🐻 DCG and Genesis are in trouble 🚨

GM friends, welcome to 2023. Last year brought us plenty of rug pulls, hacks, insider trading, fraud and political entanglements. If you were hoping to move on from that, well, you're out of luck. We’re only a few days into 2023 and we’ve already got more FUD and crypto drama in store for us. What a great way to kick off the new year!

In this issue, we’re digging into the trouble within Gemini, DCG and Genesis - all major crypto players that could come crumbling down in the coming weeks. We're unfolding the story into 3 parts:

• Part 1: The commingling of 3AC, DCG and Genesis

• Part 2: The $1.1 billion debt

• Part 3: The waiting game

Part 1: The commingling of 3AC, DCG and Genesis

Before we dig in, it’s helpful to understand who the key players are in this story.

DCG is a major crypto holding company founded in 2015 by Barry Silbert. In 2021, the company was valued at $10 billion, with Genesis and Grayscale as its two more important businesses.

Genesis is an institutional crypto trading firm that offers trading, lending, borrowing and custody services. Similar to a traditional bank, customers deposit funds to Genesis which is then loaned to companies to earn interest. In Q3 2022, Genesis originated $8.3 billion of loans.

Grayscale is a crypto asset manager that manages Grayscale Bitcoin Trust (GBTC). Investors can buy shares of GBTC to get exposure to Bitcoin without actually buying the underlying asset. At its peak, GBTC was trading 20-60% premium to the price of Bitcoin because people thought it was “easier” to buy GBTC vs. Bitcoin.

Problems first arose when 3AC filed for bankruptcy earlier this summer due to its exposure to the Terra collapse. The bankruptcy proceedings showed that 3AC owed Genesis $2.3 billion. A majority of the collateral backing the loan was GBTC shares. Part of the loan was unsecured.

It turns out, there was some heavy commingling of funds between 3AC, Grayscale and Genesis. Sound familiar? 3AC would take a loan from Genesis and use GBTC shares as collateral. Using the loan, 3AC would buy Bitcoin to contribute to GBTC and profit off the premium.

It all imploded eventually when the price of crypto crashed, GBTC began trading at a discount and 3AC collapsed.

Part 2: The $1.1 billion debt

Because 3AC and Genesis were so intertwined, of course, when one filed for bankruptcy, the other was in trouble.

To save Genesis from insolvency, DCG “bailed out” their subsidiary company by assuming liabilities. This means that DCG owes Genesis a $1.1 billion promissory note (basically a promise) due in 10 years. Similar to how FTX tried to save Alameda, DCG was just trying to cover up the damage with a temporary bandaid.

Then the FTX collapsed happened and panic ensued. Investors were frantically withdrawing their assets from every exchange and platform, which exposed liquidity issues. Following the bank run, Genesis announced the halt of withdrawals and suspended new loan originations.

This was a problem because Genesis was a lending partner to several crypto companies, including Gemini. The halt of Genesis meant that Gemini also had to halt withdrawals for their customers. Are you following this pattern of contagion?

This takes us to Christmas last week. While everyone was trying to enjoy their time with friends and family and not think about this crypto mess, Cameron Winklevoss (Gemini CEO) decided to call out Barry (DCG CEO) in a public statement.

In this letter, Cameron exposes Barry, claiming that:

• Barry refused to get in a room with them to speak.

• DCG owes Genesis $1.675 billion, which Genesis owes Gemini $900 million of it.

• “DCG and Genesis are beyond commingled.”

Barry responds and denies the accusations.

But people aren’t happy with his response.

Another good question is whether or not Genesis has the right to demand repayment of the $1.1 billion promissory note early.

Part 3: The waiting game

So what happens now? Well, we wait and see if Gemini and DCG can come to a mutual resolution. A January 8th deadline was provided by Cameron and if it’s not met, Gemini will likely come after DCG even harder with the lawsuits.

Meanwhile, Su Zhu (Founder of 3AC) decides to chip into the conversation and accuses DCG and FTX of conspiring to attack LUNA, which ultimately collapsed 3AC. Will anyone in crypto ever take responsibility?

Happy new year to us I guess. 2023 is going to be great!

In other news

• SBF tweets and denies the claims of cashing out over $600k while under house arrest.

• Coffeezilla exposes Logan Paul for scamming fans/investors with his Cryptozoo NFT project.

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