Genesis Crypto Lending Unit Files for Bankruptcy in the US

Genesis Crypto Lending Unit Files for Bankruptcy in the US

Jan 20 (Reuters) – The lending unit of cryptocurrency 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 the FTX exchange and the lender BlockFi.

Genesis Global Capital, one of the leading cryptocurrency lenders, froze client swaps on Nov. 16 after the collapse of major exchange FTX shocked the cryptocurrency industry.

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

Its bankruptcy filing is the latest crypto failure 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 market crash has continued to impact 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.”

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, that its assets were worth $5.3 billion and debts, including intercompany liabilities, were worth $5,100. million dollars as of November 30.

Genesis outlined a plan to emerge from bankruptcy by May 19, according to court documents. It will try to sell its assets at auction within three months to pay off creditors, according to court documents.

Genesis Global Holdco, parent 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 stock sale or transaction to pay off creditors and 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.

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

“Genesis has its own independent management team, legal counsel and financial advisers, and has appointed a special committee of independent directors, who are in charge of the restructuring of Genesis Capital,” the statement read.

CLAIMS BY CREDITORS

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

Cryptocurrency representations are seen against the falling stock chart shown in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration

Genesis was embroiled 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 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 unless they “make a fair offer to creditors.”

In December, the Amsterdam-based crypto exchange Bitvavo said it was trying to recover 280 million euros ($302.93 million) that it had loaned to Genesis. On Friday, Bitvavo said in a blog post 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 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, its website showed.

Its two biggest borrowers were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading company closely affiliated with FTX, a source told Reuters. Both are in bankruptcy proceedings.

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

A special committee is investigating transactions that occurred in the months leading up to the bankruptcy to determine whether Genesis has any legal claims it could pursue, court documents say.

Those claims include Genesis Global Capital loaning $850 million to DCG and transferring its 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 void some of its obligations to Gemini, according to the documents.

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)

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

Our standards: Thomson Reuters Trust Principles.

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