Business Crypto Contagion 03

Crypto Contagion Is Spreading, Fast

To ensure that Genesis is not hampered by the loss, its parent company, Digital Currency Group (DCG), sponsored it. But in the aftermath, Genesis cut 20 percent of its workforce to cut costs and Michael Moro, its longtime CEO, stepped down.

Genesis found itself on the wrong side of a collapse again earlier this month; when FTX filed for bankruptcy on November 11, the firm lost $175 million stored at the exchange. Once again, DCG stepped in and provided a cash injection of $140 million.

But despite several DCG bailouts, Genesis failed to escape the FTX fallout. Samson Mow, a prominent crypto expert and former chief strategy officer at crypto infrastructure firm Blockstream, says the broker is struggling to finance an increase in the number of customers asking to redeem their 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 (say BlockFi or Voyager Digital) – and thus the contagion spreads.

But Mow says it’s important to understand this is a liquidity problem, not a solvency problem. In other words, Genesis has enough assets to pay its debt, it’s just not readily available in cash form. For this reason, a bankruptcy seems “unlikely”, says Mow.

DCG also searched act out the situation on Twitter, saying that the decision to suspend redemptions and stop issuing new loans was a “temporary action” and that the problem was confined solely to the Genesis lending division, meaning the trading and custody units would continue to to function 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.

The effort to secure financing has so far been unsuccessful, according to reports, in part due to concerns about the financial relationship between Genesis and other entities owned by DGC. Of the $2.8 billion in outstanding loans on the Genesis balance sheet, about 30 percent are made to either DGC or its subsidiaries, but intercompany loans are currently treated with particular suspicion because of their central role in the FTX collapse.

Barry Silbert, CEO of DCG, told investors that intercompany loans of this nature are nothing out of the ordinary. “We’ve weathered past crypto winters and while this one may feel worse, we’ll come out of it collectively stronger.”

Yet for all his conviction, Silbert’s rallying cry has not stopped speculation. Recently burned by false assurances from FTX founder Sam Bankman-Fried – who tweeted on November 7 “FTX is fine” just days before the firm collapsed – crypto investors are also bracing for a bankruptcy at Genesis.

One of the consequences of a potential collapse is already playing out. After withdrawals stopped, crypto exchange Gemini, whose yield farming product sits on top of Genesis, announced that its Earn customers would no longer have access to their funds.

On November 22, the exchange explain it was working to find a solution, but until then $700 million in customer funds would remain locked up. If Genesis were to go bankrupt, some of these funds may never be repaid, just like with FTX – and it’s possible that customers of other Genesis-linked exchanges could suffer the same fate.

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