On Tuesday, Cameron, co-founder (along with his twin brother Tyler) of the Gemini digital asset exchange and lending platform, tweeted an open letter to DCG’s board of directors. Right up front, Cameron states his view that some 340,000 Gemini Earn users have been “defrauded” by DCG subsidiary Genesis Global Capital and, by extension, by Silbert “and other key personnel.”
— Cameron Winklevoss (@cameron) January 10, 2023
If you’re just joining us, this is the second public backhand Cameron has directed at Silbert after Genesis halted withdrawals in November, effectively stranding around $900 million in Gemini Earn customers’ funds that the Winklevii had lent to Genesis. The latter firm was caught short following this spring’s collapse of the Three Arrows Capital (3AC) ‘crypto’ hedge fund, which forced DCG to assume $1.1 billion of Genesis’s liabilities in the form of a ‘promissory note.’
Last week, Cameron accused Silbert of ducking his responsibilities in negotiating an acceptable resolution to this debacle. Cameron gave Silbert/DCG a January 8 deadline to “publicly commit to working together to solve this problem.” However, last weekend’s revelation that multiple U.S. federal agencies are probing financial transfers between DCG and Genesis likely complicated any resolution of the Gemini/Genesis tiff.
In Tuesday’s letter, Cameron flat out accused Silbert and his ilk of having “conspired to make false statements and misrepresentations to Gemini, Earn users, other lenders, and the public at large about the solvency and financial health of Genesis.” The intent was to “mislead lenders” regarding DCG’s claim to have absorbed the “massive losses” that Genesis incurred via 3AC’s collapse so as to “induce lenders to continue making loans to Genesis. By lying, they hoped to buy time to dig themselves out of the hole they created.”
I am still puzzled and disturbed by this situation. It’s like a Madoff feeder fund suing Madoff for fraud. IMHO, this Twitter war demonstrates once again how the entire crypto-ecosystem is a den of thieves. Get. Out. Now. https://t.co/NFRWq0UxQ8
— John Reed Stark (@JohnReedStark) January 11, 2023
We’ll get to the specifics behind Cameron’s allegations in a second, but DCG responded by calling his open letter “another desperate and unconstructive publicity stunt … to deflect blame from himself and Gemini.” DCG insists that it will “continue to engage in productive dialogue with Genesis and its creditors with the goal of arriving at a solution that works for all parties” but is also “preserving all legal remedies in response to these malicious, fake and defamatory attacks.”
Silbert, who tweeted an angry response to Cameron’s previous letter, eventually responded Tuesday with a letter to DCG shareholders, which we’ll address at length once we dispense with Cameron’s post-Festivus DCG-themed airing of grievances.
A carefully crafted campaign of lies
Cameron recounts how Genesis lent nearly $2.4 billion to 3AC before the fund collapsed last June. After liquidating the collateral that 3AC gave Genesis, there was still a $1.2 billion hole in the latter’s books. Cameron says this left Silbert with “two legitimate options: restructure the Genesis loan book (inside or outside of bankruptcy court) or fill the $1.2 billion hole. He did neither.”
Instead, Cameron claims Silbert “pretended” to fill this hole, then “embarked on a carefully crafted campaign of lies” to convince the public that DCG had “injected $1.2 billion of actual support into Genesis.”
Cameron cites a July 6 tweet by former Genesis CEO Michael Moro that claimed DCG “has assumed certain liabilities of Genesis related to [3AC] to ensure we have the capital to operate.” Cameron calls Moro’s claim “false and misleading,” given that DCG “hadn’t given Genesis so much as a penny of actual funding to make up for the 3AC losses.”
4/ Since then, we worked with @DCGco to find the optimal strategy to further isolate the risk. DCG has assumed certain liabilities of Genesis related to this counterparty to ensure we have the capital to operate and scale our business for the long-term.
— Michael Moro (@michaelmoro) July 6, 2022
The 10-year promissory note (at 1% interest) that DCG provided “was a complete gimmick that did nothing to improve Genesis’s immediate liquidity position or make its balance sheet solvent.” Cameron notes that neither Silbert nor anyone else at DCG “bothered to correct [Moro’s] misstatement.”
Damn you meddling kids!
Cameron goes on to recount how Matthew Ballensweig, then-head of trading and lending at Genesis, emailed Gemini staff a document containing “false and misleading” statements, including how losses incurred by 3AC’s collapse had been “predominantly absorbed by and netted against DCG balance sheet, leaving Genesis with adequate capitalization to continue.”
Cameron accuses DCG of “accounting fraud” via the same document, in which Ballensweig characterized DCG’s promissory note as a “current asset” valued at $1.1 billion. Cameron believes “a promissory note with a principal repayment due in 10 years falls outside the definition of a ‘current asset’ by a country mile.” Furthermore, “there is no market on earth that would value an unsecured long-dated promissory note at face value,” suggesting the real value of this note may be $300 million.
Cameron says DCG’s misrepresentations “were a sleight of hand designed to make it appear as if Genesis was solvent and able to meet its obligations to lenders, without DCG actually committing to the financial support necessary to make this true.” Channeling Scooby Doo, Cameron claims DCG “might have gotten away with it, if not for the FTX collapse.”
Greed is good, until it isn’t
Citing “greed” (apparently without irony), Cameron repeats allegations from his previous missive about how Genesis loaned 3AC so much money despite the latter’s “low quality of collateral” as part of a “much larger scheme designed to enrich the greater DCG enterprise.” Cameron says 3AC was using the borrowed funds to create shares in the Grayscale Bitcoin Trust (GBTC) of DCG subsidiary Grayscale, then posting these shares with Genesis as collateral to “borrow more to rinse and repeat.”
This scheme was based on the fact that, until early 2021, GBTC traded above the net asset value (NAV) of the 600,000+ BTC tokens held by the Trust. This created the arbitrage opportunity that 3AC was so keen to exploit.
But when GBTC began trading at a hefty discount to its NAV, 3AC lost the ability to dump its GBTC shares onto other suckers, leading to 3AC’s eventual collapse and the eventual $1.1 billion hole on Genesis’s books.
Cameron called 3AC “a mule shuttling the assets between the parties” on this merry-go-round, effectively “acting as a mere conduit for Genesis” in what Cameron called “swap transactions of [BTC] for GBTC shares.” By ceding the trading premium to 3AC, Genesis allegedly “never participated in the wins” and “only participated in the losses, turning what would otherwise have been a zero-sum trade into a negative-sum trade. Crazy town.”
Cameron claims that even after GBTC’s NAV trade inverted, Genesis didn’t close out 3AC’s position and even “continued to lend to 3AC on attractive terms and accept GBTC as collateral.” While this left Genesis vulnerable, DCG was only too happy to perpetuate this scheme due to the 2% annual fees that Grayscale imposed on shareholders of its various trusts. These fees—based on the value of a trust’s assets under management, not the trust’s share price—are believed to represent as much as three-quarters of DCG’s overall revenue.
With Grayscale restricting GBTC shareholders’ ability to convert their shares back into BTC, the trust was “Barry’s financial Hotel California that would print money for the DCG universe in perpetuity. The end would justify the means.”
All this time, Cameron claims Genesis failed to properly book the 3AC swap transactions “as the risky derivatives they were.” Instead, Genesis “hid them by mischaracterizing the first and last legs of these swaps transactions as collateralized loans on its balance sheet. This made the Genesis balance sheet appear healthier than it actually was, fraudulently inducing lenders to continue making loans.”
In the name of God, go
When the crypto party crashed last summer, Cameron claims Silbert “refused to take responsibility” and “resorted to committing fraud to protect his ill-gotten gains.” For this and other reasons cited in the letter, Cameron claims “there is no path forward” for DCG as long as Silbert remains CEO.
Cameron wants the board to “immediately” turf Silbert and install a new CEO “who will right the wrongs that occurred under Barry’s watch.” Once new management is in place, Cameron expresses confidence that “we can all work together to achieve a positive, out-of-court solution” that benefits all stakeholders.
Cameron’s letter makes no mention of any personal responsibility he and his brother bear for choosing to lend Gemini Earn customers’ cash to Genesis. Despite pre-crash claims of performing due diligence on third-party borrowers like Genesis—as well as conducting follow-ups “on a periodic basis” to “ensure the appropriate risk ratios and healthy financial condition of our partners”—Gemini appears to have simply bet Earn customers’ cash wherever they could get the highest returns.
Derar Islim, who replaced Moro as interim CEO of Genesis last August, issued a statement last week calling the efforts to save the company “a very complex process that will take some additional time.” But the sand in this hourglass is rapidly running out, and DCG’s board is facing a shrinking list of options, none of them all that palatable.
Go easy on Barry, he had a rough year
Silbert’s Tuesday letter to DCG shareholders starts by explaining how he’s been “reflecting quite a bit recently” on the past year, which he called “the most difficult of my life – both personally and professionally.”
Silbert lamented the “bad actors and repeated blow-ups” that plagued the sector in 2022 and left its “credibility and reputation … all but destroyed by a wave of unprecedented fraud and criminal behavior.” But perhaps the biggest blow was Silbert having his “integrity and good intentions questioned.” (Actually, people aren’t actually questioning these qualities, more like denying their existence.)
Before the sector and DCG can “get back to having fun and making a dent in the universe”—and hopefully making much smaller dents in the average crypto investor’s life savings—Silbert offered a prefab Q&A that he believes will help set the record straight regarding “speculation about DCG – some of which is reasonable and some that is completely baseless and false.”
Silbert almost immediately tries to distance DCG from Genesis and the mothership’s other subsidiaries, which he claims are “independent companies with their own management teams, financial and risk management protocols, and legal and compliance oversight… [their] own culture, operational structure, and incentive mechanisms.” While DCG “provides strategic guidance and general oversight to our subsidiaries … DCG does not direct any trades, loans, or borrows for Genesis’ business.”
While Silbert denies that any of DCG’s subsidiaries “commingle cash,” he does admit that, “like hundreds of other institutional investors, DCG borrowed capital from Genesis Capital, the lending arm of Genesis.” But DCG hasn’t borrowed from Genesis “since May 2022,” probably because DCG knew Genesis was effectively insolvent by that point.
DCG says it currently owes Genesis Capital $447.5 million—this amount “represents the amount that has been subject to a setoff”—that comes due May 2023. DCG used the loans to repurchase stock “from one of our earliest venture investors” while also making “investments in liquid tokens and public entities.”
In addition to cash, DCG currently owes Genesis 4,550 BTC tokens that DCG borrowed to “hedge GBTC long positions to remain market neutral on such positions.” DCG’s open-market GBTC purchases “were made when GBTC traded at a meaningful discount to NAV.”
DCG also denies ever having “a relationship” with 3AC, and Silbert “does not recall” any conversations with 3AC’s principals, “aside from an introductory call with one of the co-founders in 2020.” Genesis did have a “trading and lending relationship” with 3AC, which is why DCG finds itself in this fine mess.
The SBF question
Much has been made in recent months of Silbert’s ties to Sam Bankman-Fried (SBF), founder of FTX and its affiliated market-maker Alameda Research. During Andrew Ross Sorkin’s post-bankruptcy conversation with SBF, it was revealed that SBF “served on the board of [BTC mining outfit] Genesis Digital Assets.” That board seat came courtesy of a $1.15 billion investment that Alameda made in Genesis Digital between August 2021 and April 2022.
In Tuesday’s Q&A, DCG answered simply “No” as to whether SBF has “ever been on the board of directors of Genesis.” But it’s unclear which ‘Genesis’ DCG is referring to here, given the entity has multiple offshoots, including the troubled lending platform. DCG also denies ever having “a relationship with Alameda. Genesis had a trading and lending relationship with Alameda.”
DCG did take a $250,000 stake in FTX in July 2021, part of DCG’s “ongoing strategy to invest in exchanges all over the world.” DCG also had “a trading account with FTX” but claims that “less than 1% of all our trading volume” was done through FTX.
Furthermore, Silbert “has no personal or professional relationship” with SBF. (Note the use of the present tense, which doesn’t preclude Silbert having ‘had’ such ties.) “Aside from a conversation in the Summer of 2022 and a few emails at the time, Barry does not recall ever meeting, speaking with, or otherwise privately communicating with him.” (Silbert’s scant powers of recall make it seem as if he was queried by Robert Mueller.)
The summer of 2022 was when Alameda repaid a $2.5 billion loan it had taken from Genesis, even though FTX/Alameda was by that time using customer funds to plug its financial holes. Genesis—and by extension DCG—could be in even worse trouble should the FTX/Alameda bankruptcy court choose to ‘claw back’ a loan repaid with FTX customer cash.
Regardless, it’s funny (not ‘ha-ha’ funny) how all these entities (including DCG) invest a sum into Genesis then eventually take even more money out. Almost like good-faith cover for dipping into someone else’s piggy-bank.
So why the bailout?
Despite DCG’s claims of the independence of its various subsidiaries, DCG “believed that Genesis – both the trading division and the lending desk – were worth protecting” in the wake of 3AC’s collapse. DCG’s board concluded that it was “in the best interest of Genesis, its lenders, and DCG to try to help support Genesis.” Swell guys, huh?
In the hope of dampening down the market’s “palpable fear … of contagion,” DCG “effectively assumed Genesis’s risk of loss on the Three Arrows Capital loan with no obligation to do so.” In gratitude, Genesis agreed that any funds recovered from 3AC’s decomposing corpse “will go directly to paying down” the imaginary promissory note (rather than paying off, say, those ingrates at Gemini).
And in yet another fortunate turn for DCG shareholders, Genesis agreed to extend the maturity of DCG’s $1.1 billion promissory note until 2032 and made the note “not callable.” So, in the likely event that Genesis goes belly-up, DCG can effectively pretend that the whole imaginary $1.1 billion obligation never existed.
Happy days are here again
GBTC’s share price enjoyed a modest bump on Tuesday, closing at $9.88. The shares haven’t been this high since FTX filed for bankruptcy, although they’re still well off their $50+ high in March 2021. The modest surge reportedly came courtesy of Morgan Stanley doing some bottom-feeding, possibly because they anticipated Silbert’s public plea for more time and understanding.
Then again, Morgan Stanley may be betting on DCG being forced to unwind or sell its Grayscale subsidiary to ensure its own survival and the breakup value is worth more than the whole at this point.
And with the Winklevii clearly not content to be publicly humiliated a second time—they still haven’t gotten over the whole Zuckerberg thing—don’t expect them to stop holding Silbert’s feet to the flame. Despite their reluctance to admit their own culpability in losing Gemini customers’ funds to the siren song of ‘number go up.’
Firmly bolting the barn door now that the last horse has fled, Gemini formally “terminated” Gemini Earn’s ‘master loan agreement’ with Genesis on Tuesday. The notification claimed that this “requires Genesis to return all assets outstanding in the program,” as if that would accomplish the fine art of squeezing blood from a stone.
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