After a long, fraught journey on the brink of bankruptcy, it appears the Genesis crypto lender is the newest to join the pack of failed blockchain institutions. The subsidiary of Digital Currency Group makes for the biggest bankruptcy of the year so far, and given the ripple effect each bankruptcy seems to have on the next, it likely won’t be the last.
After weeks upon weeks of speculation around a bankruptcy filing, the news comes as little surprise to investors. Indeed, the company’s decision to freeze its assets came across as a death knell to clients. Many of the institutions that went bankrupt throughout 2022 had begun their downward spiral in the same way.
The company’s partnership with Gemini put it in serious debt when it lacked the liquidity to match mass investor exits. The resulting asset freeze added to an already tumultuous situation that began unfolding with the bankruptcy of Three Arrows Capital earlier in the summer. Genesis was massively exposed to Three Arrows, and DCG had to provide Genesis with a $1.1 billion promissory note to bail it out then.
Genesis has attempted to scrounge up some funds through the last two months, to no avail. In early January, the company laid off 30% of its staff. DCG itself attempted to find money to inject into the struggling lender as well. Fellow subsidiary CoinDesk teamed up with Lazard (NYSE:LAZ) to potentially facilitate a sale. DCG has reportedly heard offers for up to $200 million for the media outlet. This would make it one of the quickest ways to source funding. Still unable to find funding, and with the Securities and Exchange Commission (SEC) opening an investigation into the company, Genesis finds itself finally spiraling into bankruptcy.
Genesis Crypto Bankruptcy Reveals True Scope of Financial Turmoil
Under Chapter 11 bankruptcy protections, the Genesis crypto empire is down, but not totally out. As with many of its predecessors, the Chapter 11 filing will give Genesis a chance to right the ship. However, with the full scope of its debt now public, one can see that this will be a tall order.
The good news is that Genesis is seemingly slimming down its debt to Gemini. The bankruptcy filing shows that it owes the exchange just $766 million, compared to reports in December which estimated that figure at over $900 million. The bad news, however, is that it still owes a whopping $3.5 billion across its top 50 creditors. Gemini is the largest of these, followed by MoonAlpha Finance and Mirana. Both companies are owed over $150 million apiece. Two unnamed creditors are owed a cumulative $692 million. The debt adds to a total of $5.1 billion in liabilities that the company is claiming.
As Genesis begins the painful restructuring process, Digital Currency Group is not getting off lightly. It is facing its own scrutiny by regulators, who are probing the legality of DCG’s internal transfers with Genesis in late 2022. But it’s also facing potential legal action by Gemini founder Cameron Winklevoss which becomes more real by the day.
Winklevoss has been voicing his anger with DCG and its CEO Barry Silbert for weeks. Winklevoss accuses Silbert of “bad faith stall tactics” to avoid negotiating a deal with Gemini and Genesis which could’ve prevented the bankruptcy. And now that this bankruptcy is upon the companies, Winklevoss is preparing to sue DCG on behalf of its 340,000 clients affected by Genesis’ asset freeze.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.