The Breakdown - Genesis Files for Chapter 11

Episode Date: January 21, 2023

After weeks, if not months, of speculation, Genesis has finally filed for Chapter 11 bankruptcy protection, citing more than $5.1 billion in liabilities. On today’s episode, NLW looks at the implications of the filing plus the battles to come. He also covers the FTX hearing on the suitability of representation by Sullivan & Cromwell.     Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: ZargonDesign/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Friday, January 20th, and today we are closing one chapter, a chapter 11, if you will, of one of the big sagas in crypto. A quick note before we dive into that, there are two ways to listen to the breakdown. You can hear us on the CoinDesk podcast. work, which comes out every afternoon and features other great shows alongside the breakdown,

or you can listen on the breakdown-only feed, which comes out a few hours later in the evening. Wherever you listen, if you would take the time to leave a rating or a review, it would make a huge difference, and I so appreciate it. All right, now to today, we have been covering this saga of Genesis and DCG for the last several months, right up to yesterday when we discussed how the community was thinking about a possible Genesis bankruptcy. Well, late last night, the waiting was over. Genesis Global Capital has filed for Chapter 11 bankruptcy protection in the Southern District of New York. The filing includes holding company Genesis Global Holdco and sister company Genesis Asia Pacific and is part of the filing Genesis lodged an application for joint administration. The bankruptcy

does not include the prime brokerage, custody, or exchange arms of Genesis. The initial filing estimates assets and liabilities of Genesis Global Capital in the $1 billion to $10 billion range with more than $100,000 creditors. The top 50 creditors list alone shows a total of $3.6 billion in claims, including $766 million owned to Gemini Trust Company, the largest creditor, $18.7 million owned a trading firm Cumberland, $151.5 million owed to Crypto Fund Marana, which is invested in Bybit, $150 million owed to Moon Pay Finance, the team behind Babel Finance, $53 million owed to VanX's new finance income fund, and a laundry list of other crypto industry firms. There are also a large

number of creditors whose personal details have been redacted, presumably as they are individuals rather than firms. This includes the second largest creditor with a $462 million, the third largest claim at $446 million, and the fourth largest claim at $230 million. Now, to be clear, these claims are, I think, larger than what most in the industry were expecting, and when all was said and done, first-day filings put the total liabilities at $5.1 billion. In a letter to clients sent shortly after the filing, Genesis wrote, Our goal is to move through the Chapter 11 process as quickly and efficiently as possible while reaching the best outcome and emerging well positioned for the future.

Now, part of the speculation on Wednesday had been around whether creditors had truly reached a prepackaged bankruptcy deal, or if the rumors had been spread by Genesis to put pressure on creditors. On Thursday, the block reported that multiple creditors had reached out as sources to support the view of Gemini co-CEO Cameron Winklevoss that Genesis, parent company Digital Currency Group, and CEO Barry Silbert, had been misleading in presenting a promissory note for $1.1 billion that did not come due for a decade as a current asset in an attempt to make the Genesis balance sheet appear much more healthy than it was.

Minutes after the Genesis bankruptcy filing was reported, Cameron Winklevoss tweeted out his view on the situation. He writes, Earn Update. This evening Genesis Global Capital LLC, Genesis filed for bankruptcy under Chapter 11. This is a crucial step towards us being able to recover your assets. While we have been working around the clock to negotiate an acceptable solution, Barry Silbert and DCG, the parent company of Genesis, continue to refuse to offer creditors a fair deal. The good news is that by seeking the protection of the bankruptcy court,

Genesis will be subject to judicial oversight and be required to provide discovery into the machinations that brought us to this point. Crucially, the decision to put Genesis into bankruptcy does not insulate Barry, DCG, and any other wrongdoers from accountability. We have been preparing to take direct legal action against Barry, DCG, and others who share responsibility for the fraud that has caused harm to the 340,000-plus earned users and others dup by genesis and its accomplices. Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.

Meanwhile, we will use every tool available to us in the bankruptcy court to maximize recovery for earn users and any other parties within the bankruptcy court's jurisdiction. We also believe that, in addition to owing creditors all of their money back, Genesis DCG and Barry owes them an explanation. Bankruptcy court provides a much-needed form for that to happen. sunlight is the best disinfectant. This marks an important milestone in our efforts to help earn users get their assets back. Doing so remains our highest priority. Now, it's not surprising that Gemini is so intense about this. They have definitely been negatively impacted by this whole cycle. A new report from CryptoQuant shows a significant drop-off in Bitcoin inflows to Gemini,

with Bitcoin deposits reaching a six-year low. The same falloff isn't visible in Coinbase and Cracken data, implying that investors are wary of the possibility of broader financial problems at Gemini. CryptoQuant said in the report dated January 3rd, quote, declining Bitcoin inflows from other exchanges to any particular exchange could suggest investors and traders see that particular exchange as less desirable to have their coins on. Now, one of the big tests was going to be how the markets reacted to this news. This was something we discussed on yesterday's show, and the argument that this was priced in seems to be holding. At the time of writing, Bitcoin is actually up slightly at around 21,100.

Light crypto writes, Think market takes a Genesis bankruptcy and sanguine stride. Genesis global capital going down without pulling DCG and would quell hysteria surrounding GBTC turning into a spot Bitcoin Pena. Crypto-McCana research at Rock Capital writes the bankruptcy of Genesis has most likely been priced in. The key psychological factor influencing the market right now is how much worse can it get, which drives the inclination to bid.

Those waiting for drastically lower prices will be left sidelined. Markets hate uncertainty. Quite often we can rally on bad news simply because it removes any uncertainty plaguing market participant decisions. The Blocks Michael Ibelito writes, The Genesis Bankruptcy Filing feels bullish for two reasons. One, market is shrugging off bad news. Two, a big outstanding risk is almost gone. Every day, it's looking more and more like November was the bottom. Now, what about a preview for what the next drama might be? To CryptoCFA, Ram Al-Alawalia, it's definitely this battle with Gemini. He writes, after Genesis, there was Exodus.

We are entering the next phase of the drama, Chapter 11. Karen Winkleboss is waging a maximum pressure campaign threatening lawsuits against Barry Silbert to get a fair deal submitted to the court. Cameron's tweet indicates no prepackaged bankruptcy contrary to news yesterday. Cameron says they're negotiating around the clock. A mutually agreed plan would create speed, preserve the economic pie, and clarity. Now another commentator who's been following the news is Andrew at AP Abacus. He writes, update, a deal has been struck with Genesis trading creditors in principle that preceded the bankruptcy filing yesterday, expect an announcement today or in the next few days of details. Sources say a is much better than no deal. More from sources, deal is more nuanced than pre-packaged bankruptcy

reports more complex. Equity in DCG yes, cash payback schedule, sort of yes. Howell Press at North Rock LP tweeted the Chapter 11 plan saying, looks like an agreement is already in place. Many of the details the block reported are here, equity share in DCG, etc. Meanwhile, as I was wrapping the show up, DCG themselves dropped their statement. And as with many of their communications, they've been trying to draw a harder line between DCG and Genesis. The statement reads, Yesterday, the Genesis lending entities filed for Chapter 11 bankruptcy protection in the Southern District of New York. Genesis has its own independent management team, legal counsel, and financial advisors,

and appointed a special committee of independent directors, who were in charge of the Genesis capital restructuring, and who recommended and decided that Genesis capital file Chapter 11. Neither DCG nor any of its employees, including those who sit on the Genesis board of directors, were involved in the decision to file for bankruptcy. DCG will continue to operate business as usual, as will other subsidiaries. So that is where that situation stands. Reminding you of something that I mentioned yesterday, when I polled people to see whether this outcome would be bullish.

55% of people said yes. Over the coming weeks, we'll see if that is actually true. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web 3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code Breakdown to get 15% off your paths.

Visit Consensus.coindex.com or check the link in the show notes. Now the second drama for this Friday comes from FTX. One of the big questions in the bankruptcy has been whether Sullivan and Cromwell is suitable legal representative. Their appointments saw an objection from the U.S. trustee, which is the division of the DOJ, who oversees bankruptcies. It also saw informal objections from Sam Bankman-Fried via one of his blog posts, as well as from an open letter from four U.S. senators presented to the presiding judge. The key complaint is that S&C represented FTX for years prior to the bankruptcy, so have a conflict of interest. Sam also added additional claims that S&C had pressured him into placing

F.TX U.S. into bankruptcy, a claim which new CEO, John J. Ray, fervently denies. I'm going to try to keep most of my personal beliefs out of this, but I have little patience for this argument. In the final days of FTX, Sam was dealing with a company that he knew had undertaken behavior that even if he didn't think was fraudulent, the rest of the world likely would. Of course, he was getting pressure, from all sorts of stakeholders, not just a law firm. Ultimately, he was at that time the CEO. He signed the documents. He can be mad about his decision all he wants, but he made the decision. Anyway, where this situation got really hot and heated

was an 11th hour petition from the former chief regulatory officer at FtX, Dan Friedberg, filing just hours before the matter was set to go to a hearing. He joined the complaint against Sullivan and Cromwell in a major way. Now, a couple quick notes as I cover this story. First, overall, I'm a little concerned in general

about covering too much of this psychodrama stage of FTX. There are going to be so many legal machinations, a ton of attempts at obfuscation, and a lot of general soap opera-style behavior. I'm going to try to do my best to separate what's actually relevant for those who want to understand the potential impacts of the case to the larger crypto ecosystem from those who are just following the proceedings

like some grim game of baseball. Broadly speaking, I want to keep what we do here to relevant for crypto versus the Grizzly Spectacle coverage. Also, when you consider FTX overall right now, remember that there are two very separate things going on. A, real important debates about the best way for the bankruptcy to proceed in order to make customers as whole as possible. possible. But B, whether Sam committed fraud. The reason I remind you of this is that Sam is doing

his absolute level best to make the story about A, the bankruptcy rather than be his fraud. Ultimately, these stories will be inextricable. For example, Sam's contention that FTXUS was distinctly separate from the other parts of the empire and so shouldn't have put into bankruptcy will come up against the testimony that he instructed Alameda's Carolyn Ellison to send hundreds of millions of dollars to FTXUS during the crisis week. Of course, this is all a media strategy and one that totally feeds into the media's need for a new angle on the story. In other words, we've all seen the fraud charges now, and in the absence of another big drop of information, such as another FTX are working with the prosecution, the media will naturally be thrilled to cover

a new angle that, ooh, maybe a law firm is behaving badly as well. So those are the caveats. Back to Dan Friedberg's 11th hour objections. A lot of it focuses on FTXUS's general counsel, Ryan Miller, who was previously a partner at S&C. Here's how James Murphy at Meta Lawman summed it up. Well, I just finished reading the declaration of Daniel Friedberg. It's fair to say that this is one of the more shocking sworn statements I have read in a good long while. If half of what Mr. Friedberg says is true, he has just blown the top off of this bankruptcy case. Let's just first stipulate that there may be some serious credibility issues with Mr. Friedberg. I don't know whether what he is saying is true, false, or somewhere in between. That being said, here's a list of just some of what he is sworn to. FTX has claims for malpractice against Sullivan and Cromwell worth hundreds of millions of dollars. Former S&C partner, Ryan Mill, acted unethically in steering business including the bankruptcy cases to S&C. FTXUS was solvent and should not have filed for bankruptcy. A sworn declaration filed by an S&C partner contains false statements, and finally, contrary to their statements, S&C was in fact primary outside counsel to FTXUS, Ledger X, and Emergent. These are some serious allegations. Here's what I believe might happen

at the hearing tomorrow. If Mr. Freiburg does not show up at the hearing to offer himself up for cross-examination, Sullivan and Cromwell will likely move to strike the declaration as hearsay. If he does show up, then we could see one heck of a cross-examination confrontation, as Sullivan and Cromwell tries to tear apart Friedberg's allegation and misconduct by S&C and Ryan Miller. Or Sullivan and Cromwell could just ask for a continuance of the hearing. Stay tuned. Now, others in the crypto space, even those who don't particularly love Sullivan and Cromwell or have any dog in the FTX fight weren't really buying it. Gabe Shapiro at Lexnode writes,

read new FTX narrative about evil lawyers. Please be aware of how PVP Chapter 11 bankruptcies are. There are wheels within wheels. It's unlikely anything is as it seems. Beware of well-organized narratives that are emerging to deflect blame and distract you. Example. If the FTX U.S. bankruptcy can be separated from FTX international bankruptcy, then FTX U.S. creditors will take a way larger piece of the pie. Highly likely big U.S. creditors are paying advisors to attack S&C., spread narratives, etc., to accomplish this and screw the FTX International creditors. The guy making allegations against a prestigious 150-year-old

1 billion-plus revenue per year law firm and family man, was chief compliance officer of FTX international during the fraud, and was caught in 4K inventing a deceptive cover-up scheme for his prior company. The same guy also admitted that he is personally a U.S. FTX depositor, therefore he personally stands to gain if FTX U.S. is separated from the larger bankruptcy. Other law firms would also love if S&C were disqualified so they can claim this lucrative bankruptcy. On the other hand, it's very unlikely that a law firm like S&C would, quote, bet the firm by doing a legal shi to win one case, no matter how lucrative it is, just beggars belief. A guy like Ryan Miller does not have to feed a law firm business to get made partner, become super rich, super

fast, etc. He will get that anyway because of his regulatory connections. To do a legal as alleged to feed S&C business would be completely irrational. Even if you don't like big law firms and former regulators, check my history, I'm the biggest hater out there. The story SBF and Friedberg and some other interested parties are spinning just doesn't make sense and should be regarded as a desperate attempt to deflect blame. So what happened? Well, at 409 a.m. Eastern time this morning met a lawman again threads a new development. He writes, and the worm turns again. The creditors who object to Sullivan and Cromwell serving his debtors counsel have filed an emergency request to delay the hearing scheduled for later this morning. The reason for the requested delay is the last minute

filing by Daniel Friedberg. The objectors say they had no prior knowledge of Mr. Friedberg's intent to file the declaration, and they need time to investigate the shocking allegations Mr. Friedberg has made against Sullivan and Cromwell. The objectors also say they need to make sure Mr. Friedberg will show up for any hearing on the motion to appoint S&C as debtors counsel. As noted in my prior thread, if Mr. Friedberg doesn't show up, S&C would likely move to strike the declaration on the grounds of hearsay. Fast forward to 1025 a.m., James Murphy again tweets, FTX hearing is underway. Apparently, the U.S. trustee has changed its position and now agrees to the motion to appoint Sullivan and Cromwell, the debtors' counsel.

Then, 11 minutes later, wow, somebody named Daniel Friedberg has joined the Zoom call for the hearing. Judge denies the request for continuance. Four minutes after that, apparently it is the real Daniel Friedberg appearing on Zoom. Judge refuses to allow Friedberg to testify through Zoom. Judge says the Friedberg declaration is also procedurally improper, so it's now clear where this is going to end up. And in the end, he was right. It was a done deal.

Quote, as expected, the judge approved Sullivan and Cromwell as debtors counsel. judge says on the record before him he has no concern about S&C conflicts of interest. Any suspense about this decision was eliminated when the U.S. trustees switched position to favor S&C's appointment. It is a soap opera friends, and that's the end of today's episode. Until tomorrow, be safe and take care of each other. Peace.