The collapse of FTX has set off a chain reaction that threatens to topple one of crypto’s oldest and most respected institutions.
THE FALLOUT FROM the collapse of FTX just won’t stop—and now it’s threatening one of crypto’s most important institutions. On November 16, Genesis Global Capital’s lending unit suspended withdrawals due to “unprecedented market turmoil.” Now, the firm is seeking emergency funding of at least $500 million to ensure it has enough cash on hand to pay its customers. All the while, the crypto industry watches nervously.
On November 21, Genesis said it had “no plans to file for bankruptcy imminently,” but it has since appointed an external party to advise on its financial predicament. Such moves have done little to calm twitchy customers. Halting withdrawals has been the precursor to multiple previous crypto collapses this year, including at FTX and Celsius. Genesis did not respond when asked to confirm whether bankruptcy was under consideration.
If Genesis were to fold, it would deliver another gut-punch to an industry already reeling from the fall of FTX, one of its most highly regarded companies. If an institution the size and standing of Genesis is vulnerable, can trust be placed in the stability of any crypto firm? Yes, the industry is expected to survive the ordeal, but the days of minimal oversight, generous funding, and rapid expansion are over.
The impact from the potential fall of Genesis should not be underestimated. It might not be as well known as FTX and other exchanges, but it’s crucial to the day-to-day operations of the crypto world. In 2021 alone, the company issued $131 billion in loans and set up $116.5 billion in trades; the Financial Times has described it as the Goldman Sachs of crypto. To fund these loans, Genesis borrows from individuals and institutions that own large quantities of coins, also known as whales, who receive a cut of profits in return.
While the market was hot, so was Genesis. But as the price of crypto tumbles, and trust in large crypto companies bleeds away, Genesis risks becoming the latest example of a crypto giant failing to prepare for the worst. Not only might customers lose their money, but the collapse of an intermediary like Genesis threatens to “set crypto back several years,” says Brad Harrison, founder of decentralized lending protocol Venus. That’s because of how Genesis enables the flow of money between organizations—which is essential to the functioning of any industry.
When it launched in 2013, Genesis was the first over-the-counter bitcoin trading desk—somewhere traders could go to buy and sell large quantities of coins. But the company is now the largest crypto lender too, as well as the backbone for yield farming services provided by exchanges, which let customers earn interest on their holdings.
Harrison says Genesis has worked with many of the largest crypto organizations over the years, and it has wound its way into practically all corners of the cryptosphere. “It’s a household name.”
Genesis has been in trouble since July, when the hedge fund Three Arrows Capital (3AC) collapsed, taking with it $1.2 billion of the $2.36 billion it had borrowed from the firm. If someone defaults on their mortgage, the bank can seize the property to recoup the full value of the loan, but in this case Genesis didn’t have that option, because only part of the loan was secured against 3AC assets.
To ensure Genesis wasn’t hamstrung by the loss, its parent company, Digital Currency Group (DCG), bailed it out. But in the aftermath, Genesis cut 20 percent of its workforce to reduce costs and Michael Moro, its longtime CEO, stepped down.
Genesis again found itself on the wrong side of a collapse earlier this month; when FTX filed for bankruptcy on November 11, the firm lost $175 million stored with the exchange. Again, DCG intervened, providing a cash injection of $140 million.
But despite multiple DCG bailouts, Genesis has failed to escape the FTX fallout. Samson Mow, a prominent crypto pundit and ex-chief strategy officer at crypto infrastructure firm Blockstream, says the brokerage is struggling to fund a surge in the number of customers asking to redeem their crypto. This led to the suspension of withdrawals, which threatens to worsen the prevailing crisis of confidence and increase the likelihood of a rush on other lenders (say, BlockFi or Voyager Digital)—and so the contagion spreads.
But Mow says it’s important to understand that this is a liquidity problem, not a solvency problem. In other words, Genesis has enough assets to pay its debts, they’re just not readily available in cash form. For this reason, a bankruptcy “seems unlikely,” says Mow.
DCG also sought to play down the situation on Twitter, saying that the decision to suspend redemptions and stop issuing fresh loans was a “temporary action,” and that the problem is confined exclusively to the Genesis lending division, which means the trading and custody units will continue to operate as normal.
Nonetheless, the situation is serious enough for Genesis to seek additional funding, with crypto exchange Binance and private equity firm Apollo Global Management tapped as potential investors.
The attempt to secure funding has been unsuccessful thus far, reports suggest, partly due to concern over the financial relationship between Genesis and other DCG-owned entities. Of the $2.8 billion in outstanding loans on the Genesis balance sheet, roughly 30 percent are made to either DCG or its subsidiaries, but inter-company loans are being treated with particular suspicion right now because of their central role in the FTX collapse.
Barry Silbert, CEO of DCG, told investors that inter-company loans of this kind are nothing out of the ordinary. “We have weathered previous crypto winters, and while this one may feel more severe, collectively we will come out of it stronger.”
Yet, for all its conviction, Silbert’s rallying cry has not halted speculation. Burned recently by false assurances from FTX founder Sam Bankman-Fried—who tweeted “FTX is fine” on November 7, just days before the firm collapsed—crypto investors are bracing for a bankruptcy at Genesis, too.
One of the consequences of a potential collapse is already playing out. After withdrawals were halted, crypto exchange Gemini, whose yield farming product sits on top of Genesis, announced its Earn customers would no longer be able to access their funds.
On November 22, the exchange explained it was working to “find a solution,” but until then, $700 million worth of customer funds would remain locked up. If Genesis were to go bankrupt, some of these funds may never be returned, just like at FTX—and it's possible that customers of other Genesis-linked exchanges might suffer the same fate.
The silver lining is that Genesis deals predominantly with institutional customers: family offices, high-net worth individuals, hedge funds, and the like. So in the event of a bankruptcy, although confidence in the industry may be torn to shreds and knock-on effects may put other businesses in financial distress, the immediate impact on regular people would not be as severe as with FTX.
Max Galka, founder of blockchain analytics company Elementus, says that blockchain data suggests the company is also "an order of magnitude less intertwined than FTX” with large industry players. Although there will be “ripples,” a collapse is unlikely to have the same cascading effects.
The potential collapse of Genesis wouldn’t be “nearly as broad,” says Joe Flanagan, cofounder of the decentralized lending protocol Maple, because the financial shortfall is much smaller than at FTX. He also says bankruptcy proceedings would likely be more straightforward as a result of the clear demarcation between internal divisions at Genesis, which means the troubled lending division could be splintered off.
The greatest impact is likely to be felt in the crypto lending market itself; in the same way the collapse of FTX has drawn attention to the advantages of decentralized exchanges, the Genesis situation has the potential to drive people towards decentralized lenders.
Instead of relying on an intermediary to lend out their cryptocurrency in a responsible way and to keep enough cash on hand to meet withdrawals, decentralized alternatives let customers see exactly what’s happening to their crypto. This is an example of what’s known as decentralized finance, or DeFi.
Most decentralized lenders also exclusively support overcollateralized loans—that’s to say, borrowers are required to lock up assets with a greater value than those they are borrowing—so the chance of default is low. Genesis, by contrast, is reported to offer riskier, unsecured loans, which might have contributed to its current financial difficulties.
Harrison describes lenders like Genesis as “black boxes” that offer none of the transparency of the DeFi approach. He says there are two potential outcomes to the current situation: Either the “DeFi ethos” around transparency and collateralization will have to be adopted by centralized lenders, or decentralized lenders will begin to steal customers away. Galka goes as far as to say that “crypto lending by centralized services is essentially done,” as a result of what’s happened to lenders like Genesis.
Meanwhile, the FTX fallout continues. Although the effects on Genesis and other companies tied up with FTX (like BlockFi and Voyager Digital) are beginning to take shape, it’s possible that many more are quietly sitting on significant losses, Galka says. “It may take a year or more for things to shake out before we really know just how far the contagion has spread.”
- aum and Karlston
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