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Barry Silbert sweats as FBI probes Digital Currency Group’s financial transfers

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Barry Silbert appears to be living on borrowed time as U.S. federal authorities probe Digital Currency Group’s (DCG) questionable financial transfers.

Late last week, Bloomberg reported that Federal Bureau of Investigation (FBI) agents had been interviewing Cameron Winklevoss, co-founder of the Gemini digital asset exchange/lending business, regarding allegations that DCG boss Silbert misrepresented the financial health of DCG’s now-bankrupt lending arm Genesis Global Capital. Genesis filed for bankruptcy protection in January, dragged under by last year’s spate of ‘crypto’ insolvencies, including the Three Arrows Capital (3AC) hedge fund.

One of Genesis’s largest creditors was Gemini, which made the ill-advised decision to transfer $900 million worth of its Gemini Earn customers’ cash to Genesis to realize a greater interest rate on their deposits. Cameron and his brother Tyler have been struggling to convince bankruptcy courts that DCG fraudulently shuffled its financial deckchairs to ensure smooth sailing for Silbert as Genesis sank beneath the waves.

Bloomberg reported that FBI officials, along with their counterparts at the Department of Justice (DoJ) and the Securities and Exchange Commission (SEC), have interviewed Cameron in recent months regarding his allegations. Both the DoJ and SEC were previously reported to be investigating DCG’s financial transactions with its Genesis unit pre-bankruptcy. New York Attorney General Letitia James reportedly joined this investigative pile-on last month.

At the heart of these discussions is the $1.1 billion promissory note that DCG issued to its Genesis subsidiary following 3AC’s May 2022 implosion. Genesis had lent billions to 3AC, and the resulting shortfall required DCG to act swiftly—and to be seen doing it—to keep Genesis afloat. But Genesis suffered additional losses following last November’s collapse of the FTX exchange that proved too great for DCG to paper over.

DCG failed to honor a May 2023 deadline for repayment of $630 million in loans Genesis made to DCG prior to its bankruptcy. Meanwhile, DCG’s promissory note isn’t due until 2032, a fact that many Genesis creditors believe indicates DCG is simply playing for time because it has no way of making good on its subsidiary’s losses. DCG has floated several restructuring plans for Genesis that have ultimately failed to win the approval of major creditors like Gemini.

Let’s not make a deal

On August 29, Genesis, DCG, and the Official Committee of Unsecured Creditors (UCC) announced an agreement in principle that would result in unsecured creditors receiving anywhere from 70-90¢ on the dollar. In exchange for being released from future obligations, DCG would supply $275 million in installment payments, a $328.8 million first-lien facility with a two-year maturity, and an $830 million second-lien facility with a seven-year maturity.

Gemini’s response to this agreement called it “woefully light on specifics” and “woefully light in economic consideration.” The purported 70-90% recoveries are “completely unsubstantiated” and typical of DCG’s alleged “track record [of] subversion and delay.”

Gemini said its objections were shared by a separate group of Genesis lenders owed some $2.4 billion who aren’t involved with the UCC. These lenders called the proposed agreement “wholly insufficient” and took exception with the notion that DCG would be released from future legal claims regarding its Genesis-related activities.

Gemini also objected to a mid-August deal Genesis struck with FTX Debtors, the court-appointed group trying to make sense of Sam Bankman-Fried’s collapsed ‘crypto’ empire. FTX debtors initially sought to claw back around $4 billion from DCG et al. but agreed to lower this to just $175 million.

That higher figure included $2.1 billion in loans and collateral that FTX’s affiliated market-maker Alameda Research repaid to Genesis shortly before FTX/Alameda filed for bankruptcy. Genesis and its affiliated entities also successfully withdrew an additional $1.8 billion from FTX before the lights went dark.

Genesis said the deal will help “smooth the path” for its restructuring plan, according to Genesis’s interim CEO Derar Islim, who also touted that the FTX claims against Genesis had been resolved “at a fraction of their face value.”

But since FTX’s rank-and-file customers have still yet to recover the billions of their own deposits stranded when SBF went bankrupt, questions are mounting as to whether Silbert’s companies were repaid with customer cash—cash that now appears to be permanently beyond FTX customers’ ability to recover.

On August 31, Gemini filed papers objecting to the “sweetheart” Genesis-FTX deal, accusing DCG of seeking to “buy the support of the FTX Debtors, and their votes” for the proposed Genesis restructuring plan. Said vote will benefit only DCG “at the expense of recoveries” to Genesis’s other creditors.

Schadenfraud

In July, following the publication of a letter slamming Silbert for fostering “a culture of lies and deceit,” Gemini filed a civil suit alleging fraud by Silbert and DCG. The suit accused the defendants of lying about operating via “robust risk-management practices and a supposedly thorough vetting process of the counterparties to which it re-lent the assets.”

The irony here is high, given Gemini’s utter lack of due diligence in handing their money over to Silbert, simply because Genesis was offering a higher interest rate than most (by loaning assets to 3AC). Gemini also reportedly misled its Earn customers by appearing to suggest that the Federal Deposit Insurance Corporation covered deposits, whereas the Earn program was under no such protection.

In further evidence that both parties are guilty here, in January, both Gemini and Genesis were hit with civil suits by the SEC, which accused them of offering unregistered securities to the public. The two companies have attempted to have these lawsuits dismissed so far without success.

While both parties may ultimately face civil sanction for betraying their customers, Gemini’s faults may be slightly more due to ineptitude than DCG’s more criminal activities.

Genesis just couldn’t say ‘no’ to DCG

While Genesis may have reached a deal with DCG and the unsecured creditors on August 29, September 6 saw Genesis sue DCG in U.S. Bankruptcy Court for “turnover of certain property,” aka the $630 million loan that DCG was supposed to repay in May. While Genesis “agreed to stay the turnover action” to ensure the aforementioned agreement in principle could go forward, there are some exhibits submitted by Genesis that bear mentioning.

Genesis and DCG struck a ‘Master Loan Agreement’ in 2019, leading to Genesis lending DCG some 1,800 ETH tokens to create shares in the Ethereum Investment Trust of another DCG subsidiary, Grayscale Investments. DCG agreed to pay 9% interest for the 13-month loan duration but wasn’t required to provide any collateral whatsoever. (Try that at your local bank.)

On June 18, 2022, Genesis lent DCG around 18,700 BTC tokens at 3.85% interest but with no maturity date (the collateral field was left blank). This loan was amended on November 11, 2022—the day FTX/Alameda et al. filed for bankruptcy—involving 4,550 BTC tokens at 3.85% but with a maturity date of May 11, 2023. This amended loan was followed by a superseding term sheet that was nearly identical, except it was to be dated November 10, 2022—the day before FTX’s bankruptcy—and a new interest rate of 7%.

A ‘partial loan payoff letter’ dated November 10 shows that DCG gave Genesis nearly 26,000 shares of Grayscale’s BTC Trust (GBTC) worth nearly $251 million at the time to cover all but the 4,550 BTC Tokens in the June 2022 loan agreement.

It’s worth remembering that GBTC shares were, at the time, trading nearly 42% below the value of the BTC tokens the shares represented. It’s as if DCG said we earn 2% fees on the value of the trust’s assets under management, not the value of the shares, so let’s keep the BTC. Accepting payment in GBTC shares required Genesis to waive certain requirements of the loan agreement, but hey, the things you do for family, right?

On May 9, 2023, DCG asked Genesis to forget the whole May 11 deadline for repayment of those 4,550 BTC tokens and “reinstitute the BTC Loan as an Open Loan.” On May 12, Genesis attorneys—apparently realizing how this ongoing charade would look in court—wrote DCG to say they’d failed to provide “timely notice” of this desire to extend the loan agreement, and thus, the loan was officially in default.

Genesis then began filing late fee invoices with DCG, none of which appear to have been paid. The ‘collateral balance’ fields of these invoices show a variety of largely illiquid tokens, including around 182,500 Cardano (ADA), nearly a million Helium (HNT), 465 Kusama (KSM) and 129,000 Tezos (XTZ).

The timing of the June BTC loans is ominous, given DCG would have understood by then that Genesis was in dire straits due to its loans to 3AC. Mere days before those loans were inked, all signs pointed to 3AC’s insolvency. Genesis had lent 3AC nearly $2.4 billion—as part of an alleged in-out scam designed to boost the value of GBTC shares—only half of which it was able to reclaim by liquidating 3AC’s collateral.

So, facing a $1.2 billion shortfall on its books, why would Genesis surrender an additional $630 million of sorely needed liquidity? Mainly when there seemed to be no assurance that DCG would be able to repay. And all of this occurred without informing Genesis depositors? This could prove to be one of the FBI’s easier convictions.

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