Fears that one of the largest cryptocurrency lending institutions, Genesis Global Capital, has deeper ties to the now-defunct exchange FTX has accelerated contagion in crypto markets.
What has truly added to the pile of growing fear, is a Wall Street Journal report that Genesis was quietly seeking an emergency loan of US$1 billion from investors. After it failed to receive any money, it was forced to halt withdrawals leading many to question the financial integrity of the firm.
According to a recent tweet from Andrew Arch, the emergency loan was actually being raised for Genesis’ parent company, Digital Currency Group.
“DCG owes $1.1B to Genesis via a previously undisclosed promissory note that has been hidden from potential investors,” reads a tweet from earlier this morning.
The reason so many market participants are watching Digital Currency Group so keenly is because — excluding the multi-billion-dollar Genesis — it owns some of the largest companies in the crypto space, including the world’s largest digital currency asset manager, Grayscale, as well as major crypto news outlet Coindesk.
The potential links between Genesis and other major players
Given Digital Currency Group’s far-reaching tentacles, the problem is simple — if Genesis has been providing loans to other Digital Currency Group companies like Grayscale, which many market participants now suggest, there’s a reasonable prospect the financial contagion in crypto markets could stretch even further than previously imagined.
To put some numbers in context, last year alone, Genesis issued US$130.6 billion in crypto loans and traded US$116.5 billion in assets, according to its website.
The Digital Currency Group’s CEO Barry Silbert has claimed there is no risk to Grayscale’s flagship Bitcoin fund (GBTC) and that Genesis is an isolated incident caused purely by the FTX implosion.
However, because DCG may actually be quite highly exposed to the losses incurred by Genesis, there’s sufficient reason to believe that the issues plaguing DCG are likely worse than they’re being portrayed.
While the market has been in an uproar of speculation concerning the financial security of Genesis and DCG, the company’s CEO Barry Silbert has been strangely quiet. This was called out by Frank Chaparro, editor at The Block.
“Financial markets are underpinned by trust – when there’s trust they work when there’s not they don’t. Barry Silbert’s silence over the last few weeks is deeply troubling and erodes trust in crypto’s capital markets,” reads Chaparro’s damning tweet.
Genesis may be lying about its exposure
On Wednesday last week, the interim CEO of Genesis Global Trading — the trading-focused arm of Genesis Global Capital — Derar Islim reassured clients that the firm was “independently capitalised” and operates separately from its lending unit. Islim clarified that the company’s trading and custody services remained fully operational.
Genesis is a broker for cryptocurrency for major financial institutions and had US$2.8 billion in active loans according to the firm’s Q3 report. However, on the same Wednesday, Genesis Trading stopped issuing new loans and began halting withdrawals citing “unprecedented market turmoil”.
Genesis has already suffered a significant blow earlier this year following the implosion of Three Arrows Capital, a crypto hedge fund that filed for bankruptcy in July. According to court documents, Genesis had lent US$2.4 billion to Three Arrows Capital. To make matters worse, the company has also reported it still has US$175 million trapped on FTX’s platform.
The Chainsaw detailed the ways in which Genesis may have formerly covered up certain elements of its exposure to FTX, with on-chain data suggesting that its recent assurances have actually been stretching the truth.
Genesis also made loans to Alameda Research, a hedge fund with extremely close links to FTX, and accepted FTT tokens as collateral. At the time of writing, Genesis has not yet disclosed its total exposure to Alameda Research.