FTX Contagion: All About Genesis Bankruptcy Prospects And Grayscale GBTC Risks

Crypto brokerage firm Genesis faces solvency issues due to FTX contagion and may file for bankruptcy if it fails to raise emergency capital. Most believe Genesis’ parent DCG may dissolve the GBTC and ETHE trusts to pay back their lenders. Digital Currency Group (DCG) is the parent of Genesis and Grayscale.

Genesis having exposure to bankrupt crypto firms FTX and Three Arrows Capital pulled its parent Digital Currency Group (DCG) and Grayscale into the hole. Experts believe a fallout will have more impact than FTX.

Rumors Of Liquidity Issues Turn Out To Be True

The collapse of FTX and Alameda Research fueled the contagion effect, causing several crypto companies to face financial and withdrawal issues, with some planning bankruptcy protection.

Genesis Trading was rumored to be facing solvency issues. Genesis interim CEO Derar Islim host a client call on November 16 at 8 AM EST to discuss the state of crypto markets and Genesis’ lending business.

However, Genesis paused redemptions, withdrawals, and new loan originations. Derar Islim said the move will affect only the lending business, while Genesis’s spot, derivatives trading, and custody businesses remain fully operational. The contagion spread to Gemini with the company’s Earn program facing withdrawal issue due to its association with Genesis.

Is Genesis, Grayscale Next Amid FTX Contagion?

Some believe the company may dissolve GBTC and ETHE to pay back their lenders. The situation will be more clear tomorrow.

Autism Capital in a tweet asserts that Grayscale controls GBTC and ETHE trusts, not Genesis. However, Digital Currency Group, the parent company of Genesis and Grayscale, is supporting Genesis. Moreover, a solvency issue may force DCG to dissolve the trusts due to financial issues.

As part of transparency, Genesis Trading reported that it has $175 million in locked funds in FTX trading account, but no material exposure to FTX. As a result, DCG provided $140 million in equity infusion to Genesis.

The situation became worse after Andrew Parish, co-founder of ArchPublic, on November 21 claimed that Barry Silbert’s DCG owes $1.1 billion to Genesis via a previously undisclosed promissory note hidden from potential investors. He believes hidden funds are the primary reason behind DCG and Genesis seeking $1 billion in emergency funding from investors.

Crypto lender is now facing trouble raising capital as Binance and Apollo Global Management denied investing in Genesis at this point. Binance cites Genesis’ businesses might create a conflict of interest in the future. Moreover, Genesis has reduced its fundraising target by 50% from $1 billion to $500 million.

Grayscale’s GBTC and ETHE Status

Grayscale’s GBTC hit a 41% discount amid the FTX crisis. Cathie Wood’s Ark Invest recently purchased Grayscale Bitcoin Trust shares worth $2.8 million. According to Coinglass data, GBTC’s total holdings stand at 633.64 BTC worth over $10 billion. At the time of writing, GBTC premium is at -37.08%.

Meanwhile, ETHE has also hit a record low amid the FTX collapse. Currently, it is trading at a -34.47% premium rate, as per Coinglass data.

Both GBTC and ETHE fell over 45% after Genesis declared facing liquidity issues. Grayscale denied disclosing its proof of reserves citing security concerns. Investors were disappointed with the decision to keep reserve details confidential amid the FTX crisis and uncertainty surrounding Genesis.

Will Genesis File Bankruptcy

While Genesis has denied plans to file bankruptcy imminently, some believe insolvency issues will cause bankruptcy on the subsidiary level.

Ram Ahluwalia, CEO of Lumida Wealth Management, believes Genesis is not just facing liquidity issues, but also insolvency.

“There’s a run on the bank, the bank here being Genesis. Genesis as a bank makes money by originating loans. They lend to counterparties, institutions, family offices, and high net-worth individuals, but they’re not actually a bank. So they can’t fund with deposits, they have to fund by borrowing and using equity capital. Genesis will have around 5% of its assets backed by equity capital, as compared to banks’ 10%.”

He said Genesis’ balance sheet is worsening as it issued fewer loans in Q3 as compared to Q2. However, less access to funding remains the primary issue for Genesis. Ahluwalia believes Genesis Lending will surely file for bankruptcy, whereas Genesis Trading will continue to operate.