Crypto contagion spreads quickly
To ensure that Genesis was not hampered by the loss, its parent company, Digital Currency Group (DCG), bailed it out. But in the aftermath, Genesis cut 20 percent of its workforce to reduce costs and Michael Moro, its longtime CEO, resigned.
Genesis once again found itself on the wrong side of a collapse earlier this month; when FTX filed for bankruptcy on November 11, the firm lost $175 million stored on the exchange. Again, DCG stepped in and provided a cash injection of $140 million.
But despite several DCG bailouts, Genesis has been unable to escape the FTX fallout. Samson Mow, a prominent crypto expert and former head of strategy at crypto infrastructure firm Blockstream, says the brokerage is struggling to fund an increase in the number of clients requesting to redeem crypto. This led to the suspension of withdrawals, which threatens to worsen the prevailing crisis of confidence and increase the likelihood of a rush on other lenders (e.g. BlockFi or Voyager Digital) – and thus the contagion spreads.
But Mow says it is important to understand that this is a liquidity problem, not a solvency problem. In other words, Genesis has enough assets to pay off its debt, they just aren’t readily available in cash. For this reason, bankruptcy seems “unlikely,” says Mow.
DCG also applied play down the situation on Twitter, saying that the decision to suspend redemptions and stop issuing new loans was a “temporary action” and that the problem is confined solely to the Genesis lending division, meaning that the trading and custody units will continue to operate as normal.
Nevertheless, the situation is serious enough for Genesis to seek additional funding, with crypto exchange Binance and private equity firm Apollo Global Management as potential investors.
Attempts to secure funding have so far been unsuccessful, reports suggest, partly due to concerns over the financial relationship between Genesis and other DCG-owned entities. Of the $2.8 billion in outstanding loans on the Genesis balance sheet, about 30 percent are made to either DCG or its subsidiaries, but inter-company loans are being treated with particular suspicion right now because of their central role in the FTX collapse.
Barry Silbert, CEO of DCG, told investors that intra-company loans of this nature are not unusual. “We’ve weathered past crypto winters, and while this one may feel more severe, we’ll collectively come out of it stronger.”
Still, for all his conviction, Silbert’s rallying cry hasn’t stopped the speculation. Recently burned by false assurances from FTX founder Sam Bankman-Fried – who tweeted “FTX is fine” on November 7, just days before the firm collapsed – crypto investors are also bracing for a Genesis bankruptcy.
One of the consequences of a potential collapse is already playing out. After withdrawals were halted, crypto exchange Gemini, whose yield product sits on top of Genesis, announced that its Earn customers would no longer have access to their funds.
22 November, the stock exchange explained it was working to “find a solution,” but until then, $700 million worth of customer funds would remain locked up. If Genesis were to go bankrupt, some of these funds may never be returned, just like with FTX – and it’s possible that clients of other Genesis-affiliated exchanges could suffer the same fate.
