​Liquidity crisis. What does the bankruptcy of Genesis threaten the market

Brokerage Genesis is trying to raise money for its credit division and warns potential investors that if it fails, it may have to file for bankruptcy. The crypto community fears that the collapse of the FTX exchange will trigger further liquidations and losses of interconnected market players.

Crypto broker Genesis is part of Barry Silbert’s Digital Currency Group (DCG). Genesis originally sought to raise $1 billion but has now cut its goal in half. When news of this broke in the media, Genesis said it was negotiating with creditors, rejecting statements of immediate bankruptcy.

According to the company’s statements, the collapse of the cryptocurrency hedge fund Three Arrows Capital (3AC) forced it to take steps to “de-risking the book and shoring up our liquidity profile.” However, the collapse of the FTX exchange triggered a wave of withdrawal requests, which led to a sharp decline in liquidity.

How events developed

On November 8, Genesis announced that it had “no material exposure to FTT” (FTX’s native tokens) or in “any other tokens issued by centralized exchanges.” The very next day, however, it stated the sale of part of its collateral, resulting in a loss of about $7 million “across all counterparties, including Alameda.”

On November 11, Genesis admitted that as part of its “derivatives business,” the company held about $175 million in funds in its FTX trading account that turned out to be locked. The publication said that this “does not impact our market-making activities.”

https://twitter.com/GenesisTrading/status/1590836596424998912

On the same day, DCG was forced to step in. The company infused $140 million into Genesis’ capital and clearly stated that the loss of funds stuck on FTX did not affect the operation of the lending and trading business.

However, just a few days later, Genesis Global Capital’s lending arm suspended withdrawals, as well as redemptions and new loan originations. In a Twitter post on November 16, the company explained that the market turmoil caused by FTX led to “abnormal withdrawal requests which have exceeded our current liquidity.”

The next day, Genesis announced that it needed capital of $1 billion. According to some reports, it was in talks with the Binance exchange, which later backed out of the deal. Journalists reported that Genesis approached several other large funds, but no deals were made.

On November 21, the company said that if investors did not invest the necessary amount in it, it was likely to face bankruptcy. Later that day, however, Genesis representatives told reporters that the company has “no plans to file for bankruptcy” and remains focused on raising money.

On Tuesday, November 22, it became known that Genesis hired specialists from investment bank Moelis & Company to carry out the restructuring. Anonymous sources told The New York Times that potential bankruptcy is also being considered by the company as a solution to its problems.

What the implications are

An update from Genesis is expected in the coming days, and so far what is happening is not very reassuring to market participants. There is growing concern among them about the state of the entire DCG group, including also Silbert’s Grayscale Investments.

On November 22, in a letter to shareholders, Silbert noted that DCG has $575 million in liabilities to Genesis. In the letter, he also described a $1,1 billion promissory note maturing in June 2032, which he said arose when the parent company assumed liabilities to Genesis related to the collapse of the digital asset hedge fund Three Arrows Capital.

Ryan Selkis, CEO of analytics firm Messari, estimates that the 3AC hedge fund collapse caused the arm to lose more money ($2,36 billion) than it had managed to earn in its entire existence. The promissory note mentioned by Silbert was used to close the resulting financial hole, Selkis argues in a series of tweets.

According to the expert, the Genesis bankruptcy will be a blow to DCG’s reputation, but it is a “bitter pill” that is better swallowed by all parties involved in what is happening. This means that creditors will assume that DCG is backing Genesis, while DCG itself can save itself by also being an injured party in bankruptcy.

Silbert’s Digital Currency Group is the parent company of Genesis and has a stake in more than 200 companies. It owns Grayscale Investments, an investment holding company that manages bitcoin trusts and funds in several other cryptocurrencies, including ETH, ETC, ZEC, MANA, FIL, and other assets. The group was valued at $10 billion last year.

Everything is connected

The consequences of the FTX collapse have yet to fully manifest themselves, with many lending platforms just beginning to publicly acknowledge liquidity problems. “In the coming weeks, we will see who will go bankrupt after FTX. The crypto market is a closely interacting system, it will not work to sit on the sidelines,” TerraCrypto founder Vassev previously commented for GetBlock Magazine.

Genesis acts as a counterparty to many companies in the field of digital assets, and it is closely watched as an indicator of the strength of the industry. It is among the leading crypto lenders under strain after the prolonged fall in cryptocurrency prices and numerous high-profile company collapses in the industry that have taken place this year.

In response to Genesis suspending withdrawals, Gemini, owned by the billionaire Winklevoss twins, stopped payments on its Earn product. This left the program, which by some estimates had about $700 million in customer funds, in limbo.

Crypto lending platform BlockFi is also likely preparing for bankruptcy due to its large stake in FTX. On November 14, BlockFi acknowledged that it had labilities to FTX and to Alameda Research and that it held assets in the exchange’s accounts. Temasek, Singapore’s state-owned investment company, also wrote off its $275 million investments in FTX.