Harrison says Genesis has worked with many of the largest crypto organizations over the years, and wound its way into practically all corners of the cryptosphere. “It’s a household name.”
Genesis has been in trouble since July, when the hedge fund Three Arrows Capital (3AC) collapsed, taking with it $1.2 billion of the $2.36 billion it had borrowed from the firm. If someone defaults on their mortgage, the bank can seize the property to recoup the full value of the loan, but in this case Genesis didn’t have that option, because only part of the loan was secured against 3AC assets.
To ensure Genesis wasn’t hamstrung by the loss, its parent company, Digital Currency Group (DCG), bailed it out. But in the aftermath, Genesis cut 20 percent of its workforce to reduce costs and Michael Moro, its long-time CEO, stepped down.
Genesis again found itself on the wrong side of a collapse earlier this month; when FTX filed for bankruptcy on November 11, the firm lost $175 million stored with the exchange. Again, DCG intervened, providing a cash injection of $140 million.
But despite multiple DCG bailouts, Genesis has failed to escape the FTX fallout. Samson Mow, a prominent crypto pundit and ex-chief strategy officer at crypto infrastructure firm Blockstream, says the brokerage is struggling to fund a surge in the number of customers asking to redeem their crypto. This led to the suspension of withdrawals, which threatens to worsen the prevailing crisis of confidence and increase the likelihood of a rush on other lenders (say, BlockFi or Voyager Digital)—and so the contagion spreads.
But Mow says it’s important to understand this is a liquidity problem, not a solvency problem. In other words, Genesis has enough assets to pay its debts, they’re just not readily available in cash form. For this reason, a bankruptcy “seems unlikely,” says Mow.
DCG also sought to play down the situation on Twitter, saying that the decision to suspend redemptions and stop issuing fresh loans was a “temporary action” and that the problem is confined exclusively to the Genesis lending division, which means the trading and custody units continue to operate as normal.
Nonetheless, the situation is serious enough for Genesis to seek additional funding, with crypto exchange Binance and private equity firm Apollo Global Management tapped as potential investors.
The attempt to secure funding has been unsuccessful thus far, reports suggest, partly due to concern over the financial relationship between Genesis and other DGC-owned entities. Of the $2.8 billion in outstanding loans on the Genesis balance sheet, roughly 30 percent are made to either DGC or its subsidiaries, but inter-company loans are being treated with particular suspicion right now because of their central role in the FTX collapse.