The fallout from the collapse of Sam Bankman-Fried’s sprawling crypto empire spread Wednesday, with digital-asset brokerage Genesis and crypto exchange Gemini becoming the latest pain points.
Genesis is suspending redemptions and new loan originations at its lending business after facing what it described as “abnormal withdrawal requests.” Gemini, founded by Cameron Winklevoss and Tyler Winklevoss, subsequently announced its yield product targeting retail investors will also halt redemptions as Genesis was a key partner in the program.
As a counterparty to many in the sector, Genesis’ financial health has been closely watched as a gauge of the industry’s strength or for signs of potential contagion. Some of Genesis’ biggest lenders include crypto exchange Gemini, which offers a product to users to generate yield through Genesis, according to its website. On Wednesday, Gemini announced that it’s working with Genesis to help customers redeem their funds from the Earn product “as quickly as possible.”
FTX’s sudden tumble into bankruptcy is cascading through crypto markets, with panicky customers rushing to pull their assets from other platforms. Also at risk are troubled crypto lenders like BlockFi Inc. and bankrupt Voyager Digital Ltd., which was forced to try to find a new buyer for its assets to replace FTX. Investors such as crypto hedge fund Galois Capital, which reported “significant” funds stuck on FTX’s platform, are also feeling the impact. Even miners are getting hit as the decline in crypto prices sparked by the collapse of FTX has also put further pressure on profits.
Last week, Genesis said it would get a $140 million equity infusion from its parent company, Barry Silbert’s Digital Currency Group, after disclosing that its derivatives business had $175 million in funds locked in an FTX trading account. The lending business had previously been affected by its exposure to bankrupt crypto hedge fund Three Arrows Capital, to which it had made a $2.4 billion loan.
Genesis is one of oldest and most well-known cryptocurrency brokers, offering trading and custody services to professional investors in digital assets. Over the past few years it had also established itself as one of the largest cryptocurrency lenders, allowing funds or other market makers to borrow dollars or virtual currencies to leverage their trades.
Genesis’s withdrawal requests exceeded current liquidity at Genesis Global Capital, the lending arm, according to interim Chief Executive Officer Derar Islim. The New York-based company has hired advisers to explore all possible options, including raising new funding, and will deliver a plan for its lending business next week, Islim said. Alvarez & Marsal and the law firm Cleary Gottlieb are advising Genesis.
The move will affect only the lending business, according to Islim, who said Genesis’s spot and derivatives trading and custody businesses “remain fully operational.”
The lending business has shrunk dramatically this year, with loan originations falling to $8.4 billion in the third quarter from $44.3 billion in this year’s first three months.
Three Arrows put down about half of the required capital against that loan, according to court filings. DCG assumed the outstanding liabilities and is now the largest creditor to the failed hedge fund, which was run by Su Zhu and Kyle Davies.
Genesis has experienced a wave of senior executive departures this year and has been cutting staff. In August, the company eliminated 20% of its then 260-person workforce and appointed Islim as interim CEO, replacing Michael Moro. Later that month, Noelle Acheson said she was leaving her post as head of market insights.
In September, Matthew Ballensweig stepped down as co-head of sales and trading and said he would move into an advisory position. In October, Chief Risk Officer Michael Patchen left after three months in the role.
Digital Currency Group also controls Grayscale Investments, which offers the Grayscale Bitcoin Trust, or GBTC, the largest investment vehicle in the crypto market. The trust is trading at about a 40% discount to the market price of Bitcoin.
--With assistance from Muyao Shen.
This article was provided by Bloomberg News.