Genesis stops withdrawals

Digital Currency Group (DCG), which was considered a major player in the crypto industry, is being shaken by the liquidity crisis caused by FTX.

Read: The Binance vs. FTX Crypto Battle is Spreading into the Market

DCG is the parent company of Coindesk, the blockchain media outlet that sparked the FTX bank run with its coverage of Alameda Research’s balance sheet. It also owns major cryptocurrency companies such as Grayscale, operator of crypto fund Bitcoin Trust (GBTC), crypto exchange Luno, crypto mining company Foundry Digital, and crypto data company TradeBlock.

DCG is also an investor in over 200 companies, including Coinbase, FTX, hardware wallet Ledger, cryptocurrency bank Silvergate, and social trading platform eToro. In November of last year, it was valued at $10 billion, has received an investment of $700 million from Softbank’s Vision Fund No. 2 and Latin America Fund, Singapore’s sovereign wealth fund (GIC), Ribit Capital, and Capital G (G). DCG’s assets under management are estimated at more than $50 billion.

However, the sense of crisis is spreading even to DCG. On the 16th, DCG subsidiary Genesis Trading halted user asset withdrawals. After having announced that $175 million of funds were frozen due to the suspension of FTX withdrawals the previous week, Genesis Trading decided to suspend withdrawals and new loan services on the 16th, citing “abnormal withdrawal requests that exceeded liquidity”.

After confirming that Genesis was experiencing a liquidity shortage, parent company DCG injected $140 million on the 12th. However, this turned out to be insufficient, leading to the suspension of withdrawals. DCG has gone on record saying that “there is no impact on the business operations of DCG and other wholly-owned subsidiaries”.

Genesis crisis puts exchanges in a frenzy

Now, Genesis itself is also an important market maker and operator in the industry, so its crisis has come as a great shock to the market. Major industry figures, such as crypto research firm Messari’s co-founder Ryan Selkis, and its competitor Coinshares’ Chief Strategy Officer Meltem Demirors worked at Genesis Trading. DCG founder Barry Silbert entered cryptocurrency with his first Bitcoin purchase in 2012 and then founded DCG in 2015.

Genesis offered up to 10% returns on its coin lending service. According to the company’s website, its lending volume reached $2.8 billion as of Q3 2022. Genesis expanded its business by tying in services with institutions such as hedge funds and family offices, including Gemini, a cryptocurrency exchange run by twin brothers Tyler and Cameron Winklevoss.

However, in the aftermath of the Genesis withdrawal suspension, partners who provided the service are now also taking a hit. Gemini immediately stopped withdrawals from its own loan service, ‘

Gemini Earn’, which was operated in connection with Genesis. “Genesis Global, our lending partner for the Gemini Earn program, has suspended withdrawals, making it unable to meet our 5-business day customer repayment criteria”, the exchange said, adding that “we are cooperating with the Genesis team so that customers can withdraw their funds from the saving program as quickly as possible”. This spurred massive withdrawals from Gemini. According to Nansen data, a total of $563 million was withdrawn from Gemini as of 6:00 pm on the 16th (US Eastern Time) when withdrawals were suspended. Inflows were only $78 million.

The Korean exchange Gopax was also hit. This is because the firm’s deposit product, ‘GoPay’, is also managed by Genesis. As of the end of last year, Gopax’s cash holdings were only 2.6 billion won ($2 million). That is about half of the 4.6 billion won in GoPay deposits that are reaching maturity and must be repaid immediately. Gopax plans to raise funding to pay principal and interest, but it is unclear whether anyone will decide to invest for such a purpose.

BlockFi files for bankruptcy

Following the collapse of the FTX exchange, crypto lender BlockFi also ended up filing for bankruptcy protection. On the 28th, BlockFi and eight of its affiliates made Chapter 11 filings before the New Jersey Bankruptcy Court. This comes a mere 17 days after FTX announced that it was entering ‘Chapter 11 bankruptcy proceedings through its official Twitter account on the 11th.

“In the immediate aftermath of FTX’s collapse, BlockFi management took action to protect its customers and the company,” the company stated, adding that it “currently holds $256.9 million in cash. We expect to be able to provide sufficient liquidity to support restructuring.”.

BlockFi had entered a liquidity crisis following the liquidation of Three Arrow Capital, which in turn was a major customer in the Terra Luna incident. At the time, FTX had acquired a stake in BlockFi after bailing out the company by providing a $250 million revolving credit line.

After the FTX crisis, liquidity is likely to be much lower as cryptocurrency companies go bankrupt or face a crisis. “BlockFi’s Chapter 11 restructuring underscores significant asset contagion risks associated with the crypto ecosystem,” said Monsur Hussain, senior director at Fitch Ratings. “Restructuring processes can be notoriously lengthy,” he added, noting that creditors involved in Mt. Gox — a bitcoin exchange that went bankrupt in 2014 — “are only getting closer to being paid eight years after the operation failed.”

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