The Breakdown - Would a Genesis Bankruptcy Actually Be Good for Crypto?

Starting point is 00:00:00 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 Thursday, January 19th, and today we're discussing whether a Genesis bankruptcy might actually be good for the crypto industry. Before we dive 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 dive deeper into the internet, the conversation. Come join us on the Breakers Discord. You can find a link in the show notes or go to bit.

Starting point is 00:00:40 ly slash breakdown pod. All right, friendos, we are back with another discussion of 2022 cleanup, although today's news, I would argue, could be a heck of a lot more bullish than it might seem at first. So, of course, one of the biggest outstanding questions after the fall of FTX has been how far the fallout and contagion might go. And fallout there has been. For example, example, there has been a significant chilling of the relationship between the crypto industry and the Washington DC establishment. However, frankly, the main short-term thing that people have been worried about is whether the collapse of FTX would cause other crypto-institutional failures. In that context, the biggest spotlight has been on Genesis and its parent company

Starting point is 00:01:25 Digital Currency Group or DCG. I say this every time, but DCG is also the parent group of CoinDesk. Now, Genesis was hit hard in the Three Arrow's Capital collapse. They lost about $2.4 billion in loans out to the hedge fund, and ultimately ended up their biggest creditor with a $1.2 billion claim after liquidating collateral. That claim was eventually moved over to the books of DCG, a move which would later complicate DCG's other liquidity issues. When FTX went under, Genesis announced that they had something like $175 million trapped there, but it seemed there were bigger issues than that. That same week, Genesis lending halted withdrawals, which was problematic both for their main customer base, as well as for the users of Gemini

Starting point is 00:02:07 Earn, which was Crypto Exchange Gemini's yield feature. Gemini users have about $900 million or so stuck on Genesis as we record. And since then, the tension around the situation has done nothing but grow. Over the past few weeks, there has been an ever-escalating war of words. Cameron Winklevoss, the co-CEO of Gemini, has published two separate open letters around the case, the first being directed to DCG CEO, Barry Silbert, accusing him of bad-fing faith stall tactics, and asking him to meet with them to find a resolution, and the second being to the DCG board, basically demanding that Silbert be removed from the CEO role. Of course,

Starting point is 00:02:42 however much one agrees with the contents of Winklevoss's letter, they're also clearly PR positioning to pin all of the blame on Genesis and DCG, rather than accept any blame for themselves at Gemini, who were ultimately the creator of the Earn program. In short, it's been a mess, and the stakes are big. People have been very concerned that if the failure of Genesis spilt over and to a larger failure of the digital currency group, one of the casualties could be the grayscale Bitcoin Trust. GPDC currently holds around 633,000 Bitcoin, something like 3.5% of the supply.

Starting point is 00:03:14 Now, the dynamics of what might happen in the event of a DCG liquidation are broader than I want to get into for the sake of this show, but suffice it to say, the idea of even some portion of that much Bitcoin being dumped onto the market is not a prospect that our already beleaguered community has relished.

Starting point is 00:03:28 And that is to say nothing of the fire sale liquidations of DCG's subsidiaries and venture positions. All right, so that's where we are. Nothing really substantive since last week's Winklevoss letter. That was until yesterday when news started coming out quickly. DB at Tier 10K had a string of headlines yesterday afternoon. CryptoFirm Genesis is said to plan bankruptcy filing, BBG. Genesis Global Capital is laying the groundwork for a bankruptcy filing as soon as this week,

Starting point is 00:03:54 according to people with knowledge of the situation, Bloomberg. Genesis creditors are negotiating a pre-packaged bankruptcy deal with the firm, the block. Finally, creditors would agree to a forbearance period between one and two years under a prepackaged bankruptcy plan in exchange for cash payments in equity in DCG. So this last story is from the block who went out and dug up more information. According to two familiar sources, Genesis is negotiating a pre-packaged bankruptcy with their creditors. This is quite different from what a company like FTX is going through right now. Basically, in a pre-packaged bankruptcy, before the bankruptcy is filed, the firm negotiates a plan for financial reorganization or restructural

Starting point is 00:04:30 with its creditors. The upside of this is that there can be significant time savings as well as potentially fewer legal fees. The risk, however, is that if a creditor discovers the firm is moving towards bankruptcy, they can theoretically use that information to become uncooperative. A recent example of a prepackaged bankruptcy from this space is that of large mining concern Core Scientific. Through that deal, convertible note holders of the company, quote, equitized their debt into a significant majority of the common stock of the reorganized company. In other words, Core Scientific's debt holders had that debt convert. inverted into a true equity stake in the new company that would come out on the other side of the

Starting point is 00:05:04 restructuring. And presumably those creditors owned much more than they would have been entitled to had Core Scientific not needed to restructure in the first place. What's more, those note holders were investing an additional $75 million to aid the restructuring process. Black Rock, you'll remember, was a part of that, injecting something like $18 million into Core Scientific at the end of last year. Now, bringing it back to Genesis, according to the Block sources, quote, creditors like the Winklevoss twins Gemini would agree to a forbearance period in most of the payments of between one and two years under the prepackaged bankruptcy plan. In exchange, creditors will receive cash payments in equity in Genesis Parent Company Digital Currency Group. End quote.

Starting point is 00:05:41 Effectively by pre-agreeing to suspend payments for a certain period of time, creditors would get equity in the larger DCG company, but in a way that wouldn't require DCG to fold. There are lots of things that remain unclear. How Gemini earned customers would be handled is a big one. Another is leadership. With the Winklevosses followed through on their demand that Barry be replaced as head of DCG. Other folks in the crypto space who have their own sources are suggesting that a deal isn't as done as some of the reports are suggesting. AP Abacus, who has been providing breaking news on this topic via Twitter, tweeted in the afternoon that several Genesis creditors had refuted the idea of a pre-packaged bankruptcy, claiming that DCG and Genesis had leaked this

Starting point is 00:06:20 narrative as a tactic to force a deal to close. He quoted a sources saying the bankruptcy is, quote, far from a done deal. Let's assume, however, that some version of a prepackaged bankruptcy goes through. I wanted to know how the market would view that, and so I tweeted a poll. I said Bloomberg is reporting that Genesis is preparing to file for bankruptcy. Is this A, bullish, finally some resolution on one of the big overhanging issues, or B, bearish? It's a bankruptcy that will mean more capital locked up and more confidence lost. With more than 700 votes, 55% of people said it was bullish, with 45% of people saying it was bearish. Now, among those adding color to the this is good or this is bullish perspective was Nicholas Hall, the CEO of Found,

Starting point is 00:06:59 which is an on-chain bankruptcy claims trading company. He writes, Yes, a prepack means the parties are in agreement prior to filing a Chapter 11 petition. The benefits of a prepack are speed, costs, and predictability. The debtor generally dips in and out of bankruptcy, sometimes in as little as a day. Genesis formed a creditor committee weeks ago, so they may be able to obtain a due process preservation order, allowing for an ultra-fast filing so long as all classes entitled to vote on the re-arck plan support it. Having litigation claims resolved prior to filing likely means that this is a relatively routine confirmation. I would say that this is a good thing, but you never know. Scott Johnson, who is

Starting point is 00:07:33 formerly a finance lawyer at Davis Polk and now his general partner at VB Capital, writes, prepack bankruptcy would almost certainly mean little to no market impact in a very quick process, about as good a resolution as one would hope for. Compared to the free fall FTX bankruptcy, this is complete night and day. He also wrote, reading tea leaves, Trusts unaffected, never was any doubt, in my opinion. Basically, Genesis creditors capitulated and converted their immediate demand claims to long-term debt via forbearance. Struggling to see where anyone would be forced sellers or liquidators, only reason they're going through a Chapter 11 bankruptcy is likely because there are some small holdouts or non-responsive creditors that can be

Starting point is 00:08:07 forced to go along. Otherwise, prepack is comparable to out-of-court restructuring here. Holland-Cater Capital Management writes buys DCG time, so of course it's good for them. Going to be funny as price grinds up, all these bankrupt companies from FTX to 3AC. and DCG start dumping their bags. CT would welcome the exit liquidity that bails them out in that scenario unless we get the real retail back in. Citrus Vert writes, better than winding it up now and losing control of the company to the liquidator.

Starting point is 00:08:32 For creditors, perhaps they have a higher chance of getting more money back, too, since they are also getting some shares. KQA capital writes, resolution is almost always bullish, in my opinion. It's the fog of war that causes risk aversion and at a minimum, a higher cost of capital. Now, if those are the this is good kind of perspectives, there were also some who had a split view. Joyce Noia writes, it's bad for DCG in the sense that they have to give up equity, presumably in excess of the collateral granted by the security documents. It's a time-buying exercise where the parties hope crypto goes up in value. It's good for the market, as it

Starting point is 00:09:01 postpones uncertainty. Dylan Grabowski writes in the short term, it's bearish because we're going to see a wipeout in prices. However, in the long term, it's bullish because we finally scraped all the bullshit institutional grade D-Gen leverage and illiquid collateralized loans out of the space. Others weren't so sure. Crypto lawyer Freddie Rispoli writes, Agenesis Bankruptcy is terrible for Gemini. Bankruptcy forces a stay on all litigation against the company. Meanwhile, Gemini, still solvent, litigates against claims for its customers' losses that were housed inside Genesis. Now, I think this makes a lot of assumptions about what sort of terms Gemini might or might not accept, but it is worth noting that there would be serious implications one way or

Starting point is 00:09:36 another for those Gemini earn users. And then, of course, there are crypto-haters like John Reed Stark, the former chief at the SEC Office for Internet Enforcement, who writes another one bites the dust. Genesis Global Capital is laying the groundwork for a bankruptcy filing as soon as this week. Meanwhile, Genesis parent DCG told shareholders that it's suspending quarterly to conserve cash. The crypto ecosystem is crumbling. But holding aside whether it's good or bad, another question is whether it's priced in. I know many that I've talked to have expressed the feeling that a major shakeup or even blowout of Genesis' DCG is just their base case now.

Starting point is 00:10:07 But how broad is that sentiment? Commenting on the lack of negative price action around the announcement of an impending bankruptcy, Joe Orsini, the VP of Research at Eaglebrook wrote, today's Genesis bankruptcy news highlights the meaning of priced in. Fabian D writes, read Genesis situation. A, bankruptcy was baked into market expectations beforehand. B, one to two year forbearance being negotiated with creditors. C, any sale of GBTC will take time to process and is not an immediate threat. D, DCG will survive. I'm in the already priced in camp.

Starting point is 00:10:37 Also, good chance that DCG proactively sold a lot of their liquid holdings in December. And if not, then it will also take time to go through the official bankruptcy proceedings first. Now, as for me, I'm definitely most closely aligned with the whatever short-term bumps there are resolution is what matters camp. I certainly think a pre-packaged deal could be a very good scenario relative to some of the disaster options. Look, at the end of the day, things right now aren't normal or hunky-dory. The GBTC trade was great on the way up and caused problems on the way down. DCG got itself over-leveraged on that trade. Genesis got caught in the worst flameouts of last year, and valuations for everything, including liquid assets and

Starting point is 00:11:11 venture investments are down. Holding aside any value judgments or recriminations, about how everyone got in the situation where we are, the reality is that withdrawals at Genesis have been shut down for two months and it's not clear how DCG can cover all the debt. So yeah, put me in the camp of a pre-negotiated solution that doesn't involve DCG, also being pulled into bankruptcy as being a good thing. Meanwhile, speaking of DCG affiliates, it's worth noting that the Wall Street Journal is reporting that CoinDesk has engaged investment bankers at Lazard to help it explore options for a full or partial sale. CoinDisc's CEO, Kevin Worth, said, quote, over the last few months, we've received numerous inbound indications of interest in CoinDesk.

Starting point is 00:11:47 According to anonymous sources familiar with the matter, CoinDisc has received multiple unsolicited offers above $200 million in that time. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26th 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 all. offer creators, builders, founders,

Starting point is 00:12:18 founders, brand leaders, entrepreneurs, and more. Use code Breakdown to get 15% off your pass. Visit Consensus.coindex.com or check the link in the show notes. Now, keeping on the bankruptcy chain for just a minute, John J. Ray III gave an interview to the Wall Street Journal, his first public interview since becoming FTX's CEO. The big banner headline was, New FTX Chief says crypto exchange could restart.

Starting point is 00:12:48 Mr. Ray said everything is on. on the table. If there is a path forward on that, then we will not only explore that, we'll do it. The question seems ultimately to be math to them. From WSJ, Mr. Ray said he would look into whether reviving FTX's international exchange would recover more value for the company's customers than his team could get from simply liquidating assets or selling the platform. Now, the community lit up when this article was published. Some were, of course, shaking their heads. Hasakar said, assuming this is a genuine attempt and not J.J.R. 3, getting maximizing the FTX Estates FTT value, who's going to be leading the FTX 2.0 round. A16Z, Citadel, Apollo

Starting point is 00:13:23 Capitol, Justin's son come to mind. Collective memory of a goldfish and all that. It is what it is. On the other hand, some people said, sure, with new leadership, they'd trade on it. CoinMamba says, to be honest, I wouldn't mind trading on FtX again under different management. Any exchange is better than Binance nowadays. Nick Carter writes, I would actually use FtX US again. It was a good product. Gainesi speculated about this, saying, so how does this work? boot FTX back up, but people only have a percentage of their original funds in their accounts, if that? Not the worst idea if the exchange runs at a profit and fees are used to make customers whole, in my opinion. Don Alt responds saying, would be cool if people got FTX debt tokens they could

Starting point is 00:13:58 trade in relation to how much they lost. Think that it'd bring back lots of people in volume, which in turn would decrease the debt FTC has by virtue of trading fees. So many ways to make this interesting, to be honest. Now, FTT instantly popped up 30% on the news, leading Mike Dutus to joke. Congrats to FTC's liquidating CEO, John Ray, on being such a quick study. on crypto markets. CoinDesks David Morris savagely wrote, meanwhile, for those buying FTT right now because you think any restarted version of FTCS would actually use it,

Starting point is 00:14:24 I'm going to use this phrase correctly for the first time ever on crypto Twitter. Have fun staying poor. Still, for all of this, I think the silent majority are pretty skeptical. Alistair-Millney posted a poll, would you trade on FTX 2.0 without salmon company? Of the first 500 votes, 72.8% said no. 14.5% said yes. 8% said maybe, and 4.8% just wanted to see the results.

Starting point is 00:14:48 Now, Sam, for his part, certainly seemed eager to put in his two cents unsurprisingly. He tweeted, I'm glad Mr. Ray is finally paying lip service to turning the exchange back on after months of squashing such efforts. I'm still waiting for him to finally admit FTXUS is solvent and give customers their money back. In the same interview with the Wall Street Journal, Ray did have some comments for Sam as well. From the WSJ, quote, Mr. Ray said in the interview that Mr. Bankman-Fried's comments were unhelpful and self-serving. We don't need to be dialoguing with him. He hasn't told us anything that I don't already know.

Starting point is 00:15:17 Mr. Bankman-Fried responded in a text message, this is a shocking and damning comment from someone pretending to care about customers. Ray also commented on Sam's accounting from his recent blog post. Here's how Alexander Saidi from the Wall Street Journal summed it up on Twitter. Ray earlier this week said there's a shortfall at FTX US, which SBF has disputed. Sam has shown FTX bank balances that displayed a surplus of several hundreds of millions of dollars to cover U.S. customer claims, including funds sitting at at Ledger X. Ray said he doesn't agree, since Ledger X was purchased using dollars wrongly appropriated from customers. Losses at the U.S. Exchange would thus be subsidized by money that belongs to them.

Starting point is 00:15:53 This is the problem, Mr. Ray said. He thinks everything is one big honeypot. It's pretty fascinating now from afar to watch Sam give his all fighting the wrong war. This is a guy facing 165 years in prison on a variety of fraud charges, with basically all of his co-conspirators working with the police saying, yes, we did the thing that you're accusing. us of, which you call fraud. Sam seems to sort of disagree that it was fraud and just wants us to know that the exchange he built was good, and if he were still in charge, he'd be helping customers he stole from more than the current bankruptcy team. It's like he's setting up the pitch for his next company, rather than fighting to be free to actually start it. Anyway, whatever.

Starting point is 00:16:31 Tomorrow, Sullivan and Cromwell has a hearing on its motion to be appointed debtor's counsel for FTCS, and this is something that some find pretty questionable given how much Sullivan and Cromwell worked with FTCS while they were solvent. To the extent that there are any interesting things that come out of that hearing, I will report them here, of course. For now, I appreciate you guys listening, as always, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Would a Genesis Bankruptcy Actually Be Good for Crypto?

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