Crypto Lender Genesis Prepares Bankruptcy Filing As Negotiations With Creditors Stall

Crypto Lender Genesis Prepares Bankruptcy Filing As Negotiations With Creditors Stall

Genesis Global Capital is filing for Chapter 11 bankruptcy after failing to reach an agreement on repaying the $3 billion it owes creditors. The company faced liquidity crunches in November after falling victim to the FTX debacle. 

Institutional lender Genesis, a subsidiary of crypto conglomerate Digital Currency Group (DCG), is preparing to file for bankruptcy as soon as this week, reports Bloomberg News. According to sources close to the firm, after months of discussions, DCG and Genesis’ creditors failed to reach an agreement despite offering several reorganization proposals.

Crypto news outlet The Block reported that Genesis Global Capital is currently negotiating a prepackaged bankruptcy deal that will see the firm’s creditors like Gemini crypto exchange agreeing to a forbearance period of between one and two years on loan repayments. In exchange, creditors have been promised cash and equity in the parent company Digital Currency Group. The creditor’s committee advised by law firms Kirkland & Ellis and Proskauer Rose has been in discussion with the crypto lender for weeks to finalize a Chapter 11 bankruptcy protection plan. 

Forbearance is a temporary postponement of loan payments that are granted by creditors to a company as an alternative to forcing them into foreclosure or the borrower to default on the loan obligation. 

Trouble began for Genesis in November after the insolvency of FTX, where the company’s derivatives unit had $175 million locked in a trading account. Soon after the crypto exchange filed for bankruptcy, Genesis suspended all withdrawals on its lending platform. Four months earlier, the institutional lender had to write off a $2.3 billion loan given to ex-crypto hedge fund Three Arrows Capital (3AC). 

Gemini, the crypto exchange founded by the Winklevoss twins, claims that Genesis owes it over $900 million under an interest-earning program that both companies started together in February 2021. The Gemini Earn initiative lets retail crypto investors in the United States deposit their assets into an interest-earning account on the exchange that lends the funds to Genesis. However, when Genesis halted operations it also locked funds deposited on Gemini Earn. Earlier this month, Gemini shut down the Earn program with no guarantees on whether funds will be returned to its 340,000 customers. 

This led to Gemini co-founder Cameron Winklevoss getting into a public spat with DCG CEO Bary Silbert, accusing him of engaging in “bad faith stall tactics”. Cameron said that his firm has been trying to contact Genesis for several weeks over reclaiming funds under the Earn program with no response. This led to Genesis holding discussions to find a way to repay the $3 billion it owes to various creditors. 

Last week, the U.S. Securities and Exchange Commission (SEC) charged Genesis Global Capital and Gemini Trust Company for violating the Securities Act of 1933 in relation to Gemini Earn. The financial watchdog alleged that both companies raised billions of dollars from retail investors by offering and selling unregistered securities under the program. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgement interest, and civil penalties. 

On January 4, Derar Islam, interim CEO of Genesis, asked for additional time from creditors to solve its liquidity crisis. The following day, the company laid off 30% of its staff to reduce costs and stabilize its finances as it was preparing for a bankruptcy filing. To cover the $3 billion shortfall of its subsidiary, Digital Currency Group is prepared to list stakes in more than 200 crypto projects – including crypto exchange Coinbase USDC stablecoin issuer Circle, Ethereum block explorer Etherscan and on-chain data firm Dune Analytics – for sale. 

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