-bullish strategies, favoring call (buy) options by 50%.

Derivatives markets point to further upside potential

After the third consecutive week of gains, which totals 40% year-to-date when excluding stablecoins, there are no signs of demand from short sellers. More importantly, leverage indicators show bulls are not using excessive leverage.

Derivatives markets point to further upside potential and even if the market revisits the $950 billion market capitalization from Jan. 18, there is no reason for panic. Currently, Bitcoin option markets show whales and market makers favoring the neutral-to-bullish strategies.

Ultimately, the odds favor those betting that the $1 trillion total market cap will hold, opening room for further gains.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Total crypto market cap rises above $1T — data suggests more upside is in store

Bad news continues to dominate crypto media headlines, but Bitcoin and the broader market appear not to care.

Bitcoin (BTC) price gained 8% this week, stabilizing near the $23,100 level at 18:00 UTC on Jan. 27 as the markets weighed the potential impact of Genesis Global Capital’s bankruptcy on Jan. 19.

One area of concern is Genesis Capital’s largest debtor, the Digital Currency Group, its parent company. Consequently, Grayscale funds management could be at risk, with investors unsure if Grayscale Bitcoin Trust assets could face liquidation. The investment vehicle currently holds over $14 billion worth of Bitcoin positions for its holders.

Aptos (APT) gained 91% after the smart contract network total value locked reached a record-high $58 million, fueled by the PancakeSwap decentralized exchange.

Fantom (FTM) rallied 50% after the announcement of its new database system, Carmen and a new Fantom Virtual Machine, Tosca.

Optimism (OP) saw 21% gains after a sharp increase in transaction volumes during a nonfungible token incentive program called Optimism Quest.

Leverage demand slightly favors bulls

Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

Interestingly, Aptos was the only exception as the altcoin presented a negative 0.6% weekly funding cost, with short sellers paying to keep their positions open. This movement can be explained by the 91% rally in seven days and it suggests that sellers expect some sort of technical correction.

The options put/call ratio shows no signs of fear

Even though Bitcoin’s price failed to break the $23,300 resistance, the demand for bullish call options has exceeded the neutral-to-bear puts since Jan. 6.

Presently, the put-to-call volume ratio stands near 0.50 as the options market is more strongly populated by neutral-to-bullish strategies, favoring call (buy) options by 50%.

Derivatives markets point to further upside potential

Derivatives markets point to further upside potential. Even if the market revisits the $950 billion market capitalization from Jan. 18, there is no reason for panic. Currently, Bitcoin option markets show whales and market makers favoring the neutral-to-bullish strategies.

Ultimately, the odds favor those betting that the $1 trillion total market cap will hold, opening room for further gains.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Opinion: Barry Silbert keeps quiet as Genesis goes down in flames

Genesis CEO Barry Silbert should have come clean after FTX imploded. Instead, he’s still deflecting responsibility for his company’s bankruptcy.

Just two months after the collapse of FTX, Genesis is following suit.

Against an increasingly disheartening backdrop of “Big Cryptos” going bust, Barry Silbert’s cryptocurrency lender, Genesis Global Holdco, is the latest firm to file for bankruptcy, and if things always come in three, it might not be the last.

Genesis Capital’s parent company, Digital Currency Group, has denied any involvement in the bankruptcy filing, citing “a special committee of independent directors” in charge of the decision, seemingly without any input from Silbert himself. But both companies are already getting hit with fresh securities class-action lawsuits alleging violations of federal securities laws.

The complaint also alleges “securities fraud through a scheme to defraud prospective and current digital asset lenders by making false and misleading statement[s],” which translates to: Silbert knowingly and intentionally lied about the company’s health, profits and future viability, thereby violating section 10(b) of the United States Securities Exchange Act.

Well, this is easy to confirm.

Genesis’ derivatives business had $175 million exposure to FTX, but back in November, when the exchange collapsed, the firm wasn’t forthcoming about its precarious position and released a series of frustratingly contradictory statements that left the community more in the dark than ever.

Genesis Timeline

November 8: “No material net credit exposure”

November 9: We lost $7M

November 10: Okay, we have $175M locked in FTX

November 16: Sorry, no withdrawals or new loans

November 17: Okay, we need $1BN

November 21: We’ll go bankrupt without the money

— Cred (@CryptoCred) November 21, 2022

Then, at the turn of a switch, it started reassuring the community with conciliatory, PR-perfect public messaging. As I wrote in early December, Silbert spent months dismissing the “noise” surrounding both his company and the crypto space at large while reassuring investors that despite the crypto winter we were all facing, the company was on track to reach $800 million in revenue and its separate entities were “operating as usual.”

Here’s the danger: Through Digital Currency Group — which also owns the asset manager running the world’s largest Bitcoin (BTC) fund, Grayscale, mining company Foundry, crypto investment app Luno and media outlet CoinDesk, among more than 200 others — Silbert controls a large portion of the crypto landscape, and so far, he has been somewhat responsible both for keeping spirits up and for keeping panic at bay.

Furthermore, Genesis’ clients include Circle, which operates the stablecoin USD Coin (USDC), pegged to the U.S. dollar, and the Winklevoss-backed Gemini, whose founders have called for Silbert to be removed as CEO.

A first discrepancy — which, in retrospect, we can perhaps recognize as a huge sign of alarm — came on Nov. 18, when DCG’s Grayscale stated it wouldn’t share its proof of reserves with customers. A second, very clear indication that something was amiss came on Jan. 5, when Genesis laid off 30% of its workforce — following a previous August restructuring that saw it cutting its workforce by 20% and CEO Michael Moro stepping down from his leadership position and moving into an advisory role.

“As we continue to navigate unprecedented industry challenges, Genesis has made the difficult decision to reduce our headcount globally,” a spokesperson told Cointelegraph in the wake of the January layoffs. “These measures are part of our ongoing efforts to move our business forward.”

Well, it appears that moving forward won’t be part of Genesis’ future, and perhaps — unbeknownst to us — it never was. So, why were investors kept in the dark for so long?

Since the bankruptcy announcement, Genesis’ public statements have shown no remorse, humility or accountability whatsoever. Silbert seems to think he can just move on with a simple “this is what happened” and not need to acknowledge that errors were made and billions of dollars were lost. That’s unacceptable.

Silbert could, and should, have come clean back in November in the wake of the FTX fiasco. Instead, he kept a low profile for months just when everyone had their eyes on him and declared bankruptcy like a thief in the night, yet again humiliating the crypto world and disappointing the community as a whole. That’s a pretty low blow, and just like in Sam Bankman-Fried’s case, it shows that crypto management needs a complete overhaul.

Sure, Genesis’ case might not be quite as bad as FTX, but who knows how long it could have gone on? Who’s to say what such terrible management could be capable of if left alone and undetected?

It’s not in my nature to be pessimistic. I’m young, and so is crypto — I believe the best is yet to come for the industry, but it won’t be easy, and it will require a degree of transparency and accountability that we haven’t yet seen.

If the cascading effect of the crashes of the last few months is anything to go by, Genesis might be the latest firm to collapse, but not the last. We need to keep our eyes open and our instincts en garde. If we don’t, we won’t survive, and neither will crypto.

Daniele Servadei is the co-founder and CEO of Sellix, an e-commerce platform based in Italy.

Ethereum futures and options data reflect investors’ growing confidence in ETH price

ETH price struggles to flip $1,700 to support, but key derivatives data show bulls making plans to break through the resistance.

The price of Ether (ETH) rallied 16% between Jan. 14 and Jan. 21, peaking at $1,680 before facing a 5.4% rejection. Curiously, the same resistance level resulted in a substantial correction in late August and again in early on Nov. 2.

*Ether/USD price index, 2-day. Source: TradingView*

From one side, traders are relieved that Ether is trading up 35.5% year-to-date, but the repeated corrections that follow retests of the $1,680 resistance may have weakened investors’ sentiment.

Negative newsflow might have limited Ether investors’ appetite after troubled cryptocurrency company Digital Currency Group (DCG) faced more legal issues this week. On Jan. 23, a group of Genesis Capital creditors filed a lawsuit alleging violations of federal securities laws. In addition, the plaintiffs allege the lending firm made false and misleading statements as part of a scheme to defraud potential and existing digital asset lenders.

Another new concern for Ether holders came on Jan. 22, after a “temperature check” proposal to deploy Uniswap v3 protocol to BNB Chain received overwhelming support from the Uniswap community. Some 80% of Uniswap’s UNI governance tokenholders have voted to deploy the additional version of the decentralized exchange protocol.

On the bright side, Ethereum developers have created a testing environment for the upcoming Shanghai network upgrade. According to Ethereum developer Marius Van Der Wijden, the testnet appears to have been created to evaluate staking withdrawals, which are currently disabled on the mainnet. Over 14.5 million ETH (worth $23 billion) has been deposited into the Ethereum staking contract, and harsh criticism followed the multiple delays in enabling withdrawals.

Let’s look at Ether derivatives data to understand if the $1,680 price rejection has impacted crypto investor sentiment.

ETH futures finally enter the neutral area

Retail traders usually avoid quarterly futures due to their price difference from spot markets. Meanwhile, professional traders prefer these instruments because they prevent the fluctuation of funding rates in a perpetual futures contract.

The three-month futures annualized premium should trade between 4% to 8% in healthy markets to cover costs and associated risks. When the futures trade at a discount versus regular spot markets, it shows a lack of confidence from leverage buyers and this is a bearish indicator.

*Ether 3-month futures annualized premium. Source: Laevitas*

The above chart shows that derivatives traders are no longer bearish because the Ether futures premium reached the 4% threshold for neutral markets. So, bulls can celebrate that the indicator shifted to a modest premium, but that does not mean traders expect the immediate result of positive price action.

For this reason, traders should analyze Ether’s options markets to understand how whales and market makers are pricing the odds of future price movements.

Options traders are comfortable with downside risk

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 10%. On the other hand, bullish markets tend to drive the skew indicator below -10%, meaning the bearish put options are discounted.

*Ether 60-day options 25% delta skew: Source: Laevitas*

The delta skew has stabilized near 0% in the past week, signaling that Ether options traders are presenting a neutral sentiment. That is a stark contrast from the end of 2022 when the 25% skew index hovered near 18% — indicating a lack of comfort in taking downside risks.

Ultimately, both options and futures markets point to pro traders moving out of the neutral-to-bearish sentiment to a neutral positioning, meaning there is no discomfort after the rejection at $1,680 and subsequent correction.

Consequently, the odds favor Ether bulls because the negative newsflow could not prevent the 35.5% year-to-date gains and the demand for shorts using futures contracts remains thin.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Genesis eyes fast resolution to creditor disputes and bankruptcy exit in May

A lawyer for Genesis is optimistic the crypto lending firm can resolve creditor disputes before the week is out and exit bankruptcy proceedings within four months.

A lawyer for bankrupt crypto lending firm Genesis is optimistic the firm can resolve its creditor disputes as early as this week and the company could come out of Chapter 11 proceedings by late May.

Genesis’ lawyer, Sean O’Neal, made the comments at a Jan. 23 initial hearing at the United States Bankruptcy Court for the Southern District of New York, according to a Reuters report.

He added Genesis had “some measure of confidence” it would resolve disputes with creditors by the end of the week. If needed it would look for the judge to install a mediator, he said, adding:

”Sitting here right now, I don’t think we’re going to need a mediator. I’m very much an optimist.”

Genesis filed for Chapter 11 bankruptcy on Jan. 19. At the time it already had a restructuring plan along with a path pursuing a “sale, capital raise, and/or an equitization transaction” so it could potentially “emerge under new ownership.”

The bankruptcy comes nearly two months after Genesis suspended withdrawals in November, citing market turbulence caused by the bankruptcy of crypto exchange FTX.

A series of “first-day” motions, standard in bankruptcy proceedings, were granted by Judge Sean Lane, including allowing the firm to pay employees and vendors.

Lane added that Genesis did not need to reveal customer names on its creditors’ list, citing privacy concerns. Lane even suggested the lender warn users about possible phishing scams if the names are later made public.

Genesis said it will sell its assets at auction with a plan to exit its bankruptcy in a little under four months on May 19.

It reported having just over $5 billion in assets and liabilities and owes over 100,000 creditors at least $3.4 billion. Genesis’ withdrawal suspension last year impacted users of a yield-bearing product it managed called “Earn” from the Gemini exchange.

Gemini is Genesis’ largest creditor and is owed nearly $766 million.

Its largest debtor was its parent company, Digital Currency Group (DCG), which owes Genesis around $1.65 billion — $575 million of loans due in May and a $1.1 billion promissory note maturing in 10 years’ time.

Even though DCG is facing its own financial troubles, the bankruptcy did not include DCG. Similarly, the Genesis entities handling derivatives, spot trading, broker-dealer and custody are not part of the proceedings and are continuing operations, according to Genesis.

Opinion: Digital Currency Group’s Genesis implosion: What comes next?

Genesis, a subsidiary of Barry Silbert’s Digital Currency Group, filed for Chapter 11 bankruptcy on Jan. 19. Its default could have big implications for the crypto industry.

It looks as if the bear cycle is going to claim another high-profile crypto company. On Jan. 19, Digital Currency Group’s (DCG’s) lending subsidiary, Genesis, filed for Chapter 11 bankruptcy. Here we have yet another industry giant with a tale of incestuous lending, little risk management to speak of and opaque reporting policies.

For market participants, the gathering storm clouds at DCG represent a failure that would have been unthinkable in 2021. Founded by CEO Barry Silbert in 2015, DCG has become a mainstay in crypto’s short existence. Genesis’ filing revealed the full extent of creditors affected by its implosion, which notably included Gemini, the crypto exchange created by Winklevoss twins Cameron and Tyler, to which Genesis said it owed $765 million; metaverse project Decentraland ($55 million); and fund manager VanEck ($53 million).

The company listed more than 100,000 creditors in sum and said it owed its 50 biggest creditors $3.4 billion.

Super sketch that the lending desk Barry owned owed Decentraland $55m when DCG and Grayscale are $MANA investors.

Did they buy from the team and then just get cash lent back to them? How the fuck did Decentraland even have $55m left these days?

— Adam Cochran (adamscochran.eth) (@adamscochran) January 20, 2023

Some of the debts inspire new questions, including, for instance, why Genesis held a loan from Decentraland when a separate DCG subsidiary — Grayscale — holds 18 million of the project’s tokens. (The holding was valued at $11.74 million as of Jan. 20, down from what would have been $105.8 million at its peak in November 2021.)

Genesis was first rocked by the fall of Three Arrows Capital (3AC), which lost a little more than $500 million in loans from Genesis. The fall of FTX proved to be too much for the lender, prompting it to suspend withdrawals. Genesis also signaled serious trouble this month when it laid off 30% of its staff.

As the bear market drags on, more fundamental systems are breaking — systems like loan platforms, over-the-counter rails and exchanges. Failing systems and the relationships between companies operating those systems represent structural breakdowns in the market, which are certainly critical to note. Nevertheless, these are mechanical systems that can be refactored and rebuilt. Trust is another story. Hard won and easily lost, trust is the elusive but critical force that simply must exist for any industry to thrive. And it is the trust in these markets that is at risk.

Contagion revealed hidden connections, smiting public trust

The rapid collapses of 3AC, Voyager, BlockFi, FTX and Celsius shocked the market. But then the connections between these groups started to become known, and shock turned to apoplectic rage. It became apparent that while these companies purported to operate in finance, few, if any, actually operated like they were in finance, and certainly not like the industry leaders so many held them up to be — particularly when it came to risk management.

6/ Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.

— Cameron Winklevoss (@cameron) January 20, 2023

Bad policies became standard, with companies borrowing with very little to no collateral from one counterparty to pay another, some even utilizing their own “currency” as collateral. What’s more, the collateral was accepted by the creditors. The market frenzy in 2020 and 2021 created the foundation for unsavory behavior and bad business practices to proliferate at scale. As the true depth of the malpractice and poor decisions has become evident, trust in these companies has been substantially eroded.

Trust in ecosystems will be hard to recover

Asset prices may rise and fall, but most assume that the underlying fundamentals of market construction and mechanics will still hold. This has been the core problem in this bear market. As it turns out, manipulation, collusion and inside deals were the norm. And the behavior was not relegated to new companies — it seems most industry players participated at some level or another. Such is the case with DCG. Bad loans, poor risk management and obfuscated financial reporting are coming home to roost.

Crypto prices will eventually return, and new companies will enter the market. Let’s hope that the collective memory of the industry extends a bit. A return to deep due diligence and default skepticism is needed. The onerous should be on the companies to earn trust through their actions. This seems obvious, but it’s clear we’ve forgotten.

We are left with an unfortunate reality. Trust will not only need to be rebuilt in the companies operating in the space, but it will also need to be rebuilt in the ecosystem that enables the companies.

Joseph Bradley is the head of business development at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry in 2014 as an independent researcher before going to work at Gem (which was later acquired by Blockdaemon) and subsequently moving to the hedge fund industry. He received his master’s degree from the University of Southern California with a focus on portfolio construction and alternative asset management.

Crypto lender Genesis files for Chapter 11 bankruptcy

Crypto lender Genesis Global has become the latest firm to throw in the towel following the collapse of FTX, filing for Chapter 11 bankruptcy protection in New York.

Cryptocurrency lender Genesis has filed for Chapter 11 bankruptcy in the Southern District of New York.

The firm has estimated liabilities of $1 billion to $10 billion and assets in the same range, according to the Jan. 19 filing.

Earlier reports claimed the company had been considering filing for bankruptcy protection if it was unable to raise capital to stem its liquidity crisis.

In a Jan. 19 press release, Genesis said it had been engaged in discussions with its advisors “to its creditors and corporate parent Digital Currency Group (DCG) to evaluate the most effective path to preserve assets and move the business forward.”

“Genesis has now commenced a court-supervised restructuring process to further advance these discussions.”

The company’s Chapter 11 plan sees it contemplating a “dual track process” pursuing a “sale, capital raise, and/or an equitization transaction” that would apparently enable the business “to emerge under new ownership.”

The derivatives, spot trading, broker-dealer and custody businesses of Genesis are not part of the Chapter 11 proceedings and will continue operations according to the firm.

It also claimed to have more than $150 million in cash on hand that it believes “will provide ample liquidity to support its ongoing business operations and facilitate the restructuring process.”

The restructuring process will be led by an “independent special committee” of the company’s board of directors, and Genesis says the process is aimed at providing “an optimal outcome for Genesis clients and Gemini Earn users.”

The firm suspended withdrawals from its platform in November 2022 amid market turbulence caused by the collapse of FTX. The move impacted users of Gemini Earn, a yield-bearing product for users of the Gemini cryptocurrency exchange managed by Genesis.

Gemini co-founder Cameron Winklevoss tweeted the bankruptcy is a “crucial step” toward Gemini users being able to recover their assets but claimed DCG and its CEO Barry Silbert “continue to refuse to offer creditors a fair deal” and threatened to file a lawsuit “unless Barry and DCG come to their senses.”

6/ Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.

— Cameron Winklevoss (@cameron) January 20, 2023

Both Genesis and Gemini are facing charges from the United States Securities and Exchange Commission (SEC) for allegedly offering unregistered securities through the Earn program.

Fears are mounting over Genesis’ parent company DCG as it may have to sell part of its $500 million venture capital portfolio to try to offset Genesis’ liabilities.

On Jan. 17, DCG halted dividend payments in a move aimed at “reducing operating expenses and preserving liquidity.” The sale of its crypto media outlet CoinDesk is also reportedly being weighed which could net DCG $200 million.