Original author: 0x49, Jack, BlockBeats
On November 16, Genesis Trading held a conference call for less than 10 minutes to all creditors and customers at 21:00 Beijing time. Not so much a meeting as an announcement. During the meeting, Genesis announced that the loan department Genesis Global Capital will suspend redemption and new loan issuance services, and subsequent arrangements will be announced next week. After all, the call will end.
After Celsius, Voyager, 3AC, Babel, FTX and other well-known institutions or platforms have suffered thunderstorms one after another, the world's largest cryptocurrency lending platform has also announced that it will stop withdrawals and suspend lending at the same time.
Three Arrows Capital and FTX were two considerable influencing factors in the conference call and the explanation on Genesis' official Twitter. Genesis said Three Arrows' default had a negative impact on the liquidity of Genesis Global Capital, Genesis' lending arm. Since then, Genesis has been reducing book risk and strengthening its liquidity position and collateral quality. But the collapse of FTX created unprecedented market turmoil, resulting in abnormal withdrawal requests that exceeded Genesis' current liquidity.
At present, if no new liquidity or so-called "savior" is found, it is only a matter of time before the Genesis lending department declares bankruptcy.
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The Influence of Three Arrows Capital and FTX on Genesis Trading
The original origin of Genesis and Three Arrows Capital can be traced back to GBTC. GBTC is a Grayscale Bitcoin Trust launched by Grayscale. One of the biggest features of GBTC is that BTC can be used to purchase GBTC shares, but BTC cannot be redeemed through GBTC. This mechanism opened a window for the rapid rise of Sanjian Capital, but it is also destined to leave a mess in the end.
Against the background of the macro cycle of large water release and the new cycle of encryption narrative, GBTC maintains a long-term premium against BTC. Facing the seemingly risk-free arbitrage opportunity, Three Arrows Capital entered the market. According to public information, as of the end of 2020, Three Arrows Capital was the largest holder of Grayscale GBTC, holding 5.6168% of GBTC shares, and its market value at that time was approximately US$1.24 billion. At this time, GBTC has a 23.5% premium to BTC.
In fact, in order to complete rapid capital accumulation, Sanjian Capital obtained BTC off-site, subscribed for GBTC, pledged GBTC to Genesis to lend BTC at a high premium, and repeated the cycle of purchase, pledge, and loan.
With the launch of BTC ETFs such as Purpose Bitcoin ETF and 3iQ CoinShares Bitcoin ETF, the scarcity of GBTC has been diluted, and the premium of GBTC has begun to decline, and even began to have a negative premium. Due to its inability to redeem BTC mechanism, speculators lack the incentive to buy GBTC in a low liquidity market.
Encrypted assets have entered a down cycle, and GBTC has also seen a negative premium. Three Arrows Capital's collateral in Genesis is at risk of being liquidated. As we all know, GBTC cannot be redeemed and can only be sold in the secondary market. If Sanjian wants to make up the Margin call, it can only sell GBTC in the secondary market. And this may lead to further expansion of GBTC's negative premium.
Three Arrows Capital was betting on GBTC 2 weeks before bankruptcy and liquidation, and continued to promote GBTC arbitrage products to off-market customers. In hindsight, Three Arrows Capital always believes that the negative premium of GBTC can be reduced. Even if it cannot be reduced, Genesis has a great probability that it will not liquidate its collateral.
The confidence of Three Arrows Capital stems from the fact that Genesis is a subsidiary of DCG. At the same time, its pledged GBTC is also a trust launched by Grayscale, a digital asset management company established by DCG in 2013. Once Genesis liquidates the collateral of Three Arrows Capital, it will inevitably affect the development of Grayscale.
However, Genesis is not the only creditor of Three Arrows Capital. According to the documents released by the liquidators of Three Arrows Capital, Three Arrows Capital owes 27 encryption companies a total of about US$3.5 billion, of which the defaulted loan owed to Genesis is about US$2.36 billion. Genesis liquidated 17.4 million GBTC, 446,000 ETHE and other assets pledged by Three Arrows Capital.
After Three Arrows Capital defaulted, Genesis' parent company, DCG, assumed the entire $1.2 billion claim. Subsequently, Genesis also began to adjust its strategy to reduce book risk and improve collateral quality to mitigate the impact of the next thunderstorm on itself.
After experiencing the liquidity crisis of Sanjian Capital, coupled with the unilateral downturn of the market, Genesis has had a considerable impact. As of Q3 this year, Genesis' outstanding loan balance was only US$2.8 billion, compared with a year ago. The size of the loan was reduced by more than $10 billion. We will use the timeline below to list the related actions of Genesis since the thunder of Three Arrows Capital.
After 5 months, the cautious players ushered in the thunderstorm of FTX. The collapse of the world's second largest cryptocurrency trading platform within 3 days affected a wider area than we imagined. Although Genesis immediately stated after the incident that it manages the loan book and has no significant net credit risk exposure, only its derivatives department has $175 million in funds in the FTX trading account that have not been withdrawn. But judging from today's notice prohibiting redemption, the impact seems to be not small.
Even though they have tried to improve the quality of collateral, according to Genesis' Q3 report this year, the effect of the new strategy is not obvious, because their collateral includes Solana's Token SOL. This year's Q3 report shows that Genesis' SOL net inflows have seen the highest quarterly increase ever, up 217% from the second quarter.
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Genesis half-year timeline, the leading lender under the double blow of the Three Arrows and the macro
Genesis was first established in 2013 and is the first OTC bitcoin trading platform in the United States. As an important pawn in the layout of the encryption market, Genesis and Grayscale have been the killer twin stars of DCG in the past few years. Grayscale is responsible for GBTC securities services, and Genesis is responsible for trading, lending and custody services, providing liquidity support for GBTC. Since then, Genesis has expanded its business to derivatives trading, cryptocurrency lending and custody, and is one of the largest comprehensive service providers in the cryptocurrency market. In 2018, Genesis became the fifth company to receive a BitLicense issued by the New York Department of Financial Services (DFS). In Q4 of 2021, the outstanding loan balance of the Genesis platform will exceed US$16 billion, reaching its peak. But with the market down and Three Arrows capital thundering, Genesis also had to take measures.
On June 18, Michael Moro, CEO of Genesis Trading, said on Twitter that this week Genesis has taken measures such as selling and hedging collateral when a large counterparty (BlockBeats Note: Three Arrows Capital) failed to call for margin Losses have been mitigated, and in addition, Genesis will aggressively recover any potential losses through all available means, but potential losses are limited and can be deducted from the balance sheet, and the company is currently off the risk.
On June 30, a person familiar with the matter said that Three Arrows Capital and Babel Finance caused Genesis to lose several hundred million dollars. Genesis CEO Michael Moro issued a statement, "As stated in mid-June, we mitigated our losses with a large counterparty who failed to meet margin calls against us. We sold collateral, hedged The downside risk to us is that our business continues to operate as normal and meet customer demand."
On July 7, CEO Michael Moro stated that Three Arrows Capital is its large counterparty, but it has forced the liquidation of relevant collateral because it failed to meet the huge margin call in June. DCG has covered some of the losses. The weighted average margin requirement for Three Arrows Capital loans is 80%, according to Michael Moro. Once that level is breached and additional margin is posted, Genesis will sell collateral to hedge against further downside risk.
On July 19, The Block reported that Genesis had provided Three Arrows Capital with a loan of US$2.36 billion, and the average margin requirement exceeded 80%. Once the margin call requirement could not be met, Genesis would sell collateral to hedge against further downside risks.
Those debts are currently undersecured, and last month Genesis attempted to recover some of the loans by initiating arbitration proceedings against Three Arrows Capital at the American Arbitration Association (AAA) in New York, but failed to
The arbitration process was suspended after consulting firm Teneo was hired to oversee the liquidation of Three Arrows in late June.
On August 17, the Genesis CEO resigned and announced a 20% layoff.
On Sept. 1, Noelle Acheson, director of market insights at Genesis, resigned.
On September 29, Matt Ballensweigm, Genesis co-head of sales and trading, resigned.
On October 6, Grayscale, also under DCG, launched a dedicated broker-dealer "Grayscale Investments", replacing most of the business previously handled in cooperation with Genesis Global Trading, and stated that although Genesis Global Trading will no longer be used as a gray An authorized participant of Grayscale products, but will continue to be a liquidity provider of Grayscale.
On Oct. 21, Genesis' new chief risk officer, Michael Patchen, departed after just three months at the company.
On November 8, the address marked as Genesis Trading: OTC Desk by Etherscan transferred more than 3.2 million FTT (approximately US$53 million) to 5 addresses in 6 times.
On November 9th, the FTX thunderstorm caused severe market volatility. Genesis tweeted, "Regarding today's market events, it manages the loan book and has no significant net credit risk exposure. In addition, Genesis does not hold any centralized exchanges. issued tokens. We continue to meet the needs of our global customers across all products.”
On November 10, according to The Block, Genesis Trading, a cryptocurrency market maker and lending company, said on Twitter that it expected violent market volatility and reduced risk by hedging and selling collateral, but it still caused $7 million in losses. Genesis Trading stated that it does not hold a large amount of risk exposure to tokens issued by FTT and other centralized exchanges. 95% of the collateral in the lending business consists of US dollars or US dollar stablecoins, Bitcoin and Ethereum. FTX has a transaction relationship but no lending relationship. At present, Genesis Trading's spot and derivatives lending and trading business is still operating normally.
On November 11, Genesis Trading, a market maker and lending company under Digital Currency Group (DCG), stated, "Genesis Trading's derivatives business currently has approximately $175 million in locked funds in its FTX trading account, which will not affect its ability to do so." Market activity, our working capital and net position in FTX is not material to the business. Additionally, Genesis Trading has no ongoing lending relationship with FTX or Alameda."
On Nov. 11, Genesis will receive a $140 million equity infusion from its parent company, Digital Currency Group. The capital injection will be used to strengthen Genesis' balance sheet and strengthen its position in the crypto market. Previously, Genesis Trading disclosed that its $175 million derivatives business-related assets were locked in FTX accounts.
On November 16, Genesis Trading held a conference call with bondholders and customers, announcing the suspension of lending and redemption of collateral, and the specific plan will be announced next week.
