Digital Currency Group (DCG) and its founder Barry Silbert once tried to short the controversial Tether (USDT) stablecoin and unsuccessfully pitched a merger of his Genesis Global Capital digital asset custodian with rival Gemini, according to new court filings.
Last week, DCG and Silbert each filed separate motions to dismiss the fraud complaint filed against them (and Gemini) last October by New York Attorney General (NYAG) Letitia James. An amended complaint filed last month tripled the damages the NYAG seeks to reclaim from DCG/Silbert/Gemini to $3 billion based on James’ belief that the total losses inflicted on Genesis/Gemini customers and investors were greater than originally known.
The gist of the NYAG complaint is that DCG/Silbert attempted to cover up losses Genesis suffered following the mid-2022 collapse of the Three Arrows Capital (3AC) ‘crypto’ hedge fund, to which Genesis had loaned billions of dollars. The empty cupboards were ultimately exposed following the bankruptcy later that year of Sam Bankman-Fried’s FTX exchange and its affiliated market maker Alameda Research, which had also borrowed billions from Genesis.
Gemini Earn customers were left hanging when Genesis suspended withdrawals in November 2022 before filing for bankruptcy the following January. Gemini had lent Genesis around $1.1 billion of assets belonging to its Gemini Earn customers and continued to forward customer assets to Genesis even as Gemini founders Cameron and Tyler Winklevoss were pulling other assets from Genesis.
The gist of DCG’s motion is that they “did nothing wrong.” DCG claims the NYAG’s complaint is comprised of “a thin web of baseless innuendo, blatant mischaracterizations and unsupported conclusory statements” based on the NYAG’s desire for “a headline-worthy scapegoat for losses caused by others.”
The NYAG’s suggestion that DCG misled investors while using its Genesis subsidiary as its piggy bank is apparently all wrong. “On a net basis,” DCG says it plowed “hundreds of millions of dollars of additional capital” into Genesis as the latter floundered.
Moreover, the $1.1 billion promissory note that DCG issued to Genesis—with a 1% interest rate and a 10-year maturity date—is (allegedly) “an entirely valid, binding obligation” and not at all based on any actuarial tables that might suggest the people who have to honor this note could well be dead in 10 years.
Silbert’s motion picks up on this theme, saying that if he “actually believed Genesis was insolvent in June 2022, it would have made no sense” to provide Genesis with the note. DCG “was not required to support Genesis at all” but the upstanding DCG/Silbert are “now on the hook to Genesis,” whose creditors are pressing for early payment of this note.
As for how people came to think that Genesis was financially sound, this is reportedly due to Genesis itself having “mischaracterized the terms” of the note in its public and private statements. But “there is no pleaded basis to infer that Mr. Silbert knew anything about that.”
We’ll spare you the further ‘we wuz framed’ aspects of the two motions to focus instead on some of the more out-there revelations in Silbert’s motion, which offer an alternative reality of how 2022’s onset of ‘crypto winter’ might have rewritten the digital asset sector’s commercial landscape.
Misery loves company
As Genesis was melting down, Cameron Winklevoss met with Silbert on October 20, 2022. At this meeting, Barry “suggested a potential Gemini-Genesis-DCG partnership,” a scenario that included “a potential merger of the companies.” Cameron was said to have been “intrigued” by this suggestion.
In a post-meeting email, Silbert went further, saying a Genesis-Gemini combo “would be a juggernaut and would be competitive with Coinbase (NASDAQ: COIN) and FTX.” Silbert also envisioned a plan to roll out Gemini’s GUSD stablecoin “across DCG and give Circle/USDC
and [sic] run for their money.”
Silbert even proposed transferring to Gemini the assets then held by DCG’s Grayscale Investments subsidiary, which included around 600,000 BTC tokens in its GBTC Trust. (This stash has since fallen to around 420,000 since the launch of BTC spot-based exchange-traded funds in January, which allowed GBTC holders to finally sell their locked-up shares for BTC.)
The Genesis-Gemini combo would also be “super exciting to investors,” with Silbert dreaming of raising up to $1 billion and taking the combined operation public “in 24 months.”
But Silbert let his optimistic mask slip by acknowledging in the same email that the threat of Gemini Earn pulling its assets off Genesis “introduces potential catastrophic risk to Genesis and thereby Gemini, so at the very least, they need to revisit that decision … It will be difficult, if not impossible, for Genesis to find replacement liquidity if those new sources of debt and equity know that the Gemini deposits are leaving.”
Go shorty
The other major revelation in Silbert’s suit is a June 13, 2022 email titled ‘Fun never ends’ in which Silbert addresses the ongoing fallout from 3AC’s collapse. Silbert notes that 3AC owes Genesis “upwards of $500 mm of unsecured exposure,” and Silbert is convinced “they won’t be able” to post additional collateral.
Silbert goes on to describe the “cascade of forced liquidations happening right now everywhere.” Then Silbert says DCG is “doing our best to weather the storm, but I’m afraid the worst might be yet to come with the potential for Tether to blow up (we are short Tether about $400 mm to protect us a bit in that scenario).”
Reports of hedge funds shorting Tether surfaced a few months prior to Silbert’s email, with Genesis Global Trading (yet another DCG subsidiary) confirming that it had discussed the matter with some of these funds. A few weeks after Silbert’s email, the Wall Street Journal quoted GGT’s head of institutional sales confirming that it had booked “hundreds of millions” worth of Tether short positions.
This episode may serve to demonstrate Silbert’s recklessness and/or foolishness. One simply doesn’t short Tether, at least, not if you don’t want to lose your entire stake to Tether itself. Then again, since Silbert once publicly expressed a wish to “short myself,” perhaps he was only being honest when he called himself “a complete and total professional failure.”
Gemini Earn customers catch a break
In February, Genesis proposed a settlement with the NYAG as part of its bankruptcy restructuring that DCG vehemently opposes, in part because it “strips DCG of other valuable economic and corporate governance rights.” (Essentially, the proposal would focus on paying creditors rather than equity holders like DCG.)
DCG claims that it would support “a plan that pays creditors one hundred cents on the dollar” but doesn’t support the Debtors’ “cramdown plan that pays unsecured creditors hundreds of millions of dollars more than the full amount of their petition date claims—and which disproportionately favors a small controlling group of creditors over others.”
Gemini recently announced “the successful resolution of Earn” following its own settlement with Genesis that will result in “all Earn users receiving 100% of their digital assets back in kind.” Unlike the FTX restructuring, which only promised to return the cash value of customers’ digital assets at the time of its 2022 bankruptcy, Gemini customers will enjoy the benefits of the current token value bubble.
Gemini claims this will result in “over $1.8 billion” being returned to Earn customers, a $700 million premium over the value of the assets held at the time Genesis went under. (This deal still requires bankruptcy court approval that could take around two months.)
Gemini’s announcement came shortly after the New York State Department of Financial Services (NYDFS) announced last month that it had imposed a $37 million penalty on Gemini for “significant failures that threatened the safety and soundness of the company.” (This is a separate action from the NYAG complaint.)
DFS also convinced Gemini to cough up an additional $40 million to contribute to the Earn customers’ refunds. Gemini was warned that DFS retained the right to bring further action against the company if it failed to return the full value of its customers’ digital assets.
Genesis Global Trading, which was not involved with Gemini Earn, made its own settlement with DFS in January, paying $8 million “for compliance failures that violated DFS’s virtual currency and cybersecurity regulations and left the company vulnerable to illicit activity and cybersecurity threats.”
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