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Bad Players have Devastated our Industry and the Contagion Effects are Far-Reaching

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The drama surrounding Genesis, Gemini and the Digital Currency Group enters the next round: Barry Silbert from the DCG breaks his silence, the DCG makes an offer to creditors that is met with little approval, and finally the SEC intervenes.

The year 2022 leaves traces. There have been several ugly bankruptcies this year, with those of hedge fund Three Arrows Capital (3AC) and exchange FTX being the most devastating.

The year is over and crypto prices are rising again. But while investors breathe a sigh of relief, the aftermath of the bankruptcies continues to grip the market. The case that is currently receiving the most attention is the dispute between the US exchange Gemini and the lending platform Genesis or its parent company Digital Currency Group (DCG).

We have already reported on this in detail, so here is the short version: Genesis granted loans to various crypto companies and was then hit by serious payment defaults in the course of the crisis. This puts Genesis itself in default of payment, for example to customers of the Gemini exchange, who were able to earn interest on their money through the Earn program.

The Digital Currency Group, a key player in the crypto markets, is now trying to put as high a fence as possible between itself and Genesis so that the effects of contagion do not reach out to them. But that’s exactly what Gemini co-founder Taylor Winklevoss demands in an open letter to DCG CEO Barry Silbert: DCG should compensate Genesis creditors.

The letter ended with an ultimatum for an amicable settlement that expired on January 8. What happens after that is not publicly known.

The central protagonist of the story, Barry Silbert, is now addressing the shareholders with an open letter.

“A wave of unprecedented fraud and criminal behavior not seen in my entire career.”

The open letter is unique. Barry Silbert, who has been at the center of the crypto market for around a decade, has never spoken out in such detail. At the same time, the information density of the letter remains very low.

Barry admits that the past year has been “the most difficult of my entire life”, both personally and professionally: “Bad actors have devastated our industry and the contagion effects are far-reaching.” But what struck him most was that “my integrity and good intentions were questioned” after a decade of giving everything for the company and the market.

The DCG, he assures, keeps working to stay on top and build a better financial system. It reacts to the current state of the market with massive cost savings, for example by reducing staff or dissolving the subsidiary HQ.

In 2023, the entire industry has a lot of work to do to pick up the pieces and regain credibility that has been “completely shattered by a wave of unprecedented fraud and criminal behavior unparalleled in my entire career.”

Barry finds very clear words to condemn what others have done – but makes no reference to what part his companies have played and what specific example he can and will set to repair the consequences of the crisis. Only the FAQ that follows the letter goes a little bit more into the nitty-gritty, such as when it explains the company’s relationship with others.

Here it is particularly emphasized that the DCG and Barry Silbert had almost no relationship with FTX, Sam Bankman-Fried, Alameda Research, 3AC and Terra, only Genesis had a “one trading and lending relationship” with Alameda and 3AC maintained, which is not further explained. Presumably this also serves the purpose of building a wall between the DCG and Genesis, so that the effects of the bankruptcies in Genesis can peter out.

The information thus remains vague and thin. Most importantly, they don’t touch on the central issue at hand: How can and will Genesis pay off its debts? Are those who lost money from the Earn program compensated? Will the DCG participate?

A clue to this comes from another source.

An unacceptable offer

The Dutch exchange Bitvavo already announced in December that it was affected by the payment problems at Genesis. You have loaned 280 million euros to Genesis or the DCG. However, these do not threaten the solvency of the stock exchange.

In an update on January 10, Bitvavo said it had received an offer from DCG to settle around 70 percent of the outstanding debt. However, this is unacceptable “because DCG has sufficient funds to repay the amount in full.” This puts Bitvavo in line with Gemini, which is also demanding that DCG step in.

This is also reflected in the wording: As early as December, Bitvavo declared that it had used “services from the Digital Currency Group and its subsidiaries (“DCG”) to offer customers off-chain staking. DCG is going through liquidity issues due to the current crypto market turmoil.”

Just as DCG tries to differentiate itself from Genesis in order not to have to pay their debts, so the creditors try to break down this line – so that DCG can pay off the debts of the insolvent company.

Consequently, in the January update, Bitvavo also mentions Gemini’s open letter to Barry Silbert and confirms the hope expressed in it that an amicable solution can be found.

The question that now arises is of course: have other creditors also received this offer? Does Genesis only have the funds to service 70 percent of the liabilities? Will such a cut end the crisis? Or will the exchanges participating in the Earn program launch some sort of class action lawsuit?

In any case, the short info from Bitvavo allows a look behind the scenes – there is already a fight about who pays back what. Both Gemini and Bitvavo agree that Genesis alone is to blame for the debacle and that it is the Digital Currency Group’s duty to pay off the subsidiary’s debts in full with all available funds.

“It should have been notified to the Commission”

But the stock exchanges are making it too easy for themselves: They sold the Earn program to their customers, they benefited from it, they should have known the risks and should have informed their customers about them. By shifting all the blame onto the DCG, they shirk responsibility a bit too easily.

The US Securities and Exchange Commission sees it that way. She is now suing both Genesis and Gemini for selling unregistered securities with the Earn program.

As of February 2021, the SEC says, Genesis and Gemini have offered the Earn program. In doing so, Gemini users’ crypto assets were forwarded to Genesis, with Gemini executing the transaction. “Gemini charged a fee for this, sometimes as much as 4.29 percent, of the proceeds paid out by Genesis.”

The SEC now claims that the Earn program is “an offer and sale of a security under applicable law.” It “should have been notified to the Commission.”

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