Creation bankruptcy, an example of cryptocurrency overreach
Posted January 20, 2023, 1:09 p.m
In cryptocurrencies, the phrase “you’ll lose your shirt or you’ll make a fortune” was summed up in 2014 by Barry Silbert when he was the founder of SecondMarket. Nine years later, his prophecy was fulfilled. Genesis, a subsidiary of the Digital Currency Group he heads, has declared bankruptcy. The market was flat on Friday, anticipating this move after the domino effect of the FTX drop. Bitcoin and Ethereum gain about 1%.
All kinds of players are affected by this bankruptcy, a testament to Genesis’ key role in cryptocurrency lending. The company owes $3.8 billion to about 50 creditors. The Winklevoss brothers’ company Gemini ($765 million) took the top spot. VanEck has $53 million in exposure to cryptocurrency ETFs. For commercial firms, Cumberland’s risk is $19 million, and Miran is pumped in decentralized finance. The Abra platform is also affected, as is Decentraland in the Metaverse. For its part, French Coinhouse is listed at $14.85 million.
Alameda and 3AC
In an unbanked crypto sector, Genesis played an important role as a liquidity provider. It was an unofficial “crypto bank” flirting dangerously with the red line. Genesis raised money and cryptocurrencies from investors and platforms, then lent it to hedge funds and trading firms on margin. It’s just that some took too much risk with this money. When these borrowers defaulted in 2022 due to losses in the markets, the machine stalled.
FTX’s trading firm Alameda Research and triple axis capital (3AC) trader Genesis, both of which went bankrupt, borrowed a lot of money. First, the FTX cryptocurrency, which collapsed in November, offered FTT as collateral (collateral). 3AC borrowed $2.4 billion from Genesis. This resulted in a loss of $1.2 billion for Barry Silbert’s group. Seeing the difficulties of creation, everyone who lent him money demanded repayment at the same time. But the group could no longer fulfill its obligations.
Barry Silbert tried to save time to appease the Winklevoss twin brothers – the founders of the Gemini platform – who demanded their money from Genesis. DCG issued a promissory note to its subsidiary undertaking to pay $1.2 billion over 10 years at an additional premium of 1% per annum. This self-loan to the group’s subsidiary offset its loss and had to reassure the Winklevoss brothers and other creditors. Thus, Genesis was solvent, its loan portfolio was not in doubt, and the company was poised to make money again when the markets recovered. This did not happen.
On Twitter, Cameron Winklevoss felt that “the decision to bankrupt Genesis does not absolve Barry. [Silbert] and their responsibility DCG”. But are Geminis above reproach in terms of vigilance? The Earn Gemini program, which was shut down by the police officer of the American markets, lured people by promising them a 4% return if they deposited their cryptocurrency. It would then lend them to firms like Genesis at higher rates to earn. Thus, it fed the speculative bubble in cryptocurrencies and gained a lot during the period of price increases.
During the bankruptcy of FTX, 340,000 investors succumbed to the allure of this real bogus investment. “Risk-free” investments in the cryptocurrency market are all relative. Due to competition among companies offering this type of product, rates paid to investors have increased. In order to make money, these companies were forced to lend out the cryptocurrencies invested by their customers at ever-higher interest rates. And their borrowers, Alameda and 3AC, were encouraged to take on more risk to pay off their debts.