Perhaps Coindesk did not expect that after one of its own reports led to the collapse of FTX, it also set the fire on its parent company, Digital Currency Group (DCG).

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DCG has repeatedly rescued and needs US$500 million in emergency financing

Before the article starts, let's sort out the relationship between Genesis, Grayscale (grayscale) and DCG.

Both Genesis and Grayscale are subsidiaries of DCG. Among them, Genesis is a pioneer prime broker in the encryption field and does not benefit from the liquidity, standards, inter-dealer relationships, clearinghouses and deposit financing enjoyed by traditional prime brokers. Responsible for trading, lending and custody business, is an authorized participant of GBTC; Grayscale (Grayscale) is the largest "Ming Zhuang" in the field of encryption, and also the "flagship business and cash cow" of DCG. According to the 2% handling fee, it can generate The income is about 300 million US dollars, mainly responsible for the daily management of the trust, quarterly and annual reports, selection and supervision of various intermediary service agencies of the trust, etc.

For encryption institutions, GBTC is a stable arbitrage tool in the bull market, especially in the context of the previous macro cycle of flooding and the ensuing narratives of various encryption hotspots, GBTC has maintained a positive premium with Bitcoin for a long time , This also makes 3 AC, BlockFi and other institutions choose to sacrifice liquidity for arbitrage. Later, with the listing of multiple Bitcoin ETFs, GBTC was no longer attractive, and a negative premium began to appear. The overall bearish market made the negative premium intensify. DCG applied to the US SEC to convert GBTC into a Bitcoin ETF, hoping to get a chance to come back. However, the SEC has always refused, which made Grayscale sue the SEC in a fit of anger.

As an aggressive investor, 3 AC was once the largest holding of GBTC. He chose to convert the bitcoin he borrowed into GBTC worth billions of dollars, and mortgaged GBTC to Genesis to obtain liquidity. However, as GBTC gradually appears negative premium, risks also follow, which makes TPS Capital, an over-the-counter trading company under 3 AC, begin to sell GBTC arbitrage products to investors on a large scale. With the collapse of Luna and UST, GBTC cannot redeem the mechanism so that 3 AC cannot withdraw the funds to supplement the mortgage rate of the liquidation amount, so it is forced to liquidate. Genesis is also 3 AC's largest borrower thanks to its $2.36 billion loan. However, even after Genesis liquidated all the collateral, 3 AC still had an outstanding amount of US$1.2 billion, and then the hole was filled by DCG. 3 AC's liquidity crisis has also hurt Genesis. According to its third quarter report, Genesis's loan origination and transaction volume have fallen sharply. In the second quarter (US$40.4 billion), it decreased by 79%. Not only that, Genesis has also started to reduce book risk and strengthen its liquidity position and collateral quality.

However, Genesis, which had not had time to breathe a sigh of relief, encountered the FTX bankruptcy crisis again. Its derivatives department had 175 million US dollars locked in the FTX trading account. Although DCG urgently injected 140 million US dollars, Genesis’s liquidity was almost exhausted. And began to suspend lending and collateral redemption, and then sought an emergency loan of US$1 billion from investors, citing a liquidity crunch due to certain illiquid assets on its balance sheet. During this period, DCG was also revealed to have deleted the names, positions, and pictures of its team, board members, and board advisors as early as September, and many of its executives have also left. In addition, because Grayscale once refused to disclose its Bitcoin reserve certificate and cold wallet address, various rumors surrounding the dissolution of Genesis, DCG and GBTC began to spread.

At its peak, Genesis had close to $5 billion in trading assets, according to a dashboard analysis from data analytics platform Arkham Intelligence, but the company's current trading assets are worth about $238 million. Over the past three months, Genesis has received $932.56 million worth of FTT tokens from FTX, while it has received $141.1 million worth of FTT tokens from Alameda Research over the same period. Therefore, Genesis is likely to make a large number of loans to FTX and Alameda with FTT tokens as collateral, and with the fall of FTX, these collaterals will have little value left.

Genesis OTC has processed nearly $300 million in stablecoin redemptions in the past 7 days, including USDC redemptions worth $250.9 million, USDT redemptions worth $18.3 million, and DAI redemptions worth $20 million. That means Genesis has dwindling funds available.

However, Genesis no longer plays a key role in the distribution of products such as GBTC. In October, Grayscale’s newly launched broker-dealer, Grayscale Securities, took over Genesis’ original brokerage business. Not only that, but the Grayscale Assets Report released by Coinbase also shows that GBTC has sufficient Bitcoin reserves. Currently, the Grayscale Bitcoin Trust GBTC holds more than 635,000 BTCs, which are currently worth close to 10 billion US dollars. Greyscale Ethereum Trust holds More than 3 million ETH, worth about 3.3 billion US dollars.

However, Genesis still needs US$500 million in emergency financing, and the current negative premium of GBTC has reached 42.7%, which also means that Grayscale is on the verge of danger. Interestingly, similar to the FTX bankruptcy story, Genesis was also rejected after seeking financing from Binance, due to concerns that some of Genesis’ businesses may have conflicts of interest in the future. Not only that, but the funding issue between Genesis and DCG seems to be similar to that between FTX and Alameda. According to Bloomberg, citing people familiar with the matter, Genesis has $2.8 billion in outstanding loans on its balance sheet (down from $10 billion in the second quarter). Outstanding loans), about 30% of the loans were issued to related parties, including DCG's $575 million liability, which is due in May 2023. Not only that, a lending subsidiary called "Genesis Global Capital" has also been lending money to Genesis Global Trading. In this regard, DCG founder and CEO Barry Silbert explained that these loans are mainly used to fund investment opportunities and repurchase DCG shares from non-employee shareholders, while these loans are structured on an equitable basis and Priced at prevailing market rates.

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On the verge of bankruptcy, Genesis is self-inflicted?

At present, Genesis has hired investment bank Moelis to explore various options including bankruptcy, but no final decision has been made, and the company may still avoid filing for bankruptcy protection.

However, Wall Street investment bank Bernstein said in a research report that even if Genesis was unable to raise liquidity for its loan book and filed for bankruptcy, creditors would not be able to claim GBTC assets. GBTC's trust structure protects its holders and maintains protection against failure within DCG or DCG group entities. At the same time, the report revealed that even in the worst-case scenario, DCG would prefer to keep Grayscale over Genesis.

As the largest lending institution in the industry, Genesis may have come to this point due to its lack of risk control. 3 Su Zhu, the founder of AC Capital, mentioned in a recent interview with Bloomberg that Genesis repaid billions of dollars in loans in one go in the early spring of 2020, which in turn caused panic among lending institutions (because they promised deposit customers fixed returns ), and asked us to borrow money from them again. Think about us and Alameda Research, as the largest borrower in the CeFi field so far, we have gradually developed the illusion of "unlimited backup".

Su Zhu said, “Because lenders and brokerage firms have been engaged in insider trading, the industry has put a black box on the largest trading firms, which gradually breeds a culture of secrecy and opacity.” Today's step is just self-inflicted.

Now facing directional exposure and capital losses, Genesis has lost (due to the bankruptcy of 3 AC and FTX) more funds than Genesis has created since its inception. As Ram Ahluwalia, CEO of Lumida wealth, said, Genesis now has two ways to go. One is to raise funds at the DCG holding company level and inject capital into its subsidiaries; the other is to be acquired.

In addition, which institutions have already been affected by Genesis?

Gemini 

Affected by the suspension of withdrawals by Genesis, Gemini, the trading platform of the billionaire Winklevoss twins, has announced the suspension of withdrawals and said it will help customers redeem funds from the Earn program as soon as possible. While Gemini's other products and services have not experienced problems, the platform has experienced a large outflow of funds.

Circle

Circle, the USDC issuer, tweeted that Circle Yield is an over-collateralized regular yield product. Genesis is Circle's counterparty in this offering. As of November 16, 2022, Circle Yield customers had total outstanding loans of $2.6 million, protected by robust collateral agreements. Current outstanding loan balances remain overcollateralized, and Circle will insure loans against potential losses. "Currently, Circle Yield's annual yield has fallen to 0.25% in the short-term and 0 in the long-term.

Gopax

South Korean crypto exchange Gopax announced that its crypto wealth management product GOFi was affected by the suspension of redemption by its partner Genesis, and GOFi is currently delaying the repayment of principal and interest. They have asked Genesis to repay all assets to protect customers' assets from Genesis, but the repayment has not yet been made. The assets of non-GOFi customers are not affected, because the assets of the platform and the assets of GOFi products are kept separately, and Gopax deposits and withdrawals are not affected. Additionally, DCG is the second largest shareholder in Gopax.

"DCG negotiates with Genesis creditors, and everyone avoids bankruptcy, so DCG can survive. Or creditors refuse to deal, Genesis goes bankrupt, and then after years of court battles, DCG's result may be the same (bad)." Ryan Selkis, founder of Messari, gave Two hypotheses emerged, saying that while the Genesis-creditor settlement was a bitter pill to swallow, it could arguably be beneficial to all parties.