Notes 1/18: Trouble at DCG

The Wall Street Journal today has a long piece on Barry Silbert, founder of Digital Currency Group (DCG). As has been evident for some time now, problems are brewing at two of the firm’s most profitable businesses – Genesis and Grayscale. The former is one of the biggest trading and lending firms in crypto and the latter runs the world’s biggest publicly traded bitcoin instrument.

Both have been instrumental in growing the crypto ecosystem. Genesis’s lending arm is one of crypto’s earliest trading firms and was responsible for $131 billion in loans to entities in 2021. The Grayscale Bitcoin Trust (GBTC) was launched in 2013 and is reported to be among the biggest holders of bitcoin in publicly traded companies.

What Happens Next at DCG

Frankly, there is not much to see here.

DCG’s dealings are not very different from those that have occurred in the closed room that is crypto. It features the same cast of characters – Three Arrows Capital, FTX, Terra/Luna – that have become part of crypto lore since last year.

Coinbase Pro is the principal market for net asset value calculation for GBTC and Coinbase is the trust’s custodian. Even, the American subsidiary of controversy ridden crypto exchange Binance, makes a guest appearance as one of the four markets in the Index used to calculate the trust’s digital holdings per share.

Last year, Grayscale publicly announced that it was replacing Genesis with Grayscale Securities considering the former’s problems. Then, it turned around and hired Genesis right back as the trust’s liquidity provider.  

Current efforts by Grayscale’s shareholders to retrieve their holdings will, probably, hit a dead end. This is because the trust clearly states that bitcoin held by it is commingled. “…the trust’s shareholders have no specific rights to any Bitcoin. In the event of the insolvency of the Trust, its assets may be inadequate to satisfy a claim by its shareholders.”

Even if Grayscale liquidates its holdings, an article at Blockworks previously suggested that it will work with exchanges and over the counter (OTC) desks to offload its bitcoin stash. Thus, we may never know the extent of GBTC’s holdings.   

Genesis Bankruptcy Filing

Genesis is reported to be filing for a prepackaged bankruptcy as soon as this week. Creditors of the firm will receive cash and equity in DCG in exchange for forbearing their claim on its asset for a period between one to two years. [That should be enough time for Bitcoin price to shake off its current freeze and resume its upward trajectory once again].

That is a neat solution to the problem because it creates further dependencies and interrelationships in an ecosystem already at risk of a contagion because of its incestuous dealings.

It likely does not constitute a resolution for Gemini Earn holders since yields for its Earn program will continue to remain non-existent if a crypto winter is in effect. The SEC case, however, is still an overhang on its operations but such cases take many years.

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