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Why Investors Fear That Crypto Will Face More Problems | Genesis Meltdown

  • FTX meltdown has severely affected the broader crypto market and exposed exchanges.

  • Earlier Genesis trading halted withdrawals citing bankruptcy concerns.



24 Nov 2022 By : COIN GABBAR
Why Investors Fear T

After Genesis' lending arm paused withdrawals last week, investors are concerned that the company's liquidity issues will spill over to its parent company, Digital Currency Group, further harming the already distressed crypto market.

As per reports, Genesis has been trying to raise at least $1 billion from investors and has warned that if those efforts fail, the company may have to file for bankruptcy. Genesis noted that the company has hired investment bank Moelis & Co. to investigate potential options.

DCG, founded by billionaire Barry Silbert, is one of the world's largest cryptocurrency companies. In addition to Genesis, it owns Grayscale, the world's largest bitcoin fund, the crypto news publication CoinDesk, and the digital asset exchange Luno.

Silbert's letter to investors on Tuesday (Nov 22) revealed some of the connections between DCG and Genesis. As per Silbert's letter, DCG owes Genesis $575 million, which is due in May 2023. Additionally, he mentioned a $1.1 billion promissory note that is due in 2032 and that DCG assumed as a result of Genesis's liabilities from the earlier this year default of cryptocurrency hedge fund Three Arrows.

A Genesis spokesperson said the company has no plans to file for bankruptcy anytime soon. "Our goal is to resolve the current situation communally without the need for a bankruptcy filing," a spokesperson for the company told local media outlets.

"We've started talks with potential investors as well as our largest creditors and borrowers, including Gemini and DCG, to come up with a solution that strengthens our lending business' overall liquidity while also meeting the needs of our clients," noted  Derar Islim, interim CEO of Genesis. We expect to broaden these discussions in the coming days," wrote Islim. According to Islim, Genesis's spot and derivatives trading and custody businesses are still fully operational.

However, without outside funding, Genesis' lending unit will most likely see increased withdrawals once the freeze is lifted, potentially leading to bigger problems and even bankruptcy,” said Eric Snyder, a bankruptcy attorney at Wilk Auslander.

Meanwhile, the current crypto fundraising environment is difficult, as digital-asset prices have crashed following the bankruptcy of crypto exchange FTX earlier this month, shaking some investors' confidence in the space, noted Rich Lee, a lawyer at Crowell & Moring. Genesis previously stated that it had approximately $175 million in funds locked up in FTX.

If Genesis declares bankruptcy, the value of its equity in Genesis could fall close to zero, as per James Van Horn, a bankruptcy lawyer at Barnes & Thornburg. Van Horn stated that most of the time in any industry unless every other creditor is paid in full and with interest, the equity is worth nothing.

Furthermore, when a company declares bankruptcy, it may expose parent companies to various court claims, said Jonathan Pasternak, a bankruptcy attorney at Davidoff Hutcher & Citron. All of these will be scrutinized, and it may entangle the parent, forcing it to join the subsidiary in bankruptcy.

Snyder noted that one key question in DCG's case is whether it has provided guarantees for Genesis' outstanding debt to other companies.

Furthermore, if Genesis declares bankruptcy, its bankrupt estate will be obligated to pursue and collect the $575 million liability from DCG as efficiently as possible, putting additional pressure on DCG, said Van Horn.

Read also: Countries Leading the Global CBDC Race | What Does the Future Hold?

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