Crypto Weekly: New year, same contagion

Gemini goes head-to-head with Digital Currency Group (DCG)

We are not two weeks into 2023, but it is safe to say that the crypto market has so far extended the chaotic environment of 2022 to 2023 considering that the contagion continues.

The ongoing contagion was obvious as early as January 2nd, at what time co-founder of crypto exchange Gemini, Cameron Winklevoss, posted an open letter on Twitter to the founder and CEO of Digital Currency Group (DCG) named Barry Silbert. DCG is the sole owner of institutional-focused trading firm Genesis Trading. Before November, Genesis was one of the largest crypto financial service providers on lending, market making, and prime brokerage. Following the loss of up to $1.2bn to bankrupt hedge fund Three Arrows Capital in May 2022 and $175mn stuck on FTX in November 2022, Genesis is at best facing a liquidity crisis but potentially insolvency.

This caused Genesis to halt withdrawals for its lending division in November. The halting of withdrawals includes more than $900mn originating from 340,000 clients of the Gemini Earn lending program facilitated by Genesis. Since Genesis halted withdrawals, these clients have not had access to their funds to great frustration to the clients and Gemini. Although it appears that merely Genesis is obligated to reimburse clients, the reputation of Gemini is at risk, so the firm is trying to seek a solution as soon as possible. Yet, according to Winklevoss, Genesis is not greatly interested in achieving a solution. In the open letter, Winklevoss accuses Silbert of “bad faith stall tactics” and states that “time is running out” for Genesis to return the $900mn to the clients of Gemini Earn. He ends the letter by saying that they seek a public commitment from Silbert to solve the problem by January 8^th. Winklevoss does not state the consequence if not. There is currently no update.

Besides owning Genesis, DCG owns the largest crypto asset manager Grayscale, which has seen its funds trade at a steep discount of up to 60% of the underlying asset partly due to concerns over the financial health of the whole organization. Another reason is that Grayscale cannot redeem shares of its funds to keep them from trading at a discount to the underlying asset. So not only is the future unclear for Genesis, it is likewise unclear for the moneymaker of DCG namely Grayscale due to hefty management fees for its funds. We wrote about the uncertainties about Grayscale in our 2023 Crypto Outlook.

Silvergate Bank was not spared from the contagion

The contagion does not end with Genesis. On Thursday, US crypto bank Silvergate announced that it incurred a loss of $718mn by selling debt as it faced a liquidity crisis in the fourth quarter. In addition, the bank has cut its staff by 40% and written off its $182mn acquisition of Meta’s Diem project it carried out early last year. To make matters worse, Moody’s downgraded the bank’s ratings following its recent financials. Silvergate banks almost every major exchange and crypto institutional investor, so its significance for the ecosystem should not be underestimated. The stock is down by around 32% year to date.