© Reuters. Cryptocurrency representations are seen against the falling stock chart shown in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration
(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 ousted by a market crash along with exchange FTX and the lender BlockFi.
Genesis Global Capital, one of the largest crypto lenders, froze client swaps on Nov. 16 after the collapse of major exchange FTX shocked the crypto industry, fueling concerns that other companies could implode.
Genesis is owned by venture capital firm Digital Currency Group (DCG).
Its bankruptcy filing is the latest in a series of crypto failures triggered by a market crash that wiped out around $1.3 trillion worth of crypto tokens last year. While Bitcoin has rallied so far in 2023, the impact of the market crash has continued to affect companies in the highly interconnected sector.
The bankruptcy “does not surprise the markets,” said Ivan Kachkovski, a currency and cryptocurrency strategist at UBS. “It remains to be seen if the knock-on effect will continue.”
“However, given that the funds have already been frozen for over two months and no other major cryptocurrency companies have reported associated weakness, contagion is likely to be limited.”
Genesis’ lending unit said it had assets and liabilities in the range of $1 billion to $10 billion, and estimated it had more than 100,000 creditors in its filing with the US Bankruptcy Court for the District South New York.
Genesis Global Holdco, the parent group of Genesis Global Capital, has also filed for bankruptcy, along with another lending unit, Genesis Asia Pacific.
Genesis Global Holdco said in a statement that it would contemplate a potential sale, or stock-related transaction, to pay off creditors, and that it had $150 million in cash to support the restructuring.
It added that Genesis’ derivatives and spot trading, brokerage and custody businesses were not part of the bankruptcy proceeding and would continue their client trading operations.
CLAIMS BY CREDITORS
Genesis owes its 50 largest creditors $3.4 billion, according to Reuters calculations from the bankruptcy filing. Its biggest creditor is the crypto exchange Gemini, to which it owes $765.9 million. Gemini was founded by identical twin cryptocurrency pioneers Cameron and Tyler Winklevoss.
Genesis was already locked in a dispute with Gemini over a crypto lending product called Earn that the two companies jointly offered to Gemini clients.
The Winklevoss twins have said Genesis owed more than $900 million to some 340,000 Earn investors. On January 10, Cameron Winklevoss called for the removal of Barry Silbert as CEO of Digital Currency Group.
About an hour after the bankruptcy filing, Cameron Winklevoss tweeted that Silbert and Digital Currency Group continued to deny creditors a fair deal.
“Unless Barry (Silbert) and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently,” Winklevoss said in his tweet thread.
DCG did not immediately respond to a Reuters request for comment on the tweets.
Amsterdam-based cryptocurrency exchange Bitvavo said in December that it was trying to recover 280 million euros ($302.93 million) it had loaned to Genesis.
Bitvavo said in a blog post on Friday that talks about the payment “have not yet led to a general agreement that works for all parties involved” and that it would continue to negotiate.
The bankruptcy filing “brings the negotiation process into calmer waters,” Bitvavo said.
LOAN BUSINESS
Genesis traded digital assets for financial institutions such as 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 made $130.6 billion in crypto loans and traded $116.5 billion in assets, according to its website.
Its two biggest borrowers were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading firm closely affiliated with FTX, a source told Reuters. Both are in bankruptcy proceedings.
Three Arrows’ debt to Genesis was taken over by its parent company Digital Currency Group (DCG), which then filed a lawsuit against Three Arrows. DCG’s portfolio companies also include crypto asset manager Grayscale and news service CoinDesk.
Crypto lenders, which acted as the de facto banks, grew during the pandemic. But unlike traditional banks, they are not required to maintain capital buffers. Earlier this year, a collateral deficit forced some lenders, and their clients, to take heavy losses.
($1 = 0.9243 euros)
