Welcome to the FT Cryptofinance Newsletter. This week we take a look at Barry Silbert, the man at the heart of the Digital Currency Group.
It’s been two weeks since FTX — one of the iconic brands in the crypto industry — went bankrupt in spectacular fashion, and I compared it to the collapse of Lehman Brothers.
As influence spread across the market, the biggest players tried to stabilize the ship. The hardest hit this week was the Digital Currency Group and its founder and CEO, Barry Silbert.
Silbert has been trying to reassure shareholders of the viability of his conglomerate as fears circulate that one of its parts, crypto broker Genesis, will be the next big name to fall.
Simply put, Genesis is a player. Last year, he sold $116 billion worth of cryptocurrencies and issued loans worth $131 billion. However, on November 16, it announced that it was suspending withdrawals from its lending arm. This week he said it wasn’t. inevitably on the verge of bankruptcy.
Silbert’s name may be unfamiliar to some readers. Like many executives, he is on Twitter but doesn’t often use it to share his thoughts. He doesn’t make countless TV or conference appearances.
Thus, he – and by extension DCG – does not have the same public profile as the likes of Sam Bankman-Fried, Binance’s Changpeng Zhao, or MicroStrategy’s Michael Saylor. However, Silbert has an important chapter in the history of crypto that explains the direction of the market.
DCG is the parent group of a portfolio that includes digital asset management firm Grayscale, cryptocurrency news site CoinDesk, mining company Foundry, wallet provider Luno and Genesis.
That DCG’s Genesis is the latest company to falter after the industry shock kicked off by CoinDesk’s FTX article is symptomatic of its embrace.
“Never mind the fact that the same guy owns Grayscale, CoinDesk, Genesis and DCG…. . I’m not sure what it is. The industry is so interconnected,” one industry observer told me.
In terms of the industry, Silbert is a veteran. He was an investment banker in New York before founding SecondMarket, a marketplace for private companies to buy and sell their shares before it was bought by Nasdaq.
Silbert was an “early” bitcoin proponent who jumped on the crypto train in the mid-2010s as the nascent industry reeled from scandals such as Mt.Gox and Silk Road. In particular, he considered bitcoin the biggest opportunity of his career.
Shades of gray have played a crucial role in realizing these ambitions. It operates the Grayscale Bitcoin Trust (GBTC), an investment vehicle that provides investors with a commodity product that tracks the coin.
“Accredited investors,” such as hedge funds, can buy shares with bitcoin at the trust’s net asset value and then sell at the market price after the lock-up period, typically six months.
In 2020, the market price averaged 18% above NAV, making this one of the most profitable deals on the market. It was so popular that it helped raise $5 billion in new customer funds in GBTC that year. The defunct cryptocurrency hedge fund Three Arrows was one of the largest holders of GBTC.
But the emergence of several spot bitcoin ETFs in Canada undermined demand, and almost overnight the trust premium turned into a discount.
However, GBTC shares cannot be exchanged for bitcoin or hard currency, meaning that the only way for any investors to get out of the deal is to sell the shares to other investors. The discount is still in effect and has reached 40 percent, making it very unpopular. Now the largest holder of GBTC is . . . DCG.
The market still doesn’t understand how complicated this scheme has become. My colleagues Kadhim Shabber, Niku Asgari, and Joshua Oliver reported this week that DCG borrowed $575 million in cash and bitcoin from Genesis, and some of the funds were used to finance the purchase of GBTC stakes, as well as to buy back DGC shares.
Silbert told investors that the Genesis loan book has experienced a liquidity-duration mismatch, and this has not impacted the platform’s trading and depository business. But the links are further evidence of how finely balanced Silbert’s crypto empire is.
For an industry revealing the extent of the ties between crypto exchange FTX and proprietary trader Alameda Research, this is yet another cause for concern.
As DA Davidson Senior Analyst Chris Brandler told me over the phone this week, “It really is a bit like the 2008 financial crisis. . . and they were, for the most part, public companies with all kinds of oversight, but we had no idea how far this contagion had spread.”
What do you think of Barry Silbert of Crypto? Email me at [email protected]
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On Monday, two Estonian citizens were arrested and charged with a $575 million cryptocurrency fraud and money laundering scheme. The arrests indicate — amid a growing string of similar cases — that law enforcement is gearing up for illegal cryptocurrency activities.
Late Tuesday evening, I moderated a panel discussion on the impact of cryptocurrencies on the Ukrainian crisis. Industry representatives and Ukraine’s Deputy Minister for Digital Transformation Alex Bornyakov have repeatedly told me that cryptocurrency can serve as a lifeline for the economy when traditional payment systems fail. Bornyakov also predicted that Russia’s use of cryptocurrencies as a means of evading sanctions would be a “huge deal” in the future.
As you may remember, I was in the Bahamas last week looking for stories on FTX. I have found that government, regulators and law enforcement are putting their collective heads in the sand in a desperate attempt to protect the island’s “reputation” for digital assets. Read my story here.
The situation in Hoddlenaut Country is heating up. The cryptocurrency platform, hit by the summer market crash, stopped withdrawing funds earlier this year and was eventually placed under temporary judicial administration. Singapore Police this week said it was investigating the platform and its directors “for possible fraud and fraud.”
Soundbite of the Week: Binance Is “Not a Chinese Company”
Binance co-founder and CEO Changpeng Zhao, known as “CZ” in the industry, said this week that Binance is not a Chinese company.
“Binance is not a Chinese company, we are not affiliated with China at all, I have to repeat this many times just because I look like a Chinese.”
Unfortunately, this was another missed opportunity for him to tell the world where Binance is actually based. After the catastrophic collapse of FTX, CZ promised:full transparency» on Twitter. We asked Binance for nth time – where it is based. We will notify you when we receive a response.
Data Mining: Falling Gemini Trading Volume
Gemini is an example of the fear of infection. The exchange, run by twins Tyler and Cameron Winklevoss, is partnering with Genesis on a product that pays customers interest on loans of their crypto assets. Gemini is now trying to help clients redeem their funds as quickly as possible.
Moreover, Gemini’s spot trading volume has steadily declined for most of the year. The twins said it was “an incredibly challenging and stressful time for our industry.” Of course have.