To ensure Genesis was not crippled by the loss, its parent company, Digital Currency Group (DCG), saved it. But in the aftermath, Genesis cut 20 percent of its workforce to cut costs, and longtime CEO Michael Moro stepped down.
Genesis was once again on the wrong side of a meltdown earlier this month; when FTX filed for bankruptcy on Nov. 11, the company lost $175 million stored with the exchange. Again, DCG stepped in and provided a $140 million cash infusion.
But despite multiple DCG rescues, Genesis has failed to escape the FTX outage. Samson Mow, a prominent crypto expert and ex-chief strategy officer at crypto infrastructure firm Blockstream, says the brokerage is struggling to fund an increase in customers asking to exchange their crypto. This led to the suspension of withdrawals, which threatens to exacerbate the prevailing crisis of confidence and increase the likelihood of a stampede on other lenders (e.g. BlockFi or Voyager Digital) – thus spreading the contagion.
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. For this reason, bankruptcy seems “unlikely,” says Mow.
DCG also tried trivialize the situation on Twitter, saying the decision to suspend repayments and stop making new loans was a “temporary action”, and that the issue is limited solely to the Genesis lending division, meaning the trading and custody units are normally will continue to work.
Nevertheless, the situation is serious enough for Genesis to seek additional funding, with crypto exchange Binance and private equity firm Apollo Global Management as potential investors.
The effort to secure funding has so far been unsuccessful, reports suggest, in part because of concerns over the financial relationship between Genesis and other DCG-owned entities. Of the $2.8 billion in outstanding loans on the Genesis balance sheet, about 30 percent are provided to DCG or its subsidiaries, but intercompany loans are currently treated with particular suspicion due to their central role in the collapse of the FTX.
Barry Silbert, CEO of DCG, told investors that these types of intercompany loans are nothing out of the ordinary. “We have weathered previous crypto winters, and while this one may feel harsher, collectively we will emerge stronger.”
Still, for all his conviction, Silbert’s rallying cry has not stopped the speculation. Recently burned by false assurances from FTX founder Sam Bankman-Fried — who tweeted “FTX is fine” on Nov. 7, just days before the company collapsed — crypto investors are also bracing for Genesis bankruptcy.
One of the consequences of a possible collapse is already playing out. After withdrawals were halted, crypto exchange Gemini, whose yield farming product is on top of Genesis, announced that its Earn clients would no longer be able to access their funds.
The exchange is on November 22 explained it was working to “find a solution,” but until then, $700 million in customer funds would remain under lock and key. If Genesis were to go out of business, some of these funds may never be returned, as with FTX – and it’s possible that customers of other Genesis-linked exchanges may suffer the same fate.
