If the FTX saga wasn’t enough, we have another storm brewing over our heads – the fall of the crypto lender Genesis.
2022 was one of the most unfortunate years for the cryptocurrency market. It has been experiencing liquidity issues since the year’s first half, making it difficult for the not-so-strong crypto businesses to survive.
FTX, one of the world’s largest cryptocurrency exchanges, appeared normal and saved other crypto businesses until the last week when SBF’s empire crumbled right before our eyes.
But FTX wasn’t just another company. It was intertwined with the crypto ecosystem, and the fall of the exchange soon caused ripples throughout the crypto world, affecting several firms, including Genesis, the crypto lender.
Genesis… Who?
Genesis started as an OTC Bitcoin desk in 2013 and is one of the most well-known cryptocurrency brokers, providing professional crypto investors with trading and custody services.
It has also established itself as one of the largest crypto lenders in the world, with $50 billion of loan originations at the peak of the 2021 bull run.
However, this year’s lending business has shrunk dramatically, with loan originations falling to $8.4 billion in Q3.
It also runs the yield programs of dozens of exchanges like Gemini to offer yields on customers’ deposits. Remember when your crypto exchange offered you a 10% yield on depositing your otherwise-idle crypto and making money while you sleep? Yeah, those programs.
Genesis Suspends Withdrawals
It suddenly suspended all withdrawals from the platform and cited a liquidity crunch due to unusual withdrawal requests as a result of the collapse of FTX.
Following this, Islim, who became the interim CEO in August after Michael Moro stepped down, also stated that the company had hired advisors to explore all possible options to help with its $2.8 billion total active loans as of Q3 2022.
What Went Wrong?
Genesis was caught between the wrong parties. Unfortunately, it also links back to 3AC, the infamous hedge firm that kicked off the crypto winter and eventually led to the collapse of Alameda and, subsequently, FTX, which brings us here.
Genesis was the biggest lender to 3AC, extending it to a whopping $2.4 billion. When 3AC went bankrupt, Genesis sued them for $1.2 billion, which was assumed by DCG (the parent company of Genesis), leaving Genesis with no outstanding liabilities related to 3AC.
Things were looking up for a while until it came across Babel Finance, the CeFi platform that was reset in June, and eventually, FTX, where it had $175 million locked up.
Post-FTX, things were going so badly for Genesis that it received a $140 million equity infusion from its parent company, DCG, earlier this week to “strengthen its balance sheet” and boost its “position as a global leader in crypto capital markets.”
Things again started to look normal for Genesis until it halted withdrawals, highlighting that far worse news may be on the way.
The Bad News
For those who are unaware, Genesis is at the epicenter of the crypto capital markets, directly involved in everything for institutions such as exchanges, fund custody, yield earning, and so on.
For example, Genesis is the yield partner of Gemini, another crypto exchange like Binance, where it works like this:
- Customers give their deposit to Gemini for X%
- Gemini gives customers’ crypto to Genesis for X+1%
- Genesis further lends to crypto funds for X+2%
- As and when the fund pays back, Genesis makes X+2% and gives Gemini X+1%, which ultimately pays the customer X% for depositing their crypto.
This is how it is supposed to work in an ideal world, but are we in an ideal world yet? The problem is that if lenders aren’t able to pay back Genesis, they can’t pay back partners like Gemini, which also means customers won’t ever see their own crypto again.
The collapse of one crypto platform after another makes it impossible for Genesis to return the funds it borrowed, which could start another ripple effect.
The Worse News
Genesis is also a part of DCG, Barry Silbert’s holding company that owns stakes in CoinDesk, Foundry, Genesis, Grayscale, Coinbase, BitGo, Ledger, Kraken, Filecoin, Decentraland, and more.
As per the reports, DCG has the funds to stop this, and if not, they would be rushing to raise another round of funding, similar to its $10 billion fundraising in November 2021.
Reports suggest that prominent crypto market maker B2C2 has also offered to purchase loans from Genesis to save the industry.
However, if DGC cannot save Genesis, the contagion could spread within the company, collapse its other entities, and take the crypto world with it. This could mean a very long winter for crypto to recover and return to its glory.
