Key Takeaways:
- Crypto lender Genesis faces liquidity issues and halts withdrawals.
- How far do Genesis roots reach?
- Is the FTX contagion likely to spread further?
YEREVAN (CoinChapter.com) – According to reports, crypto lender Genesis is seeking a $1 Billion emergency loan by Monday and has halted customer withdrawals on its platform. The document accessed by the Journal cites a “liquidity crunch due to certain illiquid assets on its balance sheet”.
The firm has become the latest victim of the “unprecedented market turmoil” caused by the FTX contagion wave. The Genesis team pinned the problem on the “abnormal withdrawal requests, which have exceeded [their] current liquidity.”
We would like to emphasize that Genesis Global Trading, our broker/dealer that holds our BitLicense, is independently capitalized and operated – and separate from all other Genesis entities.
added the team in the Twitter thread.
However, Genesis is not a standalone lender in the industry. Thus, the situation calls for a deeper analysis to determine the possible repercussions.
Genesis Trading – how deep are the roots?
Genesis had $131 billion of loans in 2021 and ended Q3 2022 with $2.8 billion of “active loans,” according to Financial Times. Meanwhile, Genesis started as the first over-the-counter (OTC) Bitcoin desk in 2013. It is the daughter company of Digital Currency Group (DCG), owned by billionaire Barry Silbert.
According to Jason Yanowitz, the founder of financial media outlet Blockworks, DCG also owns CoinDesk, Foundry, Grayscale, and crypto investment app Luno and “runs a huge VC firm.” He also asserted that “dozens of companies like Gemini use Genesis to provide a yield to their customers.
If you’re a CeFi platform that offers yield, you probably use Genesis. Here’s how it works. You give your crypto to Gemini → Gemini gives your crypto to Genesis → Genesis lends your crypto to a fund → the fund borrows from Genesis X+2% → Genesis gives Gemini X+1% → Gemini gives you X%.
said Yanowitz.
The lending system broke down.
However, Yanowitz also noted that the described system works only if the “counter-parties that the crypto broker lent to” can actually repay their borrow. If Genesis can’t get their crypto back, they can’t repay Gemini, or any other crypto CeFi platform for that matter, which means they can’t repay clients. That is exactly what happened when the FTX contagion ripples reached Genesis.
Gemini representatives also commented that the team was “working with the Genesis… to help customers redeem their funds… as quickly as possible.” Luno also chimed in, saying said its customers’ assets were safe. Luno added that the team took the necessary steps to ensure fund access “in the event withdrawals from Genesis are not possible.”
Genesis hasn’t recovered since the 3AC collapse.
As CoinChapter reported at the time, hedge fund Three Arrow Capital (3AC) was hit by Terra Implosion in May 2022. 3AC was leveraged long on multiple platforms and was getting margin-called. However, they allegedly chose to lay low and “ghost” the creditors instead of answering the margin calls. As a result, the platforms had “no choice” but to liquidate their positions, causing the markets to dump further.
Genesis was the biggest creditor to 3AC, having lent them $2.4 billion. According to Yanowitz, Genesis then filed a $1.2 billion claim against 3AC. However, parent company DCG stepped in and “assumed the $1.2B claim, leaving Genesis with no outstanding liabilities tied to 3AC.”
The default of 3AC negatively impacted the liquidity and duration profiles of our lending entity Genesis Global Capital. Since then, we have been de-risking the book and shoring up our liquidity profile and the quality of our collateral.
commented Genesis
As mentioned, the “abnormal withdrawal requests” have exceeded their current liquidity, forcing the broker to shut down withdrawals. Meanwhile, DCG commented that Genesis’ liquidity issues have “no impact on the business operations of DCG and our other wholly owned subsidiaries.” Thus, it is not clear if DCG has the means to bail out its daughter company in case of lasting liquidity troubles.
Also read: FTX CEO Sam Bankman-Fried a Democrat Money Laundering Machine?
The ghost of the Terra implosion and its lasting effect on the crypto market make the Genesis crisis that much more daunting. However, a clearer picture will form once more information is available on the matter. For now, the FTX contagion is spreading deeper into the sector, threatening to cause the biggest bank run since May 2022.
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