\n<\/p>\n
Concerns are mounting that Barry Silbert<\/a>\u2019s Digital Currency Group<\/a> (DCG), which has ties to nearly every company in the digital asset space, could prove the next casualty of the current market crisis.<\/p>\n On Tuesday, DCG boss Silbert issued a note to shareholders, noting the \u201cdifficult industry conditions\u201d plaguing the digital asset sector. Silbert attempted to reassure investors regarding the \u201clot of noise\u201d circulating about the health of some of the DCG portfolio\u2019s leading lights.<\/p>\n Singled out for special mention in Silbert\u2019s note was Genesis<\/a>, the New York-based digital asset trading, lending and custodial platform. DCG announced<\/a> last week that the Genesis Global Capital lending business had made the \u201cdifficult decision to temporarily suspend redemptions and new loan originations.\u201d<\/p>\n Silbert blamed the Genesis lending halt on \u201can issue of liquidity and duration mismatch in the Genesis loan book.\u201d Silbert claimed that the Genesis spot\/derivatives trading and custody businesses \u201ccontinue to operate as usual.\u201d<\/p>\n Genesis had reportedly been seeking \u201cat least\u201d $1 billion<\/a> in new capital, later reducing this ask to $500 million when no takers\/suckers stepped up to the plate<\/a>. On Monday, Genesis issued a statement that it had \u201cno plans to file bankruptcy imminently\u201d but the very next day the New York Times<\/a> reported that Genesis had hired \u201crestructuring adviser\u201d Moelis & Company to examine all possible scenarios, including bankruptcy.<\/p>\n On Wednesday, Genesis Global Capital CEO Derar Islim confirmed this hiring, as well as the fact that it had begun talks with \u201cpotential investors and our largest creditors and borrowers, including [digital asset exchange] Gemini<\/a> and DCG.\u201d Last week, the already struggling Gemini<\/a> warned users of its Earn service that they faced delays in withdrawing their staked assets\u2014worth an estimated $700 million\u2014following Genesis suspending redemptions.<\/p>\n Genesis recently admitted to having around $175 million locked up on the collapsed FTX exchange<\/a>, after previously declaring that it had \u201cno material net credit exposure\u201d to the debacle. That was followed by an admission that it had suffered \u201ca total loss of ~7M across all counterparties, including Alameda [Research, the FTX-affiliated market-maker]<\/a>.\u201d<\/p>\n Bloomberg<\/a> recently estimated that Genesis had $2.8 billion in outstanding loans, nearly one-third of which was owed by related parties, including DCG and Genesis Global Trading. In the letter to shareholders, Silbert copped to borrowing $575 million from Genesis to \u201cfund investment opportunities and to repurchase DCG stock from non-employee shareholders.\u201d (How much of this $575 million might have been Gemini users\u2019 loans went unsaid.)<\/p>\n There\u2019s also the previously disclosed $1.1 billion promissory note that DCG issued to cover a Genesis shortfall following this spring\u2019s collapse of the Three Arrows Capital<\/a> (3AC) crypto hedge fund. Finally, Silbert acknowledged a $350 million loan DCG received from \u201ca small group of lenders led by Eldridge<\/a>.\u201d<\/p>\n Despite these significant liabilities, Silbert boldly declared that DCG had \u201cweathered previous crypto winters and while this one may feel more severe, collectively we will come through it stronger.\u201d Silbert noted that DCG was on track to generate $800 million in revenue this year, neglecting to add that this was one-fifth below 2021\u2019s revenue.<\/p>\n Silbert helpfully offered to alert shareholders \u201cif we decide to do a financing round,\u201d a scenario that seems almost mandatory by this point. However, since DCG might now have to ask a company it doesn\u2019t<\/em> own for cash, it will presumably face a similar lack of enthusiasm that greeted the Genesis platform\u2019s begging-bowl appeals.<\/p>\n Gray skies over Grayscale<\/strong><\/p>\n To many ears, Silbert\u2019s reassurances sounded a lot like those issued by other firms that were ultimately forced into bankruptcy, liquidation and (often) infamy this year. Investors may have been less than reassured by Silbert\u2019s touting of having founded \u201cthe first BTC<\/a> fund, which evolved into Grayscale<\/a>, now the world\u2019s largest digital currency asset manager.\u201d<\/p>\n Grayscale has been the subject of its own rumors regarding its capacity to carry on. GBTC<\/a>, the company\u2019s BTC-based trust, trades at a significant discount (around -45%) to the actual price of the BTC tokens it claims to hold. GBTC is currently trading around $9 a share, barely one-fifth of the value it boasted just one year ago during the BTC token\u2019s all-time high.<\/p>\n For years, Grayscale has been lobbying the U.S. Securities and Exchange Commission (SEC) for the right to offer a spot-based BTC exchange traded fund (ETF) that would allow Grayscale to close the gap between GBTC\u2019s price and the BTC token. But the SEC has so far rejected all of Grayscale\u2019s ETF applications<\/a> and the still-unfolding FTX scandal has likely stalled any progress on this front<\/a>.<\/p>\n While GBTC investors can sell their shares to other investors following a lockup period, GBTC hasn\u2019t permitted any actual redemptions from the trust for years (since it was known as the Bitcoin Investment Trust<\/a>). Meanwhile, Grayscale continues to charge users fees of 2% of total assets under management, and with Grayscale believed to provide 2\/3 or more of DCG\u2019s annual revenue, don\u2019t expect redemptions to resume anytime soon.<\/p>\n Grayscale alarmed many observers last week when it resisted calls to prove that it actually holds the assets that it claims to hold under its various trusts (Ethereum, Solana, Litecoin and others). Citing \u201csecurity concerns,\u201d<\/a> Grayscale said it couldn\u2019t make any \u201con-chain wallet information and confirmation data publicly available through a cryptographic Proof-of-Reserve.\u201d<\/p>\n Instead, Grayscale explained that the assets underpinning its trusts \u201care custodied with Coinbase Custody\u201d and reprinted a letter from Coinbase<\/a> attesting that the assets it was holding on Grayscale\u2019s behalf \u201care secure.\u201d<\/p>\n DCG\u2019s blockchain daisy chain<\/strong><\/p>\n We have to take Coinbase (NASDAQ:\u00a0COIN<\/a>) at its word regarding its Grayscale obligations, as the GBTC prospectus prohibits its custodians from disclosing the wallet addresses containing GBTC\u2019s roughly 644,000 BTC. Even Grayscale isn\u2019t exempt from this prohibition, meaning there\u2019s an enormous level of \u201cTrust. Don\u2019t verify. In fact, don\u2019t even bother trying to verify, because if we can\u2019t, you can\u2019t.\u201d at play here.<\/p>\n Moreover, Coinbase Custody is an offshoot of Coinbase Global, which is wholly owned by none other than Grayscale\u2019s owner DCG. The ties that bind all the players in this game offer an unsettling echo of the cozy links between FTX\u2014in which DCG also had an investment stake\u2014and Alameda. That infamous pair offered similar assurances regarding the safety and security of customer assets that were eventually exposed as hollow.<\/p>\n Meanwhile, Coinbase shares hit an all-time low this week of just over $40, and while they\u2019ve since rebounded to around $45, that\u2019s well below the $232 at which they started the year and even further from the $330+ they traded in the immediate aftermath of the company\u2019s direct listing on the Nasdaq last year.<\/p>\n Coinbase lost over $2 billion<\/a> in the first nine months of 2022 as retail investors lost their taste for high-risk digital asset speculation. Given the events of the past couple weeks, this skittishness is likely to worsen in the final quarter.<\/p>\n DCG also has a stake in Circle<\/a>, which in partnership with Coinbase issues the USDC<\/a> stablecoin. USDC saw its market cap shrink significantly after Binance<\/a>, the world\u2019s largest exchange by trading volume, announced in September that it would forcibly convert users\u2019 USDC into Binance\u2019s in-house stablecoin BUSD<\/a>. So, you know, just good news on all DCG fronts these days.<\/p>\n The dog ate my bathing suit<\/strong><\/p>\n The incestuous nature of DCG\u2019s portfolio makes one wonder exactly how much real money is underpinning all these companies and how much of it was being used for purposes other than advertised. How many of them are, in Warren Buffett\u2019s infamous analogy, currently swimming naked? We may learn far more than we wanted to know over the coming weeks.<\/p>\n But it\u2019s worth recalling that the original sin at the heart of the digital asset sector\u2019s fatal attraction to fraud was the fateful decision to pass off the neutered BTC protocol as \u2018the real Bitcoin.\u2019<\/a> Once that fraudulent hurdle was cleared, everything that followed was like taking candy from a baby, be it launching an initial (shit)coin offering, offering double-digit yields for staking said shitcoins or treating customer deposits as operating capital.<\/p>\n Bear in mind that several companies that are either wholly or partly owned by DCG\u2014including Coinbase, Blockstream<\/a>, Kraken<\/a>, Bitpay<\/a> and Protocol Labs\u2014are part of the Crypto Open Patent Alliance<\/a> (COPA). And COPA was formed for the sole purpose of suing Dr. Craig Wright<\/a>, advocate for Bitcoin SV<\/a> (BSV) and chief science officer at blockchain technology firm nChain<\/a>.<\/p>\n As a utility-focused blockchain, BSV has been spared the pump-and-dump frenzy that has led the sector down this garden path. While other blockchains focused on rampant speculation, BSV was building, including research conducted by Wright and nChain that resulted in the world\u2019s leading blockchain IP portfolio<\/a>, something COPA members view as a threat to their ability to dominate the blockchain space going forward.<\/p>\n Predatory outfits like DCG realize that the herds of public sheep they are fleecing can never be told that the original vision for Bitcoin was low-cost microtransactions and immutable data storage. Otherwise, there would be little point to the array of function-free tokens these companies are begging you to buy, flip, stake and lend. And that would mean there would be no point for the continued existence of these companies.<\/p>\n Based on its investment portfolio, DCG appears to share genetic traits common to many of the other firms that have crashed and burned over the past year: a strategy of \u2018moving fast and breaking things,\u2019 a belief that the rules don\u2019t apply to them, and a sense of entitlement that they should be allowed to do as they like based on the theory that it\u2019s easier to beg forgiveness than to ask for permission.<\/p>\n If nothing else, that familiarity with begging will serve the fraudsters well when deciding who gets the top bunk in their prison cell.<\/p>\n Follow\u00a0CoinGeek\u2019s Crypto Crime Cartel<\/a>\u00a0series, which delves into the stream of groups\u2014from\u00a0BitMEX<\/a>\u00a0to\u00a0Binance<\/a>,\u00a0Bitcoin.com<\/a>,\u00a0Blockstream<\/a>,\u00a0ShapeShift<\/a>,\u00a0Coinbase<\/a>,\u00a0Ripple<\/a>, New to Bitcoin? Check out CoinGeek\u2019s\u00a0<\/i><\/b>Bitcoin for Beginners<\/i><\/b><\/a>\u00a0section, the ultimate resource guide to learn more about Bitcoin\u2014as originally envisioned by Satoshi Nakamoto\u2014and blockchain.<\/i><\/b><\/p>\n<\/div>\n
Ethereum<\/a>,\u00a0FTX\u00a0<\/a>and\u00a0Tether<\/a>\u2014who have co-opted the digital asset revolution and turned the industry into a minefield for na\u00efve (and even experienced) players in the market.<\/em><\/p>\n