Cameron Winklevoss and Barry Silbert are battling it out in cryptocurrency

Tyler Winklevoss, CEO and co-founder of Gemini Trust Co., left, and Cameron Winklevoss, president and co-founder of Gemini Trust Co., speak during the Bitcoin 2021 conference in Miami, Florida, U.S., Friday, June 10, 2018. 4, 2021.

Eva Marie Uzcategui | Bloomberg | Getty Images

Cameron Winklevoss and Barry Silbert were both early believers bitcoin who gained wealth through his investments and built big businesses along the way. For nearly two years, they enjoyed a mutually beneficial partnership that made their clients a lot of money.

Now, the bitcoin heavyweight is engaged in a war of words that shows the depths of the crypto crisis and highlights the risks shouldered by ordinary investors entering a massively unregulated market. Incidentally, hundreds of millions of dollars in customer cash remain out of reach as the two crypto entrepreneurs fight over who is responsible.

Silbert is the founder of Grayscale Bitcoin Trust and Digital Currency Group (DCG), an incorporated crypto conglomerate. Genesis trading platform. Winklevoss co-founded the popular Gemini with his brother Tyler cryptocurrency exchange, unlike many of its peers, is subject to New York banking regulation.

Winklevoss and Silbert linked up through a proposal called Earn, a nearly two-year-old product of the Gemini group. up to 8% return on customer deposits. By winning, Gemini gave Genesis customer money to place between various crypto trading desks and borrowers.

As the digital coin markets rallied in 2020 and 2021, this capital yielded high returns for Creation and easily paid out earnings to Earn users, which was very attractive at a time when the Federal Reserve’s benchmark rate was virtually zero. Other risky (and now defunct) cryptocurrency platforms like Celsius and Voyager Digital offered returns as high as 20%.

Barry Silbert, founder and CEO of Digital Currency Group

David A. Grogan | CNBC

It was a flourishing business. Genesis had 260 employees and a strong sales desk, and Gemini was one of its largest lending partners, sending $900 million worth of customer cryptocurrency to the firm. Gemini considered Genesis, which is regulated by New York state and the Securities and Exchange Commission, to be the most trusted name in crypto lending, according to a person with direct knowledge of the matter. Diversification was difficult because other players’ risk standards were weaker, said the source, who spoke on condition of anonymity.

Friends became enemies

In 2022, the cryptocurrency market crashed and the Earn model collapsed.

Cryptocurrencies turned south, borrowers defaulted, hedge funds and lenders went bust, and activity ground to a halt.

In November, the floodgates opened wider FTX plunged into bankruptcy and cryptocurrency exchange customers were unable to access billions of dollars in deposits. FTX founder Sam Bankman-Fried was soon arrested on fraud charges, accused of using client funds for trading, loans, venture investments and a lavish lifestyle in the Bahamas.

There was an industry-wide crisis as cryptocurrency investors across the board tried to withdraw their assets. Five days after FTX collapsed, Genesis was forced to freeze new lending and halt repayments. “FTX has created unprecedented market volatility, resulting in abnormal withdrawal requests that have exceeded our available liquidity,” the company said in a tweet.

The contagion was so rapid that both Gemini and Genesis hired specialists to guide them through a potential Genesis bankruptcy.

Since November, all withdrawals on Earn have been suspended. Gemini’s 340,000 retail customers are angry, and some have joined together in class actions against Genesis and Gemini. Winklevoss puts the blame squarely on Silbert, who has gone public with his fight to get back the $900 million deposit his clients placed on Genesis.

One letter Winklevoss, who reached out to Silbert on Jan. 2, said the funds belonged to clients, including a school teacher, a police officer and “a single mother who loaned you money for her child’s education.”

Winklevoss said the Twins had been trying to engage Silbert in a “good faith” way for six weeks, only to be met with “malicious stall tactics.” Gemini’s attorneys attempted to work with the Genesis team over the Thanksgiving break, but their efforts were effectively backfired, the source said.

Another person, who asked not to be named, told CNBC that advisers to Genesis, DCG and Gemini’s creditor committee met multiple times during the six-week period Winklevoss cited.

The twins’ creditors are represented by attorneys at both Kirkland & Ellis and Proskauer Rose and financial advisors at Houlihan Lokey.

Advisers to DCG and Genesis include law firm Cleary Gottlieb Steen & Hamilton and investment bank Moelis and Company.

According to the person, the most recent meeting between the three lawyers and the banker was on Monday.

Tuesday, Winklevoss followed with a year open letter He asked the DCG board to replace Silbert.

One of Winklevoss’ central complaints stems from Silbert’s loan to Genesis after the demise of crypto hedge fund Three Arrows Capital (3AC) last year. Genesis was owed more than $1 billion by 3AC when the firm defaulted on its debt. Silbert stepped in and effectively ended the trading firm’s influence with a $1.1 billion intercompany loan to Genesis.

At the time, Genesis tried to reassure Gemini that the DCG division remained decisive and strong and supported by its parent company. “Genesis had an unparalleled track record and the world’s best institutional client base,” Silbert justified the decision in a note to investors this week. On July 6, Genesis assured Gemini that liquidity was not a concern and the two parties agreed to continue working together, court documents show.

The twins claim Genesis misrepresented Silbert’s credit. Instead of strengthening Genesis’s operating position, the loan was a “10-year promissory note” and “was a complete gimmick that did nothing to improve Genesis’ immediate liquidity position or make its balance sheet solvent,” Winklevoss said.

Although the company has come to its defense, Silbert has avoided directly responding to Winklevoss’ latest accusation. In a tweet on Tuesday, DCG called the letter “yet another desperate and unconstructive publicity stunt,” adding that “we are pursuing all legal remedies in response to these malicious, false and defamatory attacks.”

“DCG will continue to engage in a productive dialogue with Genesis and its creditors with the goal of achieving a solution that works for all parties,” the company said.

A DCG spokesperson told CNBC that the company denies Winklevoss’ allegations of financial impropriety.

Public and high-profile controversy is nothing new for the 41-year-old Winklevoss twins. They are best known for their role in the creation of what is now known as Facebook Meta, It was founded by his Harvard classmate Mark Zuckerberg. They sued Zuckerberg, eventually agreeing to pay $65 million in cash and Facebook stock in 2011.

The brothers quickly moved into cryptocurrency, and by 2013 they said they controlled 1% of the bitcoins in circulation. When Bitcoin reached its peak in 2021, it rose from $11 million to $4.5 billion at that time.

Silbert, 46, entered the market around the same time. He sold his previous company SecondMarket to Nasdaq in 2015 and started DCG that year. But he first invested in bitcoin in 2012.

Silbert and the Winklevoss brothers were bitcoin bulls long before any exchanges or trading software made it easy to buy the digital currency, well ahead of institutional interest in the space. Now that the trade has reversed, they are deep in contention.

Faced with mounting pressure from creditors and the imminent threat of bankruptcy, Genesis recently cut its workforce by 30% in a second round of layoffs. Gemini cut 10% of its staff in June 2022, followed by another layoff seven weeks later.

Thousands of Gemini customers are “looking for answers,” says Winklevoss. On Tuesday, Gemini told Earn customers that it was terminating their customer credit agreements with Genesis and ending the program.

Gemini and Genesis insist they are negotiating in good faith. But the harsh reality is that with the emergence of the cryptocurrency bubble last year, both companies had nowhere to hide. Their customers are now struggling to make ends meet.

— CNBC’s Kate Rooney contributed to this report.

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