Jan 20 (Reuters) – The lending arm of cryptocurrency firm Genesis filed for U.S. bankruptcy protection on Thursday, owing at least $3.4 billion to creditors after it collapsed in the market along with exchanges such as FTX and lender BlockFi.
Genesis Global Capital, one of the largest cryptocurrency lenders, froze customer payments on Nov. 16 following the collapse of major stock exchange FTX, raising concerns that other companies could implode.
Genesis is owned by venture capital firm Digital Currency Group (DCG).
Its bankruptcy filing is the latest in a string of cryptocurrency failures that have resulted in a market crash that saw cryptocurrencies lose nearly $1.3 trillion in value last year. While Bitcoin has rallied so far in 2023, the impact of the market crash has continued to hit companies in the highly correlated sector.
Ivan Kaczkowski, currency and cryptocurrency strategist at UBS, said the bankruptcy was “not a shock to the markets”. “Whether the ripple effect will continue remains to be seen.”
“However, given that funds have already been frozen for over two months and no major cryptocurrency companies have reported a related vulnerability, the contagion is likely to be limited.”
Genesis’ credit division said it has between $1 billion and $10 billion in assets and liabilities and estimated it has more than 100,000 creditors in a filing with the U.S. Bankruptcy Court for the Southern District of New York.
Genesis Global Holdco, the parent group of Genesis Global Capital, filed for bankruptcy protection along with its other credit unit, Genesis Asia Pacific.
Genesis Global Holdco said in a statement that it would consider a potential sale or stock transaction to pay off creditors and that it has $150 million in cash to support the restructuring.
It added that Genesis’ subsidiaries and spot trading, broker dealer and custodial businesses are not part of the bankruptcy process and will continue to trade with customers.
CLAIMS OF CREDITORS
Genesis owes $3.4 billion to its 50 largest creditors, according to Reuters estimates from its bankruptcy filing. Its biggest creditor is the cryptocurrency Gemini, which owes $765.9 million. Gemini was founded by identical twin cryptocurrency pioneers Cameron and Tyler Winklevoss.
Genesis had already been embroiled in a dispute with Gemini over a crypto-lending product called Earn, which the two firms jointly offered to Gemini customers.
The Winklevoss twins said Genesis owed more than $900 million to about 340,000 Earn investors. On January 10, Cameron Winklevoss called for Barry Silbert to be fired as CEO of Digital Currency Group.
About an hour after the bankruptcy filing, Cameron Winklevoss tweeted that Silbert and Digital Currency Group continue to deny creditors a fair settlement.
“If Barry (Silbert) and DCG don’t come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG very soon,” Winklevoss tweeted.
DCG did not immediately respond to a Reuters request for comment on the tweets.
Bitvavo, an Amsterdam-based cryptocurrency exchange, said it was trying to get back the 280 million euros ($302.93 million) it lent to Genesis in December.
Bitvavo said in a blog post on Friday that the refund talks had “yet to lead to a common agreement that works for all stakeholders” and that it would continue negotiations.
The bankruptcy filing “brings the negotiation process into calmer waters,” Bitvavo said.
LOAN BUSINESS
Genesis brokers digital assets for financial institutions such as hedge funds and asset managers and had almost $3 billion in total active loans at the end of the third quarter, down from $11.1 billion a year earlier.
Last year, Genesis issued $130.6 billion in crypto loans and traded $116.5 billion in assets.
Its two biggest borrowers were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading firm closely linked to FTX, the source told Reuters. Both are in bankruptcy proceedings.
Three Arrows’ debt to Genesis was assumed by its parent company, Digital Currency Group (DCG), which later sued Three Arrows. DCG’s portfolio companies also include cryptocurrency manager Grayscale and news service CoinDesk.
Acting as de facto banks, crypto lenders have soared during the pandemic. But unlike traditional banks, they are not required to maintain capital cushions. Earlier this year, a foreclosure shortage forced some lenders and their customers to face huge losses.
($1 = 0.9243 euros)
Reporting by Tom Hals in Wilmington, Delaware, Akanksha Khushi and Elizabeth Howcroft in London; Edited by Lananh Nguyen, Clarence Fernandez, Kim Coghill, Ira Iosebashvili, and Sharon Singleton
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