Genesis crypto lending unit files for bankruptcy in the US

Jan 20 (Reuters) – The loan unit of crypto firm Genesis filed for bankruptcy protection in the United States on Thursday, owing its creditors at least $3.4 billion after being knocked down by a rout of the market with FTX exchange and lender BlockFi.

Genesis Global Capital, a leading crypto lender, froze client redemptions on November 1. 16 days after major exchange FTX collapsed sent shockwaves through the crypto industry.

Genesis is owned by venture capital firm Digital Currency Group (DCG).

Its bankruptcy filing is the latest crypto failure triggered by a market meltdown that wiped around $1.3 trillion from the value of crypto tokens last year. As bitcoin has risen so far in 2023, the market crash has continued to ripple through the highly interconnected sector.

The bankruptcy “is not a shock to the markets,” said Ivan Kachkovski, currency and crypto strategist at UBS. “It remains to be seen whether the chain effect would continue.”

The company’s filing with the U.S. Bankruptcy Court for the Southern District of New York estimated that it had more than 100,000 creditors, its assets were worth $5.3 billion, and its debts, including intercompany debts, s amounted to $5.1 billion as of November 1. 30.

Genesis has outlined a plan to emerge from bankruptcy by May 19, according to court filings. It will try to sell its assets at an auction within three months to pay off creditors, according to court documents.

Genesis Global Holdco, parent company of Genesis Global Capital, has also filed for bankruptcy, along with another loan unit Genesis Asia Pacific.

Genesis Global Holdco said in a statement that it would consider a potential sale or equity-related transaction, to pay creditors, and that it had $150 million in cash to support the restructuring.

He added that Genesis’ derivatives and spot trading, brokerage and custody businesses were not part of the bankruptcy process and would continue trading with customers.

Genesis owner DCG said in a statement that neither DCG nor its employees, including those who served on Genesis’ board, were involved in the decision to file for bankruptcy.

“Genesis has its own independent management team, legal counsel and financial advisors, and has appointed a special committee of independent directors, who are in charge of the restructuring of Genesis Capital,” the statement said.

CLAIMS OF CREDITORS

Genesis owes its 50 biggest creditors $3.4 billion, according to Reuters calculations from the bankruptcy filing. It owes $765.9 million to its largest creditor, crypto exchange Gemini, founded by identical twins Cameron and Tyler Winklevoss, cryptocurrency pioneers and former US Olympic thieves.

Representations of cryptocurrencies are seen in front of the descending stock market graph displayed in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration

Genesis was embroiled in a dispute with Gemini over a crypto loan product called Earn that the two companies jointly offered to Gemini customers.

The Winklevoss twins said Genesis owed more than $900 million to some 340,000 Earn investors. On Dec. 10, Cameron Winklevoss called for the removal of Barry Silbert as chief executive of DCG, the parent company of Genesis.

About an hour after the bankruptcy filing, Cameron Winklevoss tweeted that Silbert and DCG continued to deny creditors a fair deal and threatened to sue them unless they “made a fair offer to creditors.”

In December, Amsterdam-based cryptocurrency exchange Bitvavo said it was trying to recover 280 million euros ($302.93 million) it loaned to Genesis. On Friday, Bitvavo said in a blog post that the refund talks “have not yet resulted in a comprehensive agreement that works for all parties involved” and that it would continue to negotiate.

The bankruptcy filing “brings the negotiation process into calmer waters,” Bitvavo said.

LOAN TRADE

Genesis traded digital assets for hedge funds and asset managers and had nearly $3 billion in total active loans at the end of the third quarter, up from $11.1 billion a year earlier, according to its website.

Last year, Genesis issued $130.6 billion in crypto loans and traded $116.5 billion in assets, according to its website.

Its two main borrowers were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading company with close ties to FTX, a source told Reuters. Both are in bankruptcy proceedings.

Genesis’s parent, DCG, assumed Three Arrows’ debt to Genesis, then filed a claim against Three Arrows. DCG’s portfolio companies also include crypto asset manager Grayscale and news service CoinDesk.

A special committee is investigating transactions that took place in the months leading up to the bankruptcy to determine whether Genesis has any legal claims it could pursue, according to court filings.

These claims include Genesis Global Capital lending $850 million to DCG and transferring its bankruptcy claim against Three Arrows Capital to DCG in exchange for a $1.1 billion promissory note. The special committee is also considering whether Genesis could cancel some of its obligations to Gemini, according to filings.

Crypto lenders, which acted as de facto banks, have exploded during the pandemic. But unlike traditional banks, they are not required to hold capital buffers. Earlier this year, a lack of collateral forced some lenders – and their customers – to take heavy losses.

($1 = 0.9243 euros)

Reporting by Tom Hals in Wilmington, Delaware, Akanksha Khushi and Elizabeth Howcroft in London; Editing by Lananh Nguyen, Clarence Fernandez, Kim Coghill, Ira Iosebashvili, Sharon Singleton and David Gregorio

Our standards: The Thomson Reuters Trust Principles.

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