Original article by Nina Bambysheva, Forbes

Original compilation: Luffy, Foresight News

Barry Silbert, founder of Digital Currency Group

In May 2022, the domino effect after the Terra collapse quickly hit the entire crypto industry. In the following year, Celsius Network, BlockFi, Voyager Digital, and FTX all filed for bankruptcy, and once-famous cryptocurrency CEOs were either taken to court or jailed. Now, with Bitcoin topping $40,000, the crypto industry appears to be finally emerging from its winter months.

For Barry Silbert and his Stamford, Conn.-based Digital Currency Group (DCG), the impact of Terras collapse was like quicksand. His Genesis Global Capital lending arm filed for bankruptcy protection in January, but the group still has more than 200 companies in its massive portfolio, including cryptocurrency miner Foundry and digital asset exchange Luno, as well as crown jewel Grayscale Investments (the worlds largest Bitcoin fund, with assets of US$27 billion and an expense ratio of 2%). Despite the rise in Bitcoin prices, Grayscales flagship product GBTC still trades at an 11% discount to Bitcoin spot. Last month, DCG sold its news website CoinDesk to Bullish, a cryptocurrency exchange led by former New York Stock Exchange president Tom Farley, for an undisclosed amount.

Silbert’s crypto winter continues, and the former billionaire faces a series of serious problems:

• New York State Attorney General Letitia James is seeking to ban DCG and Genesis from doing business in New York as punishment for allegedly defrauding investors by trying to cover up more than $1.1 billion in losses related to the collapse of Singapore-based Three Arrows Capital, a cryptocurrency firm. Hedge funds are among the largest borrowers of Genesis.

• Cameron Winklevoss, president of cryptocurrency exchange Gemini, also accused Silbert and DCG of defrauding Gemini depositors. The FBI, Securities and Exchange Commission and state officials are investigating the allegations, Bloomberg reported, citing people familiar with the matter.

• Genesis accuses the parent company of treating it as a de facto treasury without appropriate corporate controls. It requires DCG to repay more than $320 million in loans due in May 2023 by April 2024. DCG has agreed to new terms under a proposed bankruptcy plan filed on Nov. 28.

• Many Genesis creditors rejected DCGs latest recovery proposal in August. The new plan allows Genesis to sue DCG on a variety of grounds. DCG said such accusations were baseless, while Genesis said it would rather settle than hold its former parent company accountable in court.

Allegations of fraud cited in the New York civil lawsuit include a suspicious $1.1 billion 10-year promissory note on Genesis balance sheet from DCG that Genesis marked as a current asset.

Austin Campbell, an adjunct professor at Columbia Business School and managing partner of blockchain-focused Zero Knowledge Consulting, said, “FTX is more like Bernie Madoff, but if these accusations are true, DCG may be more like Enron. .”

DCG denies the fraud allegations. “The promissory note represents DCG’s intervention to assist Genesis following Three Arrows Capital’s default in June 2022,” an unnamed company spokesperson told Forbes via email. DCG agreed to assume the $1.1 billion unsecured loan lent by Genesis to Three Arrows Capital, the recovery of which was and remains highly uncertain. DCG did not receive any cash, cryptocurrency or other form of promissory note payment and in Genesis risk of loss with Three Arrows Capital is assumed without obligation.

The spokesman added that the promissory note mechanism used to aid Genesis was provided by DCGs financial and legal advisers and with input from our accountants.

Silbert and DCG also maintain that they cooperated with the New York Attorney Generals investigation and were blindsided by the allegations, which they called baseless and described Genesis allegations as misleading. Still, numerous lawsuits and claims remain unresolved, and time is on Silberts side.

As for Geminis claim that DCG defrauded exchange depositors, DCG said in a statement in January that this was an interface for Cameron Winklevoss, the sole person responsible for operations at Gemini Earn, to evade responsibility for promoting the platform to clients. product.

Bitcoin is up 157% in the last year, and the value of many of the digital assets behind Silberts vast empire may have increased by billions. Bitcoin miners, for example, have seen their share prices soar in recent weeks, with Marathon Digital up 356% year-to-date. DCGs mining company, Foundry, now has a market capitalization of $3 billion. Given its wealth of assets, DCG is already doing much better than other victims of the Terra debacle.

Ram Ahluwalia, CEO of Lumida Wealth Management, an investment advisory firm that has been following the case, said the biggest threat currently facing DCG appears to be the New York lawsuit, which could force Silbert to abandon Grayscale. The New York State Attorney General is trying to ban DCG from operating securities and commodities businesses in the state, Ahluwalia said. Legally, they would be required to cease various operations.

Ahluwalia added that if James wins, DCG will be unable to operate in New York, which could soon become a broader issue: Other states may take similar action.

Grayscale manages more than a dozen cryptocurrency funds, including the massive Grayscale Bitcoin Trust (GBTC), which accounts for nearly two-thirds of DCG’s revenue, according to a recent investor letter seen by Forbes. Of the $188 million in revenue reported by DCG in the third quarter, Grayscales revenue accounted for 67%, or $126 million, which is 2.5 times that of the second largest subsidiary, Foundry.

Worse, a Bitcoin spot ETF could be approved, which could make Grayscale less attractive to future buyers. Ironically, Grayscale has been working hard to turn GBTC into an investor-friendly ETF and recently won a major court case, further advancing the case, but the result may be a flood of new competitors, Management fees for comparable funds, including giants like BlackRock and Fidelity, are a fraction of current levels.

Ahluwalia said the loss of Grayscale would leave the downsized DCG trapped in endless settlements and litigation. He added that the remnants of Silberts empire would effectively become an insolvent zombie company. However, the cryptocurrency’s rally could be its savior. In November 2021, at the height of the cryptocurrency craze, DCG sold $700 million in a private placement led by SoftBank, valuing it at $10 billion.

If DCG cannot ultimately get out of trouble and reach a settlement with Genesis creditors, they may be forced into bankruptcy, consultant Campbell said.

DCGs recovery plan, initially supported by Genesis and the committee of unsecured creditors but not by an ad hoc group of Gemini and Genesis lenders, offers the best possible recovery option available.

One of the most complicating factors in Genesis bankruptcy resolution is the legal dispute between Genesis and Gemini. In 2021, Earn is offering up to 8% annual yield to savers willing to park their cryptocurrencies in Gemini. Under the scheme, Genesis borrows crypto assets from Gemini Earn customers, reinvests them at higher interest rates and pockets much of the difference after paying interest. Winklevoss Gemini acts as an agent, processing deposits and withdrawals and taking a small commission from payments made by Silberts Genesis to Earn investors. Genesis suspended withdrawals on November 16, 2022 to protect assets.

Shortly before this, as cryptocurrency market conditions worsened due to a series of bankruptcies, Genesis agreed to post collateral to ensure that Earn customers would not lose their assets in the event of a borrower default. It used shares of the Grayscale Bitcoin Trust as collateral and agreed to pay 30.9 million shares on August 15, 2022, and 31.2 million shares on November 10. When Genesis stopped withdrawals six days later, Gemini foreclosed on the first tranche, but the second tranche had not yet been transferred. At the time of the foreclosure, GBTC was trading at $9.20 per share.

Last month, Gemini sued Genesis for the remaining collateral. DCG allegedly sent GBTC shares to Genesis, but the department refused to transfer them. The collateral is now worth much more than it was originally, trading at over $30. The shares are worth a combined $1.6 billion, enough to satisfy claims from Earn customers.

Genesis sees things differently. It filed a lawsuit against Gemini on Nov. 21, seeking to recover $689.3 million that Earn users withdrew within 90 days of Genesis filing for bankruptcy. Genesis also wants to reallocate the collateral to benefit all of its creditors and contest Geminis right to foreclose and additional GBTC shares. Gemini maintains that Earn customers have first dibs on compensation as a result of the mortgage deal.

Theres another twist: When Gemini foreclosed, the first tranche of GBTC collateral was then worth $284 million, a figure that has now grown to more than $800 million. Gemini still controls the shares and says it holds them for the benefit of Earn savers.

One Genesis lender, who requested anonymity, told Forbes that many creditors believe both Silberts DCG and Winklevoss Gemini acted in bad faith. I think creditors have felt an incredible sense of frustration because this bankruptcy process has taken so long and DCG has been unwilling to come up with a reasonable solution. They have delayed and delayed and ended up with very unfavorable terms.

I think the best outcome for creditors, DCG and Genesis owners is to reach a fair settlement with DCG, said another Genesis creditor who calls himself BJ on Telegram. Creditors lives have been significantly disrupted by the bankruptcy proceedings, while DCG has benefited from delays in this case. I believe it is in DCGs best interests to find a way to avoid protracted litigation involving thousands of creditors alleging fraud .”

There is no doubt that the recovery in the cryptocurrency market is helping DCG. Either DCG buys enough time so that enough profits from Grayscale help rebuild the balance sheet and can eventually pay Genesis; or there is some other legal pressure that forces DCG to file for bankruptcy. Jeff Dorman, chief investment officer of crypto hedge fund Arca Now, does anyone have a stick big enough to force payment from DCG and force it into bankruptcy? We havent seen that so far.

Another anonymous creditor said Silbert and DCG may also benefit from the delay in Genesis bankruptcy: There are millions of dollars in loans [to Genesis] due in May that he hasnt paid back yet, and thats something he Capital that can make money. The risk-free rate right now is 5%, so you think about it, hes getting $30 million a year because of the delays. According to the filing on November 27, DCG has invested more than $600 million in its affiliates US dollar debt was reduced to approximately $324.5 million.

The deal Genesis just struck with DCG regarding the DCG loans is absolutely ridiculous. Those loans were due in May. Creditor BJ scoffed. They sued DCG for repayment of the loan and they immediately gave them a break. That break ended and DCG hasnt paid them yet and now they are ready to give them another break. Its not fair to the creditors.

Meanwhile, the clock is ticking. Grayscale and other asset managers, including BlackRock, Ark, WisdomTree, VanEck, Invesco and Fidelity, appear to be on the verge of receiving SEC approval to launch a spot Bitcoin ETF. The timing of approval is uncertain but could come before January 10, according to analysts at Bloomberg.

If Grayscale succeeds in getting SEC approval and converts GBTC into an ETF, the discount to the value of the funds holdings will shrink or be wiped out, increasing its value to shareholders (one of its largest shareholders is Genesis). DCGs cash flow could take a hit from pressure to keep management fees in line with ETF rivals. According to Morningstar, the average expense ratio for U.S.-listed ETF and mutual fund managers is less than 0.4% of assets. However, given that it has $27 billion in assets as a closed-end fund, Grayscale would immediately become the largest ETF on the market. New inflows into the GBTC ETF could make up for the reduction in its fee income.

Genesis creditor BJ explained: If GBTC is converted to an ETF, the management fee will be halved, which will affect the compensation we may receive. But he added that if the ETF is approved, it will be detrimental to DCG, and the actual situation Its going to be complicated, Theyre still the biggest players.

Regardless of what actions Grayscale takes, Ahluwalia believes DCG is facing brand destruction, which could happen within two to three years.

“We’ve heard over and over again that this is bad for (cryptocurrency market) sentiment,” said Arca’s Dorman. “For a casual observer, this sucks because they only see negative headlines every day. These businesses will find a way to go elsewhere.