Investors worry that liquidity problems for crypto-financial services firm Genesis could spill over to its parent company, Digital Currency Group, and further damage the already battered crypto market, after Genesis’ lending arm suspended withdrawals last week.
Genesis has been trying to raise at least $1 billion from investors and has warned it may have to file for bankruptcy if the efforts fail, according to a Bloomberg report Monday. The company hired the investment bank Moelis & Co. hired to explore possible options, Genesis said.
Founded by billionaire Barry Silbert, DCG is one of the largest crypto companies in the world. In addition to Genesis, it also owns Grayscale, backer of the world’s largest bitcoin fund, crypto news publication CoinDesk and digital asset exchange Luno, among others.
A letter to investors by Silbert on Tuesday, obtained by MarketWatch, partially revealed the interrelationship between DCG and Genesis. DCG has a liability to Genesis of about $575 million, due in May 2023, Silbert said in the letter. He also mentioned a $1.1 billion promissory note due in 2032, which was the result of DCG assuming Genesis’ obligations from the default of crypto hedge fund Three Arrows earlier this year.
A spokesperson for Genesis said Monday that the company has no plans to file for bankruptcy anytime soon. “Our goal is to resolve the current situation in consensus without the need for any bankruptcy filing,” the spokesperson told MarketWatch.
“We have begun discussions with potential investors and our largest creditors and lenders, including Gemini and DCG, to agree on a solution that strengthens our lending business’ overall liquidity and addresses customer needs,” Derar Islim, Interim CEO at Genesis , wrote to clients on Wednesday, according to a letter obtained by MarketWatch. “We expect to expand these discussions in the coming days,” Islim wrote. Genesis’ spot and derivatives trading and custody businesses remain fully operational, according to Islim.
Without outside financing, Genesis’ lending unit is likely to see increased withdrawals once the freeze is lifted, and could face greater problems and even be forced into bankruptcy, said Eric Snyder, a bankruptcy attorney at Wilk Auslander.
Meanwhile, the current fundraising environment in crypto is challenging as prices for digital assets collapsed following the bankruptcy of crypto exchange FTX earlier this month and shook some investors’ confidence in the space, said Rich Lee, a lawyer at Crowell & Moring. noticed. Genesis previously said it had about $175 million in funds locked up in FTX.
If Genesis files for bankruptcy, DCG could be hit hard as the value of its shares in Genesis could drop to near zero, noted James Van Horn, a bankruptcy attorney at Barnes & Thornburg. “Most of the time in any industry, often unless every other creditor is going to be paid 100% in full with interest, the equity is worth nothing,” Van Horn said.
What’s more, in general, when a company files for bankruptcy, it can expose parent companies to various court claims, says Jonathan Pasternak, a bankruptcy attorney at Davidoff Hutcher & Citron. “They will all be scrutinized, and it could ensnare the parent, forcing it to join the subsidiary in the bankruptcy.”
In DCG’s case, one key question is whether it provided guarantees for Genesis’ outstanding debt to other companies, Snyder noted.
Additionally, if Genesis files for bankruptcy, its bankruptcy estate will be required to pursue the $575 million liability of DCG and collect it as efficiently as possible, putting more pressure on DCG, Van Horn said.