Gemini’s “ultimate ultimatum”
On Monday (January 2), Cameron Winklevoss, co-founder of the Gemini exchange, sent an “ultimatum” to Barry Silbert, the head of Digital Currency Group (DCG), accusing the group of using “… delay trick” and demanded answers as to why $900 million in Gemini client funds are still inaccessible.
Winklevoss asked Silbert to “publicly commit to work together to resolve this matter by January 8”. Before becoming the head of Gemini, Winklevoss was a famous Olympic rower and in 2004 with his twin brother sued Mark Zuckerberg, alleging that Mark had stolen their ConnectU idea. to create the famous social networking site Facebook.
In a letter to Silbert, Winklevoss wrote: “I am on behalf of more than 340,000 users looking for answers.”
This $900 million is in the Gemini Earn program – which offers up to 8% rewards to customers who lend their crypto to other parties, specifically here Genesis Global Capital, a subsidiary of DCG. The program was forced to halt withdrawals after Genesis was caught up in the spiral of FTX collapse.
In an earlier statement in November 2022, Gemini said: “We are aware that Genesis – the lending partner of the Earn program – has paused withdrawals and will not be able to accommodate customer redemptions. goods as agreed.”
Winklevoss says she has tried to contact Silbert several times, most recently over Christmas, but has been met with silence or resistance. “You continue to refuse to meet with us to discuss a common solution,” Winklevoss wrote. “You hide behind lawyers, bankers and the investment process… your behavior is not only completely unacceptable but also unscrupulous.”
According to Winklevoss, DCG owes Genesis $1.675 billion, and claims that Silbert used the money “to promote greedy share buybacks, illiquid venture capital,” and irresponsible practices. with Grayscale.
Silbert tweeted refuting these claims: “DCG did not borrow $1.675 billion from Genesis” and “never missed a single Genesis interest payment nor on all current outstanding debt. ” He added that DCG made a proposal to Gemini on December 29, 2022 but has yet to receive a response.
DCG did not borrow $1,675 billion from Genesis
DCG has never missed an interest payment to Genesis and is current on all loans outstanding; next loan maturity is May 2023
DCG delivered to Genesis and your advisors a proposal on December 29th and has not received any response
— Barry Silbert (@BarrySilbert) January 2, 2023
In a letter to investors, Silbert said that Genesis owes DCG $575 million and must repay it by May 2023, according to the Wall Street Journal. In addition, there is a promissory note worth $1.1 billion that is due to be paid before June 2023
GBTC is where the crisis begins
Grayscale Bitcoin Trust (GBTC) is the source of tension between Gemini and DCG-Genesis, and also the root cause of the biggest chain crisis in crypto history to date: the bankruptcy of Three Arrows Capital (3AC), BlockFi, Terra-Luna, FTX…
Grayscale products continue to be a nightmare for investors as their discount to their fair value (the underlying assets held in the trust) has fallen. up to 40% with no fee reductions or ETF conversions in the near term.
Experts say that the collapse of Terra-Luna last spring was also partly due to the fact that investors had made bad bets on GBTC. Do-Kwon’s empire was like a dry bush, just waiting for a spark to burn.
Ethereum-based DeFi remains mired in a multi-year recession that has forced return-hungry investors further into the risk curve by gobbling up 20% yields from an algorithmic stablecoin. emerging (UST) and its emerging lending protocol (Anchor), without realizing they were oiled.
“This is a good reminder to invest wisely. If you don’t understand yields, you are yields,” says Ryan Selkis, founder of Messari.
Read more: Exit LUNA but “died” at the hands of UST
Many industry experts have attempted to summarize the fall of crypto dominoes with the impetus of GBTC, and the story can be understood as follows:
Grayscale Trusts is where the crisis begins. Specifically, these vehicles allow investors to purchase GBTC with their 401k plan through OTC-traded securities. But they’re not ETFs (exchange-traded funds), so they don’t have a typical creation and redemption mechanism. Eligible investors can instead create Trust shares with Bitcoin, hold the shares for a period of 6 months, then “flip” (transfer) them for heavy GBTC Premium for a period of time. long before 2021.
The GBTC Premium flip has become extremely popular and Grayscale Trading is going to be in full swing in 2020, reaching 40 billion USD AUM (assets under management) at its peak due to stimulus packages, Bitcoin halving events. and zero interest COVID policy in 2020. During its peak in February 2021, 3AC and BlockFi accumulated 10% of Trust stock with an investment of $4 billion. But then in batch Big crash of GBTC Premium3AC began to reduce some of its investments.
However, 3AC’s GBTC is stuck and in a pinch, while BlockFi is still subject to six-month holding restrictions. They “swallow” unrealized losses and rely on lending desks that allow them to borrow with GBTC collateral. Genesis Capital, Grayscale’s sister company, is one of the only lenders with an incentive to take GBTC seriously, given their affiliate control over the share buyback mechanism and in the interim Genesis can “squeeze” milk” large borrowers for interest.
BlockFi Lending desk and 3AC fund allowed GBTC to operate, but now they have to push the risk curve further. In 2021, this is not a big deal because everyone is making money like crazy. However, as the market dropped from its peak in November 2021, the tide started to recede. But Luna is still growing massively and mobilizing 1 billion USD in February 2022 to diversify the budget. 3AC is a major investor in Luna.
The Luna Foundation bought $1.5 billion in Bitcoin in UST from Genesis, which then sold off the UST and caused the stablecoin to lose its peg. Other funds and trading desks saw this loss of peg and a “bank run” happened to the UST. Luna went through a death spiral, and 3AC sank in two mega-transactions (UST/LUNA and GBTC), becoming insolvent. Their GBTC is liquidated and Genesis holds 35 million GBTC shares.
The “epidemic” spread strongly when many funds and trading desks connected with 3AC went bankrupt (Defiance) or were temporarily granted by FTX – also a lending and relief partner (BlockFi, Voyager ). All time bets in the crypto lending market then become fraught with risk and then dissipate. Genesis active loans decreased from $14.6 billion at the end of March 2022 to $2.8 billion at the end of September 2022.
Read more: 3AC and bankruptcy story evaporated 1 trillion USD
As active deposits depreciate, lending desks start making collateral calls and withdrawing the funds they have lent whenever possible.
Credit shrinks as people accelerate risk reduction, including Alameda. In August 2022, Alameda received a call for an outside loan from Genesis after the company realized that Alameda didn’t care much about the FTT number they used as collateral anymore.
At that time, Coindesk got the scoop and released details about Alameda’s financial situation and token reserves. The fund’s balance sheet is filled with illiquid stuff like FTX’s own FTT token and some DeFi tokens like Serum, which is FTX-backed and inflated in 2021.
Later, an analyst noticed that Binance moved $2 billion worth of FTT onto-chain and speculated that CZ was about to “dump” the position. A few days later, CZ confirmed that it plans to sell FTT and completely cut ties with FTX. This is $2 billion of an illiquid token.
FTT price collapsed, other important positions of FTX/Alameda also lost, despite their best efforts to control the damage. The company is in dire straits because its collateral is currently worthless and has no liquidity accounts or access to other credit (all of its partners have gone bankrupt or squirming). Even CZ pulled out of the FTX acquisition.
A few notes on the balance sheet info that has been circulating recently:
– that specific balance sheet is for a subset of our corporate entities, we have > $10b of assets that aren’t reflected there
— Caroline (@carolinecapital) November 6, 2022
FTX and the Alameda fund fell into trouble because of the lack of liquidity, and the client’s money was at risk. Since then, a “bank run” on FTX that wasn’t really a “bank run” happened.
So far, this is pretty much everything that’s been going on. Ryan Selkis gives the lesson: “Do not mix client assets, for bad trades it is better to cut losses early instead of increasing the risk and pray to God, maintain internal control and a balance sheet sound accounting, dividing assets among different custodians and partners, and of course, just keep trading what you can lose.”
Industry experts say that things probably don’t end here and the future of DCG and Genesis doesn’t look very good.
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