Crypto lending unit of Genesis files for US bankruptcy

Jan 20 (Reuters) – The lending unit of crypto firm Genesis filed for U.S. bankruptcy protection on Thursday, owing creditors at least $3.4 billion after being toppled by a market rout along with exchange FTX and lender BlockFi.

Genesis Global Capital, a leading crypto lender, froze customer redemptions on November 16 after the collapse of major exchange FTX sent shockwaves through the crypto sector.

Genesis is owned by venture capital firm Digital Currency Group (DCG).

The bankruptcy filing is the latest crypto failure triggered by a market collapse that wiped out about $1.3 trillion of the value of crypto tokens last year. While bitcoin has rallied so far in 2023, the market collapse has continued to reverberate through the highly interconnected sector.

The bankruptcy “doesn’t come as a shock to the markets,” said Ivan Kachkovski, currency and crypto strategist at UBS. “It remains to be seen whether the knock-on effect will continue.”

The company’s filing with the US Bankruptcy Court for the Southern District of New York estimated that it had more than 100,000 creditors, its assets were worth $5.3 billion and its liabilities, including intercompany liabilities, were worth $5.1 billion as of November 30.

Genesis outlined a plan to exit bankruptcy by May 19, according to court documents. It will try to sell its assets at auction within three months to repay creditors, the court documents said.

Genesis Global Holdco, parent of Genesis Global Capital, also filed for bankruptcy protection, along with another lending unit Genesis Asia Pacific.

Genesis Global Holdco said in a statement that it would consider a potential sale or stock-related transaction, to pay creditors, and that it had $150 million in cash to support the restructuring.

It added that Genesis’ derivatives and spot trading, broker-dealer and custody businesses were not part of the bankruptcy process, and would continue their client trading operations.

Genesis’ owner DCG said in a statement that neither DCG nor its employees, including those on the Genesis board, were involved in the decision to file for bankruptcy.

“Genesis has its own independent management team, legal advisors and financial advisors, and has appointed a special committee of independent directors, which is responsible for the restructuring of Genesis Capital,” the statement said.

CLAIMS OF CREDITORS

Genesis owes its 50 biggest creditors $3.4 billion, according to Reuters’ calculations from the bankruptcy archive. It owes $765.9 million to its biggest creditor, crypto exchange Gemini, founded by identical twins Cameron and Tyler Winklevoss, cryptocurrency pioneers and former US Olympic rowers.

Genesis was locked in a dispute with Gemini over a crypto-lending product called Earn that the two firms jointly offered to Gemini customers.

The Winklevoss twins have said Genesis owed more than $900 million to about 340,000 Earn investors. On January 10, Cameron Winklevoss asked to remove Barry Silbert as CEO of Genesis parent DCG.

About an hour after the bankruptcy filing, Cameron Winklevoss tweeted that Silbert and DCG continued to deny creditors a fair deal and threatened to sue them unless they “make a fair offer to creditors.”

In December, Amsterdam-based crypto exchange Bitvavo said it was trying to recover 280 million euros ($302.93 million) it had lent to Genesis. On Friday, Bitvavo said in a blog post that talks about the refund “have not yet led to an overall agreement that works for all parties concerned” and that it will continue to negotiate.

The bankruptcy filing “brings the process of negotiations to calmer waters,” Bitvavo said.

LOAN BUSINESS

Genesis brokers digital assets for hedge funds and asset managers and had nearly $3 billion in total active loans at the end of the third quarter, down from $11.1 billion a year earlier, according to its website.

Last year, Genesis extended $130.6 billion in crypto loans and traded $116.5 billion in assets, the website showed.

The two biggest borrowers were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading firm closely linked to FTX, a source told Reuters. Both are undergoing bankruptcy proceedings.

Genesis parent DCG assumed Three Arrows debt to Genesis and subsequently filed a claim against Three Arrows. DCG’s portfolio companies also include crypto asset manager Grayscale and news service CoinDesk.

A special committee is examining transactions that occurred in the months before the bankruptcy to determine whether Genesis has legal claims it can pursue, the court documents said.

These claims include Genesis Global Capital lending $850 million to DCG and transferring the bankruptcy claim against Three Arrows Capital to DCG in exchange for a $1.1 billion promissory note. The special committee is also investigating whether Genesis could cancel any of its obligations to Gemini, according to the filings.

Crypto lenders, acting as the de facto banks, flourished during the pandemic. But unlike traditional banks, they are not required to hold capital cushions. Earlier this year, a lack of collateral forced some lenders – and their customers – to take big losses.

($1 = 0.9243 euros)

Reporting by Tom Hals in Wilmington, Delaware, Akanksha Khushi and Elizabeth Howcroft in London; Editing by Lananh Nguyen, Clarence Fernandez, Kim Coghill, Ira Iosebashvili, Sharon Singleton and David Gregorio

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