Notes 1/20: Genesis Bankruptcy Filing, FTX Tech

As expected, Digital Currency Group’s (DCG) lending arm Genesis Global Capital filed for bankruptcy last evening.

Genesis was the biggest lender in the cryptocurrency ecosystem. Its business model consisted of providing yield on cryptocurrencies from firms like BlockFi and Gemini by rehypothecating them to institutional borrowers. At its peak, the company had over $16 billion on its loan book in the middle of November of 2021.

But exposure to crypto’s cascading crashes – Terra/Luna, Three Arrows Capital, and FTX – last year led to a pause in customer withdrawals in November. Crypto exchange Gemini, which is also Genesis’s biggest creditor per its filing, escalated matters this past week, leading to the current filing.

What’s In Genesis’s Filing?

A couple of things jump out from the filing.

First, it is not clear how the company arrived at the amount owed to creditors. The valuations of assets on Genesis’s loan books does not represent real dollar amounts because its contents are not known.

Presumably, it has a significant percentage of cryptocurrencies. But they have problematic trading patterns and are unregulated. An example of this is Gemini’s claim of being owed more than $900 million by Genesis. The lending firm, on the other hand, says it owes $766 million to the crypto exchange.   

In a previous tweet, the company had disclosed that 95% of its collateral consisted of US dollar, stablecoins, Bitcoin, and Ethereum. Cash is the only part of this mix that is safe and liquid. All other assets, including stablecoins, are prone to volatility and have become fair game for regulators and speculators in the currently inclement weather afflicting crypto markets.

Second, the filing further makes clear the narrow and closed ecosystem that is crypto. Babel Finance, a creditor on Genesis’s list, was also hit by the Three Arrows Capital blowout and was planning to enlist DCG CEO Barry Silbert’s former employer, Houlihan Lokey, to restructure its debt.

Another creditor to Genesis is Abra, a crypto wallet company that is part of DCG’s portfolio. It is owed $30 million. Around fifteen of the 30 creditors listed in the Genesis bankruptcy filing are on file, meaning their identities are not disclosed. Given what we know about the interbreeding that is part of crypto, one wonders how many, out of that figure, are part of DCG-related entities.  

What Happens Next?

Genesis has filed for a Chapter 11 bankruptcy, meaning it plans to reorganize itself and emerge once again as a functioning outfit after the process.

A report earlier this week claimed that Genesis was working out a prepackaged bankruptcy that would enable creditors to take equity in DCG. According to the press release, the company also plans to pursue a sale of its assets or raise capital through other means to pay back creditors.

That should be an interesting experiment. If the sale of its assets doesn’t happen, other companies from the DCG portfolio – example, Abra – might end up owning Genesis. But the process will take time, according to Eric Snyder, partner at Wilk Auslander LLP.   

Add this case to the interminable crypto wait, then.

FTX’s Technology

FTX might be coming back. The bankrupt exchange’s CEO John J Ray III told the Wall Street Journal that his team is exploring a rebooting of the exchange.

According to him, some customers have suggested there is value in restarting the platform because of its technology. FTX co-founder Sam Bankman-Fried earlier touted its matching engine technology while marketing the platform.  

I did not use FTX but certain people in crypto might not share his opinion. Max Boonen, co-founder of B2C2 – a London-based market making firm, had earlier tweeted that FTX’s tech was “known to be s—t” in the industry. According to him, they did not have test and quality environments and operated their exchange and trading firm with a bare bones team of ten people. [Test and QA environments are a necessity to resolve bugs in software in the Software Development Lifecycle].

Those are red flags.     

How Valuable is FTX’s Tech?

A little-known secret about the tech industry is the portability of its codebases. With open-source projects like Bitcoin, it is possible to replicate, or copy paste, code and create permutations of currencies that may look different on the surface but, actually, are identical under the hood. An example is Dogecoin, which is nothing but copy pasted code from Litecoin which, in itself, is a derivative of Bitcoin’s code.

This also is the reason why the numbers of cryptocurrencies, earlier a sleepy backwater of finance, multiplied after the 2017 run up in their prices.

Cryptocurrency exchanges, I suspect, work in a similar fashion. The number of exchanges across crypto has multiplied rapidly. [Some are even opening for business in the current crypto winter]. But there aren’t enough actors – read market makers to traders and investors – in crypto to justify this growth.

The value of FTX’s tech might make a difference if the current market for crypto can sustain itself through these troubled times. The chances that crypto’s leaky ship will survive the current storm are close to zilch. Meanwhile, Ray’s statement caused a 32% price surge in FTX’s worthless token, FTT. According to Kaiko Research, the surge occurred mainly due to increased trading activity at Binance.

The drama never ends in crypto.

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