On Monday, Cameron Winklevoss, who with his twin brother Tyler control the Gemini digital asset exchange and lending platform, tweeted an open letter to DCG boss Barry Silbert. The blistering letter accuses Silbert of failing to return $900 million in Gemini Earn customers’ funds that the Winklevii naïvely lent to DCG subsidiary Genesis.
— Cameron Winklevoss (@cameron) January 2, 2023
The New York-based Genesis Global Capital lending business abruptly halted withdrawals in November, with Silbert blaming “an issue of liquidity and duration mismatch in the Genesis loan book.” Gemini Earn had around $900 million locked up on Genesis, the fate of which appears ever more tenuous after Genesis hired a ‘restructuring adviser’ to help unravel its estimated $2.8 billion in outstanding loans. More than half of this sum is owed to Genesis by DCG.
With DCG teetering on the brink of its own insolvency, Gemini and other Genesis creditors formed a creditors’ committee to work out a plan “to resolve the liquidity issues at Genesis and DCG and provide a plan for the recovery of funds.” Cameron’s scathing letter to Silbert accuses the DCG boss of “engaging in bad faith stall tactics” to delay the inevitable reckoning.
Cameron claims Silbert received a proposal from the creditors’ committee on December 17, with an updated version arriving on Christmas Day. Cameron accuses Silbert of refusing to “get into a room with us to hash out a resolution” and “agree to a timeline with key milestones.” Cameron goes on to accuse Silbert of “hid[ing] behind lawyers, investment bankers, and process. After six weeks, your behavior is not only completely unacceptable, it is unconscionable.”
Twisting the knife further, Cameron tells Silbert that the latter’s apparent belief “that you can quietly hide in your ivory tower and that this will all just magically go away, or that this is someone else’s problem, is pure fantasy … this mess is entirely of your own making.”
Cameron notes that DCG owes Genesis $1.675 billion, which Cameron claims Silbert used “to fuel greedy share buybacks, illiquid venture investments and kamikaze Grayscale NAV [net asset value] trades that ballooned the fee-generating AUM [assets under management] of your Trust.” Cameron urged Silbert to “dispense with this fiction” that Genesis is a wholly independent company, saying “DCG and Genesis are beyond commingled.”
Cameron pulled on the public heartstrings by describing the 340,000 Gemini Earn customers as “not just numbers on a spreadsheet, they are real people.” Cameron listed school teachers, husbands and wives, and a clear father of the year candidate “who lent his son’s bar mitzvah money to you.” Cameron set a January 8 deadline for Silbert to “publicly commit to working together to solve this problem.”
I know you are but what am I?
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
Silbert replied to Cameron’s public shaming thusly: “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 29 and has not received any response.”
It’s worth noting that before Monday, Silbert hadn’t tweeted since December 19, when he addressed DCG’s annus horriblis by saying he was “looking forward to getting this year behind us.” Since 2023 appears to have started off on an equally sour note, perhaps Silbert should crawl back under the covers and sit this year out entirely.
Cameron was quick to respond to Silbert’s retort, saying, “Stop trying to pretend that you and DCG are innocent bystanders and had nothing to do with creating this mess. It’s completely disingenuous. So how does DCG owe Genesis $1.675 billion if it didn’t borrow the money? Oh right, that promissory note…”
Cameron may be right about the lack of meaningful distance between DCG and its various offshoots, but his vision turns myopic when he blames Silbert for the precarious state Gemini customers find themselves in. After all, it was the Winklevii who thought it was a smart play lending its customers’ life savings and little Irving’s bar mitzvah bucks to a Silbert-led company with apparently little in the way of actual due diligence.
If Genesis never existed, the Winklevii would have handed their customers’ cash to some other dodgy ‘crypto’ lender promising ludicrously high returns, who in turn would have lent that cash to yet another company offering even greater rewards. All of this was based on the inane ‘number go up’ fallacy, as well as the fact that there’s nothing constructive to do with these function-free casino tokens, so might as well let ’em ride.
The Winklevii are clearly looking to redirect the finger of scorn in someone else’s direction after being hit with a class action lawsuit two days after Christmas. The suit, a response to Gemini suspending its Earn program on November 16, alleges that the company was offering unregistered securities and marketing said securities as “secure” and failing to adequately state the risks involved.
A request for class action arbitration was filed Monday against Genesis and DCG by three Gemini Earn users who accused Genesis of breaching its Master Agreement with Gemini. The trio accuse Genesis of concealing its insolvency from its customers as early as last summer, a subterfuge in which Genesis allegedly conspired with DCG.
Sharks smell ‘crypto’ blood in the water
The Winklevii may well force Genesis into bankruptcy, which would force DCG to liquidate its assets, with DCG’s own bankruptcy following shortly thereafter. Trouble is, there’s just not enough actual money in these entities—or in the whole ‘crypto’ sector, to be honest—to make all their customers whole. There is one significant cache of assets that could come into play here, but unlocking it could cause more problems than it solves.
**Genesis bankruptcy will trigger the liquidation of DCG assets (based on callable loans). DCG bankruptcy quickly follows.
**Grayscale Trust assets will be at significant risk
— Andrew (@AP_Abacus) January 3, 2023
Recall the complaint filed in December against DCG’s Grayscale Investments by the Fir Tree family of hedge funds. The complaint alleged that “DCG, Genesis, and their affiliates are using the [Grayscale Bitcoin] Trust and its outstanding shares to keep their own finances afloat.”
GBTC has custody of roughly 644,000 BTC tokens, but since early 2021 the Trust has traded at a hefty discount to the NAV of these tokens. Worse, GBTC shareholders aren’t allowed to redeem their shares—which have lost 80% of their value in a little over a year—without the Trust’s permission. Worse still, the Trust charges an annual 2% fee on the market value of GBTC’s total AUM rather than the diminished share price. DCG is believed to derive as much as 2/3 of its total revenue from Grayscale’s management fees.
Two new characters have entered the Shakespearean drama that is DCG.
Fir Tree and Valkyrie arrive on the scene with blades unsheathed.
We also have a new puzzle on Fir Tree's true motivations…
— Ram Ahluwalia, crypto CFA (@ramahluwalia) December 31, 2022
This weekend, Lumida Wealth Management co-founder/CEO Ram Ahluwalia offered his perspective on Fir Tree’s Grayscale suit and how it might relate to a short-selling position Fir Tree opened against Tether’s USDT stablecoin last spring. That short position envisioned an “asymmetric upside” by March 2023, the asymmetry based on the fact that Tether could well slip below its 1:1 peg with the U.S. dollar but was (theoretically, at least) far less likely to rise above that peg.
Ahluwalia believes that Fir Tree views’ crypto’ as a three-legged stool, with Grayscale, Tether, and the regulatory-averse Binance exchange each representing one leg. If any one of them goes, the stool collapses. While Fir Tree has no cards to play against Binance, it seems Grayscale and Tether offer easier targets.
Ahluwalia suggests that Fir Tree may have filed its Grayscale complaint in the hope that it might deter investors from investing in the already shaky Silbert vehicle. Fir Tree appears to be betting that a DGC collapse would force an unwinding of GBTC that would flood the market with BTC, creating downward pressure on the token’s value and a ripple effect on USDT.
Fir Tree isn’t the only entity targeting DCG. Last week, Tennessee-based crypto asset manager Valkyrie Investments proposed taking over GBTC management from Grayscale. GBTC investors are likely intrigued by Valkyrie’s proposal to slash the Trust’s management fees from 2% to 0.75%, but also its pledge to “attempt to offer redemptions” at NAV in both BTC and cash. (That latter pledge could also put downward pressure on BTC.)
Where Valkyrie would get the cash to assume control of Grayscale is unclear, given that Valkyrie’s total assets represent less than 5% of GBTC’s. In the meantime, Valkyrie is launching a Valkyrie Opportunistic Fund that will “take advantage of the massive discount in the spread between the NAV and price of GBTC.”
Fir Tree and Valkyrie may be “strange bedfellows,” but Ahluwalia nonetheless believes the combined effect of their (uncoordinated?) moves are “lowering the value of Grayscale” and could indeed deter VC’s from taking a chance on anything affiliated with DCG, which would make Silbert’s already sucky 2023 even suckier.
The fact that outside parties like Fir Tree are turning their predatory eyes toward crypto should give pause to anyone predicting a reversal of 2022’s misfortune. There are still too many dead companies walking and no new public money coming to their rescue. In this Year of the Rabbit, death awaits crypto casinos with nasty, big, pointy teeth.
But hey, don’t stop believin’…
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