The fallout from the collapse of FTX is growing, as Genesis searches for a $1 billion savior.
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If crypto lender Genesis can't find $1 billion soon, it may be forced into bankruptcy — becoming the latest victim of the FTX exchange's implosion earlier this month.
Genesis Global Capital is the lending arm of Genesis Global Trading, a large and long-established digital asset broker that could go down with it, Bloomberg reported on Monday.
On Nov. 10, Genesis revealed that it had loaned FTX $175 million with insufficient collateral, and was unlikely to get it back soon, if ever. That led to a spike in withdrawals, which in turn led to a liquidity crunch, forcing the firm to halt withdrawals.
It has been seeking a cash infusion since then, having turned without success to Binance and Apollo Global Management, among others, according to the Wall Street Journal.
On Nov. 22, The New York Times reported that Genesis had hired investment bank Moelis & Company “to explore options including a potential bankruptcy.” Moelis advised Voyager Digital on its bankruptcy filing a few months ago.
And Genesis is not alone. Crypto lenders including SALT and BlockFi were forced to halt withdrawals.
A Familiar Story
It's an increasingly familiar pattern that began with lenders like Voyager Digital back in July, when the $48 billion collapse of the Terra/LUNA stablecoin in May drove crypto hedge fund Three Arrows Capital (3AC) into bankruptcy — revealing that it had taken out billions in loans without collateral from a large number of crypto lenders.
Genesis was hit even worse then, with parent company Digital Currency Group (DCG) filing a $1.2 billion claim against 3AC — a case that, like FTX's, is likely to take years to resolve.
DCG on Monday told Bloomberg that no bankruptcy filing was coming "imminently" and that it "continues to have constructive conversations with creditors."
But more than anything, Genesis' troubles are indicative of the way the financial troubles of one company spread throughout the crypto industry.
Trouble Spreads
The 3AC collapse that initiated the first round of crypto lenders' troubles was a result of the Terra/LUNA stablecoin collapse.
As bankruptcy proceedings begin against FTX, it is looking like the financial troubles that led to its collapse in early November began this summer, when FTX's sister company, crypto trading firm Alameda Research, lost heavily. That led it to borrow customer funds from FTX, which collapsed quickly when details of its balance sheet were leaked.
Highly regarded FTX in turn had borrowed from a large number of firms like Genesis, which subsequently halted withdrawals — leaving many small crypto investors with their funds stuck indefinitely, and possibly lost if Genesis can't find the backing to fill its balance sheet.
Among those hit are many customers of cryptocurrency exchange Gemini, which ran its crypto yield program, Gemini Earn, through Genesis. Crypto lenders borrow funds via yield programs which pay high returns — Gemini Earn topped out at 8%, which is fairly low — for the funds they lend out.
But now Gemini has had to reassure clients that no other operations are affected.
Much like DCG has had to reassure investors that its flagship Grayscale arm, which holds about $10.5 billion in various cryptocurrencies in trusts including the Grayscale Bitcoin Trust, would not be affected by a Genesis bankruptcy. It is "ring-fenced," analysts from Bernstein reported on Nov. 21, saying creditors wouldn't be able to touch it.
Nor will Genesis’ spot and derivatives trading or custody businesses be impacted, DCG CEO Barry Silbert said in a client letter.
Then there's Bitcoin itself, which plunged well below the $20,000 range it had been holding for months into the $16,000 to $17,000 range after FTX, which has been called crypto's "Lehman moment."
Fears about a Genesis failure causing further contagion drove BTC down even further over the weekend, driving it briefly into the $15,000 range.
