Amidst the tumult of an ongoing crypto crash, the industry’s seediest players appear to be in a race against time to air each other’s dirty laundry before anyone can get a good look at their own.
The latest example of this phenomenon are the founders of 3AC: Su Zhu and Kyle Davis. 3AC was an early harbinger of contagion from the dazzling Luna/Terra collapse back in June: being the largest venture capital fund in crypto at the time, 3AC was one of the biggest holders of the Terra (LUNA) stablecoin when it crashed, and as a result 3AC went bankrupt.
This week, both founders came out swinging against Sam Bankman Fried’s FTX and Barry Silbert (founder of Digital Currency Group), accusing the two of colluding to attack Terra and by extension 3AC, as well as engaging in a ponzi-esque lending scheme:
Here's rough summary of dcg situation
1) they conspired w FTX to attack Luna and steth and made a fair bit doing so
2) they took substantial losses in the summer from our bankruptcy as well as Babel, and other firms involved in gbtc
3) they could've calmly restructured then
— 朱溯 🐂 (@zhusu) January 3, 2023
SBF can try to argue he was a child playing in an unregulated offshore sandbox.
But Barry was a full grown man who architected the entire highly regulated lending daisy chain from his left to right pocket.
It’s going to get messy af.
— Kyle Davies 🐂 (@KyleLDavies) January 2, 2023
Zhu coming out against FTX isn’t a surprise: after all, what better smokescreen could there be for Zhu’s return from disgrace than an even bigger and more public disgrace in SBF?
Silbert is a bit different. Silbert, of course, is the founder of Digital Currency Group: DCG is the parent to a broad portfiolio of digital asset companies which include CoinDesk, Foundry and most pertinently, Genesis and Grayscale Investments, which manages the Grayscale Bitcoin Trust (GBTC).
Zhu didn’t elaborate on exactly why he believes that DCG and SBF orchestrated attacks on Luna/Terra, there is reason to believe it’s true. The New York Times reported that the U.S. Department of Justice is investigating SBF over potential market manipulation concerning—you guessed it—TerraUSD and Luna.
And SBF and Silbert are closely linked. Zhu claimed that SBF served on the board of Genesis, DCG’s crypto lender, something which SBF did not deny when asked about it by the New York Times. Alarmingly, it also seems that Alameda at one point paid a $2.5 billion loan to Genesis in August. Where did that money come from? Given what we now know about the comingling of corporate and client funds not just within FTX but between FTX and Alameda, it’s hard to imagine that this was paid using anything other than FTX customer deposits.
If that is true, then DCG could be headed for even choppier waters than originally thought. Bankruptcy attorneys are currently picking through the remains of the SBF empire to see what, if anything, can be recovered for FTX’s estimated 1 million creditors. That $2.5 billion, then, belongs to those creditors. And the U.S. bankruptcy code makes express provision for clawing back such transfers, with bankruptcy trustees granted added clawback powers in cases of fraud. Clawback powers typically arise in two circumstances—where there has been a fraudulent transfer or where there has been a preferential transfer.
A fraudulent transfer occurs when a debtor such as FTX makes a transfer in the two years prior to filing for bankruptcy with the intent to either delay, hinder or defraud creditors or became insolvent/intended to incur more debt than they could pay back due to the transfer.
A preferential transfer is a transfer made to a creditor in the 90 days preceding a bankruptcy filing when insolvent, in such a way that the creditor receives more than they would have via the subsequent bankruptcy process. Alameda filed for bankruptcy on November 11, so depending on when the loan was repaid this puts the $2.5 billion transfer to DCG’s Genesis right on the edge of the threshold—suspiciously so. However, the 90-day threshold will not apply if the transfer is made to an insider—such as a business partner or friend.
An argument could be made for Alameda’s $2.5 billion transfer to Genesis to fall under either category—meaning of all the companies caught in the SBF web currently at risk of receiving a clawback order, Genesis and by extension DCG may be the biggest.
Lie with dogs, get fleas
For Zhu to come after Silbert is more notable because 3AC was so vulnerable to such an attack on Terra/Luna thanks to an absurd lending scheme between DCG entities and 3AC to extract premium from GBTC shares.
GBTC is an investment product which allows investors to gain exposure to Bitcoin without holding the underlying asset. It sounds like an ETF, but Silbert has repeatedly tried and failed to have it formally recognized as such by the SEC. As long as GBTC isn’t actually an ETF, its shares can only be offered directly to investors of a certain size and stature; GBTC investors buy those shares at net asset value (NAV)—in other words, at the true value of each share in accordance with the value of the BTC held by the Trust. Further, shares purchased by these accredited investors can be sold on secondary markets to the average joe, but only after the expiry of a six month lockup period. As a result, GBTC shares are usually always traded either at a premium to, or (more likely) a significant discount to their NAV.
When 3AC went bust, sleuths began poring over 3AC’s financials to find out exactly how things went so wrong for the company. This turned up the aforementioned scheme: it appears that 3AC would borrow BTC from Genesis, which it would then send back to Genesis in exchange for GBTC at NAV. What’s more, it appears that 3AC was then using these shares as collateral on further USD loans from Genesis. As long as GBTC was being publicly traded at a premium to NAV, 3AC was essentially able to print money. However, when GBTC began to trade at a discount to NAV in February 21—a discount which steepened amid the chaos of 2022—then suddenly 3AC is swamped with loans it can’t pay back.
For DCG’s part, it doesn’t particularly care about whether GBTC is trading at a discount to NAV: via Genesis, they clear a 2% management fee on all the assets in the Trust, and that fee is based on the NAV rather than the market price for GBTC. Since GBTC shares can’t be redeemed until Silbert’s longstanding promise of an ETF conversion materializes, GBTC’s discount to NAV only matters to DCG insofar as it makes GBTC a less attractive option for future accredited investors.
There are no good guys here
So, for Zhu and Davies to be the ones calling foul over the cynical exploitation of the glaring holes in the digital asset industry is somewhat rich. Even moreso due to the fact that Zhu and Davies appear to not be engaging with their own bankruptcy proceedings.
Both founders originally went radio silent on social media and had apparently fled to Dubai shortly following the 3AC collapse, so for them to stick their necks out to take a bite out of a competitor is naturally of interest. In fact, the liquidators in charge of dismantling 3AC complained to a New York bankruptcy court that the 3AC founders were becoming vocal on social media despite the fact that they ‘repeatedly fail to engage’ with liquidators over 3AC’s assets.
Naturally, Zhu and Davies are happy to blame the collapse of Terra for 3AC’s woes, because it makes it easier for them to ignore the fact that they are implicated in Silbert’s own reckless GBTC lending scheme. But the reality is that while the Terra collapse’s impact on the market amounted to a deathblow to 3AC, 3AC has actually been in major financial trouble since at least 2020, as shown by 3AC’s insolvency documents. Analysed by Francis Coppola, they show that the company was massively overleveraged, in part thanks to loans taken from Zhu and Davies directly and worsened by the fact that the assets it did hold were almost all risky crypto bets.
So while Zhu may be right to complain that SBF and Silbert conspired to sink Luna, in doing so they ignore the much more proximate cause of the 3AC collapse: their own recklessness and greed. If a reckoning is due to SBF and Silbert’s DCG, so too is one due for Zhu and Davies.
— Dells (@CryptoDells) January 2, 2023
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