The Breakdown - On Bitcoin’s 14th Birthday, the Gemini-DCG War of Words Heats Up

Episode Date: January 4, 2023

Bitcoin celebrates its birthday today! This is also the first Breakdown of the year. NLW discusses the news and events from the past couple weeks, including the arrest of Mango Markets exploiter Avraham Eisenberg as well as the escalating feud between Gemini and the Genesis/DCG leadership.  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 - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with today’s editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Image credit: erhui1979/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 CoinDest. What's going on, guys? It is Tuesday, January 3rd, and today on Bitcoin's 14th birthday, we are talking about why the debate is all around Barry versus the Winklevi. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to want to dive deeper into the conversation, come join us on the Breakers Discord.

You can find a link in the show notes or go to bit.L.Y slash breakdown pod. All right, folks, well, I hope you have had a great holiday season and a very happy new year. And boy, this year is off with a bang. Yesterday for most businesses in the U.S. was a day off, which is what happens, obviously, when New Year's falls on a Sunday. But that didn't stop some of the biggest drama in crypto for coming right up to the four. So a quick recap of the Genesis DCG Gemini situation. Genesis is a digital currency group subsidiary, by the way, so is CoinDesk.

And Genesis has been caught up in a lot of the crypto-institutional failures of this year. In July, court documents from the liquidator of Three Arrows Capital showed that DCG's Genesis had lent three arrows capital a total of $2.4 billion. 3C had put up approximately $1.2 billion worth of crypto, as it was valued at the time, as collateral. In the court filings, it showed that DCG's claim against 3AC was by far the largest at 1.2 billion. The next biggest creditor was Voyager Digital, whose claim was $687 million, and then there was one more claimant with $302 million, and the rest were in the lowly eight figures. At the time, a spokeswoman for DCG said both the DCG and Genesis balance sheets remain strong.

With no remaining exposure to three arrows capital, Genesis continues to be well capitalized, and its operations are business as usual. How many times was that sort of statement last year proven to be not completely true? So, fast forward to the FTX collapse. At first, Genesis said they had basically no exposure, but then a few days later, that was up to 175 million. However, just a few days after FTX went into bankruptcy, Genesis Global Capital, which is the company's lending unit, halted withdrawals. Halting withdrawals is never a good sign.

In fact, it's usually the sign that something much bigger is going on than anyone had wanted to let on. The VP of Communications and Marketing at DCG said at the time, today Genesis' global capital, Genesis's lending business, made the difficult decision to temporarily suspend redemptions and new loan originations. This decision was made in response to the extreme market dislocation and loss of industry confidence caused by the FTX implosion. The decision impacts the lending business at Genesis and does not affect Genesis' trading or custody businesses. Importantly, this decision has no impact on the business operations of DCG and our other wholly owned subsidiaries. Right from then, no one thought that was exactly true,

but over a couple weeks, there was much swirling and rumor of potential bailouts and funding rounds. Binance, for example, was mentioned to someone who had decided to pass on a billion-dollar-plus funding. However, Genesis itself wasn't the only collateral damage. About $900 million of locked funds were those of Gemini users who had their money in the exchanges' Earned program, Gemini Earn. Gemini Earn was powered by, you guessed it, Genesis. Anyway, ever since then, it has just gotten messier and messier. Plot thickened in November when it was revealed in a note to shareholders that over $1.6 billion was owed to Genesis by its parent company DCG.

The loans were made via promissory notes between the companies. 1.1 billion, which was used to cover bad debt from loans written to Three House Capital, comes due in June, 2032. A further $575 million note is due in May this year. This arrangement has been widely questioned by many in the industry, but honestly, that's not really where the drama has been. Now, instead, the drama has been in the tit for tat back and forth between the leaders of Gemini and DCG.

In an open letter published on Monday, Gemini co-CEO Cameron Winklevost accused DCG CEO, Barry Silbert of using, quote, bad faith stall tactics to delay negotiations. Now, rather than sum up Winklevoss's note, I'm just going to read it in full. It's only a page or so, so not overly long. It's titled, An Open Letter to Barry Silbert. Barry, today marks 47 days since Genesis halted withdrawals. I am writing on behalf of more than 340,000 earn users who are looking for answers. These users aren't just numbers on a spreadsheet, they are real people, a single mom who lent her son's education money to you,

a father who lent his son's bar mitzvah money to you, a husband and wife who lent their life savings to you, a schoolteacher who lent his children's college funds to you, a policeman and so many more. Altogether, these people entrusted more than $900 million of their assets to you. They deserve concrete answers, and we are here to get them. For the past six weeks, we have done everything we can to engage with you in a good faith and collaborative manner in order to reach a consensual resolution for you to pay back the $900 million that you owe while helping you preserve your business. We appreciate that there are startup costs to any restructuring, and at times things don't

go as fast as we would all like. However, it is now becoming clear that you have been engaging in bad faith stall tactics. For example, on December 2nd, we expressed our belief, quote, that getting everyone in a room together as soon as possible will be the most productive path towards reaching a resolution. You agreed but stated you would only do so after there was a proposal on the table. On December 17th, the proposal was delivered to you. On December 25th, Christmas Day, an updated version of this proposal was delivered to you.

Despite this, you continued to refuse to get into a room with us to hash out a resolution. In addition, you continue to refuse to agree to a timeline with key milestones. Every time we ask you for a tangible engagement, you hide behind lawyers, investment bankers, and process. After six weeks, your behavior is not only completely unacceptable, it is unconscionable. The idea in your head that you can quietly hide in your ivory tower and that this will all just magically go away or that this is someone else's problem is pure fantasy. To be clear, this mess is entirely of your own making. Digital currency group, DCG, of which you are the founder and CEO, owes Genesis its wholly owned

subsidiary, $1.675 billion. This is money that Genesis owes to earn users. and other creditors. You took this money, the money of school teachers, to fuel greedy share buybacks, illiquid venture investments, and kamikaze gray-scale nav trades that balloon this fee-generating AUM of your trust, all of the expensive creditors and all for your own personal gain. It is now time for you to take responsibility for this and do the right thing. It is not lost on us that you started your career as a bankruptcy restructuring associate. And it's not lost on us that you've been working desperately to try and firewall DCG

from the problems that you created at Genesis. You should dispense with the business. You should dispense with this fiction because we all know what you know, that DCG and Genesis are beyond commingled. Everyone takes orders from you and always has, and anything you have done after the fact to pretend otherwise won't hold up. If instead you had put all this energy towards finding a resolution, we would have been done by now. Everyone would be in a better place, including you. Earn users are tired, they're scared, many are now in dire straits, and yet despite all that they have had to endure, they have been remarkably patient and supportive. But there is only so much more they can take. They deserve a resolution for a recovery of the assets they lent to you and an end to

this nightmare. To that end, and for the final time, we are asking you to publicly commit to working together to solve this problem by January 8th, 2023. We remain ready and willing to work with you, but time is running out. Sincerely, Cameron Winklevoss. Now, this is obviously a major rhetorical escalation. It is written very clearly, not just for Barry, but for the public's eyes as well. And despite his relative quietness on Twitter over the last two months, Barry Silber did think it worthy of response. He replied to Winklevoss's tweet saying DCG did not borrow $1.67 billion from Genesis. DCG has never missed an interest payment to Genesis and is current on all loans outstanding.

Next loan maturity is May 2023. DCG delivered to Genesis and your advisors a proposal on December 29th and has not received any response. To which Cameron Winklevoss then replied saying, there you go again. Stop trying to pretend that you and DCG are innocent bystanders and had nothing to do with creating this mess. It's completely disingenuous. So how does DCG owe Genesis $1.67 billion if it didn't borrow the money? Oh right, that promissory note. Dot, dot, dot. Will you or will you not commit to solving this by January 8th in a manner that treats the $1.1 billion promissary note as $1.1 billion. Now, part of what's fueling all the intensity

around this exchange is growing discontent among Gemini customers. Last Tuesday, a class action lawsuit was filed against Gemini, claiming that the exchange had violated securities laws and failing to register their earned product as a security. Then just today, three Gemini earn users filed a request for class action arbitration against Genesis and DCG. Now, class action arbitration is radically oversimplifying, of course, a less expensive, faster version than a class action lawsuit.

From CoinDes, quote, the claimants alleged Genesis had failed to return and there and all Gemini earn users' digital assets as required under the master agreements between the firm and users. They claim Genesis first breached the master agreement when the firm became insolvent in the summer of 2022, but concealed its insolvency from customers. Genesis then, they allege, engaged in a sham transaction with its parent company, DCG, to conceal the insolvency, exchanging the right to collect a $2.3 billion debt owed to Genesis by the now-insolvent hedge fund three arrows capital for a promissory note of $1.1 billion due in 233.

The group also claims that Genesis Master Agreement effectively is creating unregistered sale of securities and are seeking to rescind the contracts of sale and related damages. So in terms of the specifics of what is going on, Erie Paul tried to break it down. The CIO of Block Tower wrote, As long as DCG and Genesis never did any cross-party transactions that weren't fully disclosed and were arms length, then what Cameron is saying is relevant. If not, then not. For anyone following along at home, Barry is claiming DCG and Genesis are entirely separate entities

such that Genesis' liabilities don't extend to DCG. That's true if they really were entirely separate economic entities. It's false, and courts will find it false, if Genesis and DCG engaged in transactions with each other that were different from how either would treat a random third party and disadvantage to either side. In this case, it doesn't seem like Genesis would be in default right now without the DCG favors,

meaning that corporate veil likely to be pierced. Courts can decide. Regardless, there's a lesson here for everyone. When you do business with a person or company, you may really be engaging with some subsidiary, the person in holding company will then try to disown. Now, this question of co-mingling and veil piercing is the key. Autism Capital wrote, DCG is turbo-screwed. Barry Silbert is trying to sequester Genesis as its own problem to avoid personal responsibility,

but everything is commingled beyond belief. Gemini also looking turburito boned as they're facing a huge class action and want to rip Barry alive. Happy 2023. Now, Lexnowd, Gabriel Shapiro writes in response, I doubt it's truly commingled. These corporate veil-piercing claims are really tough to win. Legally, Gemini probably doesn't have that much hope, and that's probably a big part of why they're waging a PR war. Still, I would sum up most of the sentiment in crypto as a pox on both your houses.

I think people took particular umbrage at the idea in the first paragraph of Cameron's letter that these people were loaning their money to Barry and DCG or even Genesis when the product was called Gemini earned. DC investor writes an open letter to Cameron. No one put a gun to your head and made you accept earn user deposits and promise a return by depositing with Genesis and skimming some at the top for yourself. At the end of the day, it is Gemini who owned these customer relationships, not Genesis. While I fully agree that Barry and Genesis royally f***ed up here, I am so tired of this

C-Fi past the buck mentality. There is zero accountability from anyone up or down the chain. All right. Now, one more story to catch up on from over the break before we part today. another arrest that in just about any other crypto cycle might have made more of a splash. On the Monday following Christmas, Abraham Avi Eisenberg was arrested in Puerto Rico. Eisenberg became prominent in the latter half of last year after exploiting Salon a defy platform Mango markets draining crypto worth $110 million.

He then followed up by attempting a similar exploit on Ave, which was defeated by other market participants squeezing his positions. Unlike the multitude of other defy hacks last year, Eisenberg's exploit was simply using the platform as designed, but in a way that wasn't intended. He bought a large amount of the platform's native token, which was valid collateral for loans. He then pumped the price of the low-float token by 1,300% using futures contracts, which allowed him to take out a massive loan, which he had no intention of repaying. This drained essentially all of the deposits on the platform. The collateral value then crashed, leaving the lending platform with a massive

amount of bad debt and functionally insolvent. At the time, commentators noted that this was textbook market manipulation, which has, of course, long been illegal in other markets. But Eisenberg was so confident that he explained the entire method on Twitter, bragging about his, quote, highly profitable trading strategy, and the millions his team makes, quote-unquote, risk-free. It turns out that the DOJ was unimpressed with Eisenberg's trading strategy and has now charged him with commodities fraud and commodities manipulation. A deposition in the case alleges that, quote,

Eisenberg engaged in a scheme involving the intentional and artificial manipulation of the price of perpetual futures contracts on a cryptocurrency exchange called Mancoe Markets and other manipulative and deceptive devices and consistent. contrivances. The charges open up a number of questions around areas of defy law. This is the first case to really touch on the Code's law concept. Clearly thought that because what he did was allowed by the code, then he had no legal concerns. But should the law step in when badly designed protocol leads to a service becoming insolvent? At the time, everyone was able to watch the exploit happening in real time, but Mango Market's developers were powerless to stop it.

Eisenberg tweeted that he was simply, quote, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are. As a consequence of Eisenberg's exploit, other lending platforms have changed their design, significantly limiting the ability to borrow against relatively illiquid tokens. But the outcome of the case could put a lot of defy activity into questionable legal territory. Gabriel Shapiro again writes, believe it or not, the arrest is very bearish for defy. Sure, it might deter further attacks,

but the whole point of these protocols is that they need to be robust against such attacks in a PVP environment. If this goes to trial, it will necessarily deal with many threshold regulatory issues for defy, including whether regulation of perps and swaps extends to smart contract-based incentive systems that do not involve legal agreements and promises. You do not want such threshold issues being decided for the first time in the context of trying to hold someone responsible for a $100 million exploit in a criminal trial. As the quote says, hard cases make for bad law. To me, this feels like what is likely to be one of the biggest themes for this,

year, which is Defi absolutely colliding with the American legal system. And on that note, there is a lot more to catch up on. I of course haven't mentioned anything yet about SBF or FTX, despite some news on that front. Sam is widely expected to enter a plea of not guilty today at 2 p.m. Eastern time, which is before you're hearing this, but after I'm recording it, so we'll likely get into that tomorrow. Still, I would be remiss before we close not to note the significance of today's date. Today is Bitcoin's birthday. Remember the message. embedded in the Genesis block. The Times 03 January 2009, Chancellor on the brink of a second bailout for banks. Now for giggles, I pulled on Twitter to see whether the Bitcoin white paper

day, which was October 31st, 2008, or today was in fact Bitcoin's birthday, and a whopping 80% said today. The standard response I got was that Halloween was the conception, or the immaculate conception, as one person put it, and that this was the birth. I like that construct, so happy birthday Bitcoin. And related, at least it feels related to me. Yesterday, I ran another poll asking how people were feeling heading into 2023. Were they optimistic or were they pessimistic? 66.4% of more than 1,100 people said optimistic, which I don't think speaks to an assessment of likely economic outcomes

or a belief in some big shift in the macro. I think it's more that ask Bitcoiners the same question any year and at least two-thirds are going to say optimistic, for the simple reason that they're an optimistic group who have a lot of faith in their own power to shape their destiny. In spite of everything that happened at the end of last year, I certainly consider myself in that group as well. So as we close this first 2023 breakdown, let's do this thing. Until tomorrow, keep thinking, keep building, and keep believing.

Peace.