By Amy Castor and David Gerard
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“Normalize thinking of con artistry as a predatory crime that largely targets the vulnerable rather than a glamorous caper.” — James Palmer
How Genesis kept Gemini hanging on
As a group, Gemini Earn’s retail customers are the largest creditor of Genesis.
According to Genesis’ Chapter 11 bankruptcy filings, Genesis owes Gemini Earn customers $785 million. Cameron Winklevoss of Gemini said $900 million, but we guess $785 million was the value of the crypto on the day of the petition.
How did Gemini get themselves into this mess?
Genesis was technically insolvent in July 2022 when Three Arrows Capital (3AC) imploded and blew a massive hole in their books. The Winklevoss twins should have shut down Gemini Earn right then and ended their partnership with Genesis — but they chose not to.
By July, the crypto collapse was in full swing. Maybe the Winklevosses crossed their fingers and thought everything was probably survivable when Genesis’ parent company Digital Currency Group (DCG) issued a $1.1 billion IOU to Genesis to fill the gaping void left by 3AC.
Or maybe it was because Genesis pledged 31 million shares of GBTC as collateral for Gemini Earn in August 2022.
GBTC is a bitcoin-backed fund run by Grayscale. Like Genesis, Grayscale is owned by DCG. GBTC used to trade above the price of the bitcoins backing the fund. Since early 2021, GBTC has been trading well below par.
By early November, FTX was starting to wobble hard. So on November 10, Genesis pledged another 31 million shares of GBTC to secure Gemini Earn loans — except that Genesis never delivered those shares.
On November 16 — the same day that Genesis froze withdrawals because FTX had imploded — Gemini sold that first pledge of 31 million GBTC to a private buyer for $284 million ($9.20 per share), and applied the money against their claim. [Declaration of Michael Leto, PDF]
DCG was probably horrified by this — the last thing they wanted was more GBTC shares diluting the market and upsetting already pissed-off GBTC holders.
Genesis is now saying that Gemini’s sale of the shares was not conducted “in accordance with the notice requirements set forth in the Uniform Commercial Code.” They appear to be trying to use this as an excuse to void the remaining claim altogether. [Axios]
Ram Ahluwalia, the cofounder of crypto investment advisory Lumida, thinks Gemini’s massive sale of 31 million GBTC in November crashed the price of GBTC and widened the discount to nearly 50%. [Twitter]
Elsewhere, GGC International, a unit of Genesis Global, which filed for bankruptcy, is looking to recover $20.9 million from Roger Ver over crypto options trades that weren’t settled. Ver had similar issues last year with CoinFLEX. [Offshore Alert; CoinDesk]
Genesis chapter 11: First day
Genesis’ lawyers were very optimistic about the future — way more than anyone who knows crypto would consider credible — while dismissing the company’s past missteps. Sean O’Neal for Genesis: “We’d like to talk less about where we’ve been and more about where we are going.” Sure you would.
Genesis CEO Michael Moro stepped down in August. On November 18, the company formed a special committee, with directors Paul Aronzon and Thomas Conheeney. Aronzon and Conheeney are the ones guiding the company through bankruptcy.
Assets: Genesis has more than $2 billion in outstanding loans. They have $150 million in cash, $500 million in (unspecified, and probably illiquid) digital assets, and $385 million in shares in brokerage accounts — presumably GBTC, but they didn’t specify.
Genesis had $5.1 billion in liabilities as of November 30, according to a declaration signed by Genesis Global Holdco interim CEO Derar Islim. [Declaration, PDF]
The special committee and Cleary Gottlieb have been negotiating with two ad-hoc Genesis creditor groups and DCG — Genesis’ parent company and largest borrower — to come up with a plan to pay back the loans.
Genesis wants to sell its assets. If they can’t sell their business, they plan to give creditors equity shares in Genesis Global Holdco — shares in a washed-up company that’s currently being scrutinized by the SEC and DOJ. The idea is for Genesis to continue operations in the future, because you’re supposed to promise that in Chapter 11 bankruptcy. DCG will not long have any affiliation or controlling interest in the business, apparently.
Most of the creditors are institutional investors — this is all just business. The Gemini Earn customers are the retail investors, and they’re screaming and will continue to scream.
DCG posted a public letter on Genesis filing bankruptcy. [DCG, archive]
Frances Coppola writes on how Genesis wrecked DeFi lender Donut. Donut loaned Genesis $78 million, representing 99.55% of their total AUM. Worse, all of Donut’s loans to Genesis are unsecured. “Just like Voyager, Celsius and BlockFi, ordinary people will pay the price for Donut’s mis-selling, mismanagement and dishonesty.” [Coppola Comment]
In the meantime, the Gemini crypto exchange will be laying off another 10% of staff. This is their third round of layoffs. [The Block]
Grayscale CEO Michael Sonnenshein goes on CNBC Squawkbox to point fingers at the SEC. Becky Quick asks him why Grayscale doesn’t just liquidate the trust and return the bitcoins to GBTC holders, or lower its fees now instead of blowing hot air. [Twitter]
Binance is fine, you’re just holding it wrong
Binance has admitted to further management issues with stablecoin assets — after getting caught. Some of the tokens on Binance’s BNB blockchain aren’t fully backed.
Binance-pegged tokens, sometimes called “B-Tokens,” are wrapped versions of outside tokens that Binance issues on its own BNB chain — and they don’t have sufficient backing. [Fortune, archive, paywalled]
USDC and USDT are only available on the BNB chain as wrapped tokens, and the reserve for these coins is managed much like the reserve for BNB-BUSD. That is, just as badly.
During the Terra-Luna collapse, Binance printed unbacked Binance-pegged stablecoins in huge quantities. [Data Finnovation]
Binance also admitted to keeping collateral for almost half of its ninety-four Binance-pegged tokens — worth over $539 million — mixed up with customer funds inside a $16.5 billion exchange wallet. The exchange calls this blatant commingling a “mistake.” [Bloomberg]
Despite claims to the contrary, Binance is far from fully reserved. If it were fully reserved, it wouldn’t have to keep suspending withdrawals. [Twitter]
Signature Bank cuts off Binance
Binance sent a notice to customers that starting February 1, their banking partner, Signature, would not be processing SWIFT transfers of less than $100,000.
Retail customers of Binance have until the end of the month to get their US dollars off the exchange. After that, their money is stuck.
Rumors are swirling around this — not helped by an early news report (rapidly corrected) claiming that the SWIFT system itself was cutting off all crypto exchanges. Here are the facts that we know so far:
- Binance is cut off from Signature for transactions below $100,000.
- Signature’s other exchange customers have not said they’re affected, and we haven’t seen their customers saying so either.
- We haven’t heard of other banks putting such a condition on Binance or another exchange.
So it’s so far just Binance, via Signature.
It’s true, however that some US banks were so tempted by crypto riches that they screwed up a license to literally print money. The regulators have their angry trousers on, and their T-shirt saying “HIGHLY LIKELY TO BE INCONSISTENT WITH SAFE AND SOUND BANKING PRACTICES” is raising a lot of questions that Signature and Silvergate should already have answered.
Offshore exchanges are taking heed and lining up shadow banks instead, such as Advanced Cash Limited and Mercuryo. Advcash’s clients include Binance, Huobi, OKCoin, and Nexo. It turns out this company is operating out of Eastern Europe and Russia. Mercuryo directors Peter Kozyakov and Alexander Vasilev and Advcash CEO Yaacov Bitton were involved in the Native Video Box ICO in 2018, which rugpulled investors for $6 million. [Dirty Bubble]
Signature tapped its local home-loan bank for nearly $10 billion in the fourth quarter — among the largest such borrowings by any bank since early 2020. [WSJ, paywalled]
Signature was also banking Binance through Seychelles shell company Key Vision Development. Key Vision was struck off the corporate register in the Seychelles over a year ago, and Binance continued to bank using their name. [Twitter]
By the way, is there anyone on board who knows how to fly a plane?
Sam Bankman-Fried of FTX used to say on the Silvergate Bank website: “Life as a crypto firm can be divided up into before Silvergate and after Silvergate. It’s hard to overstate how much it revolutionized banking for blockchain companies.” The testimonial has since been deleted.
Silvergate CEO Alan Lane described the Silvergate Exchange Network (SEN) in 2021 as “not like it’s an approved product. It’s a non-disapproved product.” Yeah, regulators are really into those.
By the way — SecondMarket, the company that became Genesis, was Silvergate’s first crypto customer. [Intelligencer]
Silvergate’s co-founder and Chief Credit Officer Derek Eisele just jumped ship. [Twitter]
Friends of FTX
Shortly before FTX folded, it sent $400 million to Modulo Capital — a hitherto unknown crypto “hedge fund” with no history,and no profile. It was one of Sam Bankman-Fried’s largest investments. [NYT]
Modulo operated out of the compound in the Bahamas where Sam and the FTX inner circle lived. Modulo founders Duncan Rheingans-Yoo and Xiaoyun “Lily” Zhang were colleagues of former FTX US head Brett Harrison at Jane Street. SBF and Zhang apparently used to be a couple.
Molly White annotated SBF’s second mycrimes.blog, so nobody else has to. Sam makes clearly false statements from the beginning, and any true statement is probably an accident. [Molly White]
CeFi crypto “lender” Nexo has agreed to pay the US Securities and Exchange Commission $45 million in penalties and cease the offering of its unregistered crypto lending product. [Order, PDF]
Nexo’s Sofia office was raided earlier this month and the Bulgarian government charged them with money laundering. Nexo says the actions were politically motivated — and not a coordinated international police action — so they will be suing Bulgaria for ONE BEELION DOLLARS. [Novinite]
Withdrawals from Nexo appear finally to have stopped. [Reddit]
Everybody hates Avi Eisenberg
The charges are use of a manipulative or deceptive device and manipulation of a swap. CFTC asks that Eisenberg be permanently enjoined from trading commodities — which presumably includes this variety of crypto assets.
The interesting part is that this complaint is phrased just like a perfectly ordinary commodities trading violation. Even the meat of the demanded penalty is a lifetime ban from trading.
We expect this to be a template for future CFTC actions against DeFi traders.
Cooking the planet for no fun and no profit
Bitcoin mining has been pushed out of Kazakhstan. There’s lots of abandoned equipment and facilities. [MIT Technology Review]
Galaxy Digital has acquired the Helios mining operation from Argo Blockchain, which has let Argo avoid bankruptcy. In mainframe computing, this was called “mating dinosaurs.” In banking, it’s “two drunks propping each other up.” In crypto, it’s “finding a bigger shell to keep hiding the pea-word.” [press release; CoinDesk]
BlockFi is selling off its loans backed by mining rigs. [Bloomberg]
Other happy news
The SEC has been giving crypto firms who want to go public a hard time. Good. This is why Circle abandoned its SPAC plans. [WSJ, paywalled]
Phishing attempts have been made on Celsius customers. [Doc 1904, PDF]
Aw, darn it! Celsius CEO Alex Mashinsky’s magnum opus The Mashinsky Method is no longer being published, even if it is still listed on Amazon UK as coming out in June. Your mission: find and leak this text. Direct to LibGen. [Twitter; Amazon]
Patrick McKenzie explains how Know-Your-Customer laws actually work — and why. Patrick has now left Stripe, and you can subscribe to his excellent blog explaining payment system nuts and bolts. [Bits About Money]
Crypto.com suddenly had to migrate EUR payment providers at very short notice. We’re sure everything is fine. [Twitter]
Dirty Bubble — a.k.a. Mike Burgersburg, or his real name, James Block — goes on Laura Shin’s Unchained. This is a great interview and you should watch it. 64 minutes. [Youtube]
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