To ensure Genesis is not affected by the loss, its parent company Digital Currency Group (DCG) helped out. But Genesis subsequently cut 20 percent of its workforce to cut costs, and Michael Moreau, its longtime CEO, stepped down.
Earlier this month, Genesis was once again on the wrong side of the collapse; when FTX filed for bankruptcy on November 11, the firm lost $175 million held on the exchange. Once again, DCG stepped in, securing a $140 million cash injection.
But despite DCG’s many rescue missions, Genesis couldn’t escape the effects of FTX. Samson Moe, a well-known crypto expert and former chief strategy officer at crypto infrastructure firm Blockstream, says the brokerage is struggling to fund the rise in customers asking to buy back their crypto. This has resulted in the suspension of withdrawals, which threatens to exacerbate the prevailing crisis of confidence and increase the likelihood of hype from other lenders (say BlockFi or Voyager Digital) – and so the contagion is spreading.
But Moe says it’s important to understand that this is a liquidity issue, not solvency. In other words, Genesis has enough assets to pay off its debts, it’s just that they’re not always available in cash. For this reason, bankruptcy “seems unlikely,” Moe says.
DCG also sought downplay the situation on Twitter, stating that the decision to suspend repayments and stop issuing new loans was a “temporary action” and that the issue was solely with the Genesis lending division, meaning that the trading and custody divisions continued to operate as usual.
However, the situation is serious enough for Genesis to seek additional funding, with cryptocurrency exchange Binance and private equity firm Apollo Global Management being considered as potential investors.
An attempt to secure funding has so far been unsuccessful, according to reports, due in part to concerns about financial relationships between Genesis and other DGC-owned companies. Of the $2.8 billion in outstanding loans on Genesis’s balance sheet, roughly 30% is to either DGC or its subsidiaries, but intercompany loans are now viewed with particular suspicion due to their central role in FTX’s collapse.
Barry Silbert, CEO of DCG, told investors that intercompany loans of this nature are not out of the ordinary. “We have survived previous crypto winters and while this one may seem harsher, collectively we will come out of it stronger.”
However, for all its persuasiveness, Silbert’s battle cry did not stop speculation. Recently burned by the false assurances of FTX founder Sam Bankman-Fried, who tweeted “FTX is fine” on Nov. 7, just days before the firm collapsed, crypto investors are also gearing up for the bankruptcy of Genesis.
One of the consequences of a potential collapse is already manifesting itself. After withdrawals were halted, cryptocurrency exchange Gemini, whose crop-growing product sits on top of Genesis, announced that its Earn customers will no longer be able to access their funds.
November 22 exchange explained he worked to “find a solution” but until then, $700 million in client funds remained blocked. If Genesis goes bankrupt, some of these funds may never be returned, as in the case of FTX, and it is possible that clients of other Genesis-related exchanges will suffer the same fate.