Unchained - ​​Genesis May Be Facing Bankruptcy. Could It Take DCG Down With It? - Ep. 429

Episode Date: December 6, 2022

Ram Ahluwalia, CEO and co-founder of crypto-native investment advisor Lumida, and Samuel Andrew, crypto author and analyst, talk about the financial situation at Genesis and parent company Digital Currency Group (DCG). The collapse of FTX has dealt crypto lender Genesis another major blow, with the firm halting withdrawals and DCG stepping in to help. Now the two face a range of suboptimal outcomes in the face of massive debts. Ahluwalia and Andrew discuss what could come next, and what should be learned from the recent debacles.  Show highlights: why Genesis and DCG are so important for the crypto sector Ram's explanation of the "Grayscale trade" and why it is relevant to understand the current crisis the ghost of Three Arrows Capital and the origins of Genesis' problems why Sam thinks Genesis was "reckless" in its loan underwriting what a spot Bitcoin ETF would mean for Grayscale's revenue what options Genesis and DCG have to weather the storm whether it makes sense for Genesis to file for bankruptcy why Ram thinks Genesis lending product needs to be be shut down why Gemini and its Earn program loom large in the Genesis situation the risks of enforcement action from regulators what the most likely outcome is for Genesis and DCG and whether creditors will be made whole whether there will be broader contagion stemming from Genesis and what other crypto companies could be in trouble the problems of leverage and why crypto's "shadow banks" need regulation     Take Unchained's 2022 survey!   Unchained is doing its annual survey. Tell us how you think we’re doing and how we could improve, whether it be on the podcast, in the newsletter, or in our premium offering. Looking forward to hearing your thoughts!  Thank you to our sponsors! Crypto.com Chainalysis Minima   Ram: Twitter Ram’s thread on GBTC Previous Unchained episodes: Why Genesis Could Very Well Be Insolvent, Not Just Illiquid Sam: Twitter Substack     Episode Links   Genesis: Unchained:  Genesis Warns of Bankruptcy If Funding Plans Fail: Report On-chain Analysts ID 432 GBTC Addresses After Grayscale Says No to Proof-of-Reserves WSJ: Crypto Lender Genesis Asks Binance and Apollo for Cash Decrypt: Digital Currency Group Says No Imminent Threat Despite Owing Genesis $575M The Block: DCG CEO Barry Silbert updates shareholders, says company will emerge 'stronger' Previous coverage of Unchained on Genesis: ‘The Last Big Whale’: Why the Crypto Contagion of 2022 Eventually Hit Genesis Adam Cochran on Why Crypto Prices Will Be Down Bad for the Next Six Months Is the Collapse of Crypto Lending Over, or Is It Just Starting? The Chopping Block: SBF Wants to Win in the Court of Public Opinion. Will He?   FT: Crypto broker Genesis owes Winklevoss exchange’s customers $900mn   WSJ: Rising Tether Loans Add Risk to Stablecoin, Crypto World Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everyone, just a quick note before we begin. Unchained is doing its annual survey. Head to surveymonkey.com slash R slash Unchained 2020 to tell us how you think we're doing and how we could improve, whether it be on the podcast, in the newsletter, or in our premium offering. Looking forward to hearing your thoughts. Again, the link is surveymonkey.com slash R slash unchained 2022. And you can also check the show notes for the link. Hi, everyone. Welcome to Unchained. You're no hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians.

I started covering crypto seven years ago, and as the senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the December 6th, 2020 episode of Unchained. After the collapse of so many centralized lenders, is now the right time for crypto wallets? I recently sat down to talk about this with Oriole O'Hayan,

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Today's topic is the financial situation of Genesis and its parent company DCG. Here to discuss are Rom Alawalia, CEO and co-founder at Lumida, and Sam Andrew, author of Crypto Clarity Research. Welcome, Rom and Sam. Pleased to be here. Thank you. Hey, Laura and Rom. In the last few weeks, there has been some clouds on the horizon for the industry, which is this question of what will happen to Genesis and DCG. Let's just start by making sure the audience understands who these two entities are and why it is that they're so important for crypto.

And Ron, why don't we start with you? Sure, I'll frame it up. So DCG is a storied institution within the crypto sector. DCG was born out of second market and founded by Barry Silver. And it has several businesses underneath that, including a coin desk, the media institution, as well as Genesis lending. and a number of other businesses as well. And the challenge has been that Genesis lending is the world's largest prime broker. And it's had a run on the bank.

There's been an acceleration of customer withdrawals. And Genesis lending has been lending on a secured basis as well as unsecured basis to institutions, including three euros, capital and others. some of those institutions have failed to pay back their loans, they've blown up, there've been write downs, and that's caused a collapse of confidence in Genesis lending. And what we've seen over the last few months are a series of tweets and notices from Genesis attempting to restore some kind of confidence. But in the last few weeks, you've seen Genesis has halted withdrawals. And there's also been a letter issued by DCG summarizing the situation. from their perspective.

And it appears to be that there's a goal to raise capital at the DCG hold co level to attempt to repair the situation. And Sam, is there any more that you want to add on the importance of these two entities for crypto? Yeah. Let me highlight three things as to why the DCG issue in particular is a big deal in crypto. In my mind, there's three kind of main reasons for that. One market liquidity, two contagion and three reputation.

And so from market liquidity standpoint, as Ram was alluding to, like, Genesis is really big, right? And they're really big and a kind of large part of the crypto markets because of their lending and trading business. And just to put some numbers around that, they did about $8 billion of loan issuances in Q3 of 2022. They did about $50 billion at its peak. And they trade about $30 billion worth of volumes, both in derivatives and spot contract, right? And so it's a huge liquidity provider to crypto markets. And so what that is, like think of that as like almost like the motor oil for a car, right? It helps the kind of lubricant of assets in crypto trading fairly easily. And so with DCG or sorry, with DCG and specifically Genesis particularly gone,

then all that liquidity dries up and it becomes much more difficult for crypto assets to trade. The second thing is contagion. Genesis in particular has about $3 billion worth of liabilities, at least. If that goes to zero, which I think is unlikely, but if it did, then it has like all sorts of knock on effects selling wise across the industry. Within the DCG business, one of the businesses, which I'm sure we'll talk about in detail, is called Grayscale. They have their prime asset in Grayscale is the Grayscale Bitcoin Trust, commonly known as GBTC.

it's possible, though unlikely, and I'm sure we'll talk about this in more detail, that that trust could be unwound, in which case there would be a huge amount of Bitcoin selling into the market, 630,000 worth of Bitcoin selling into the market, which is worth about a little over $10 billion. Again, that's probably unlikely, but there's a concern of that. And the third reason why this is a big deal is reputational. DCG, you may not have heard of it. It's this large crypto conglomerate that generally flew under the radar until a few

weeks ago when all of a sudden, Genesis halted its withdrawals. And from a reputational standpoint, it's yet one more hit that the crypto industry has taken. So as Rom began to describe, there were a number of seeds of these issues that were planted kind of over the last several months. I think the headlines really started after the collapse of FTX, but a lot of the origin of these problems began, in some ways you could say with three arrows capital going under, but also even before that with, I think, some of DCG's business strategies. So, Rom, can you describe how it was that all these events sort of unfolded in terms of them affecting first genesis and then ultimately ensnaring DCG?

Yeah, you have to go back to the grayscale trade. So let me define what that trade is. It's a variation on a carry trade. So what was happening is GBTC was trading at a premium relative to spot. Bitcoin. And the reasoning for that is because GBTC was one of the only ways to access Bitcoin in scale as an institution. So you had a number of players, including blockfying three arrows, that would buy Bitcoin and then sell forward to deliver Bitcoin to gray scale. And they could capture the premium. However, you had to wait six months before you can monetize that.

So you're taking risk on the spread between GVTC and the spot price of Bitcoin. Now, what happened in around March of last year, shortly before the Coinbase IPO, we had new onramps that enabled easier access and awareness of easier access to Bitcoin, is that spread flipped from a premium to a discount to negative. So if you had been buying Bitcoin attempting to capture this time arbitrage, a pseudo-arbitrage, which is in riskless, of course, then you're stuck holding the bag and you're losing money. And really, the unwind of that premium has caused a lot of issues in risk and contagion. It was a perpetual motion machine around which other machines were built and all that's come undone.

So that I think is the proximate cause for the issues that three hours capital faced. In addition, what you saw was that DCG, according to their 10Q, had plowed back $780 million to buy GBTC at a discount. Now, in general, a closed-end fund, it's very unusual for a discount to exceed 20 to 25% on a sustained basis. There was a thesis there that this spread would close, and of course it had historically been at a premium. But in fact, the spread kept widening. Genesis lending was financing three hours capital in that trade. Of course, Genesis is wholly owned by DCG. It would have been in the interest of DCG to have Genesis finance three hours as capital.

And it appears that Genesis lending was also financing DCG. So DCG already had operating leverage on the gray scale, on the GBT trade. But it was compounded with financial leverage from Genesis. As that spread continued to widen, ultimately, it led to a margin call from three Earth's capital. They were not able to pay back their $2.3 billion loan. There was a collateral shortfall. That led to an impairment on the Genesis lending balance sheet.

So Genesis lending had to go to its parent company, DCG, which has real businesses and real assets like the Crown Jewel Grayscale. And DCG took an action to restore the solvency of Genesis lending by borrowing one $1.1 billion from Genesis and assuming, quote unquote, certain liabilities, namely the bad debt of three hours capital. That action restored the balance sheet help of Genesis, but it also led Genesis having a duration issue because they've got this 10-year loan where the counterparty is their parent company payable in $1.1 billion in 10 years and a liquidity issue. And yeah, so as you probably know, Because you were on my premium offering.

And in that interview, you talked about how you felt that Genesis has both a liquidity and a solvency problem. I have seen a lot of commentary on Twitter and also, obviously, the DCG statement or letter to shareholders itself. And more or I don't know about more, but a number of people are just saying that this is a liquidity issue. So I was curious, Sam, for your perspective on what the core problems are for Genesis. Okay.

there's maybe just taking a step back and just defining what the problem is, there's two problems, right? And the two problems are interconnected. So let's start with the two entities that have the two problems. Entity number one is Genesis. And Genesis has a liquidity problem, right? And they have a liquidity problem because a whole bunch of depositors want their money back. And how did that come about? Well, the business model of Genesis is to take money in in the form of deposits and then lend those deposits out in the form of loans, right?

similar to a bank. In the wake of the FTX collapse, everyone wanted their crypto back. It didn't matter where it was. There was just give me your crypto back. And so they call up Genesis and say, give me my money back. And Genesis doesn't have the money, right? And it's not surprising that Genesis doesn't have all the money because that's the business model is to lend it out. So that's a liquidity issue that has been solved at least temporarily right now by halting withdrawals.

Usually when you halt withdrawals, that spells the end of the business, right? And spells the end of the business because there's no longer any trust in the entity in which you have, lent your money to, and that can often lead to a bankruptcy. But that's been at least halted for now, and we can talk about how that things may play out for Genesis. The second problem is with DCG. Now, usually how a company is organized. You have separate entities. Each one is ring-fest with his own assets and its own liabilities, and that provides some form of security for all these different entities operating. That's how DCG is set up as a parent company with his various assets. However, there's a key problem here, and that is what was revealed in a tweet from DCG CEO is that there's

actually $1.6 billion of loans that went from Genesis to DCG. So that creates another problem is that if Genesis were to go bankrupt, right, which it's potentially on the path of doing, then Genesis creditors enforce on Genesis's assets. The largest assets, the largest assets, on Genesis's balance sheet is a loan it made, Genesis made to DCG. So all of a sudden, by enforcing on that asset, DCG gets brought into Genesis's bankruptcy proceedings. That is why these two entities are now intrinsically linked is because if one fall, the other one falls. And that is kind of critical to understand of to how these two entities are now tied together. The doom of one, being Genesis, will impact the fate

of DCG. Yeah, I agree. And just to build off what Sam said, DCG had a chance to cordon off the liabilities and let Genesis go to Chapter 11 and limit the fallout and there would still be issues around Gemini Earn. But by borrowing $1.1 billion,

to Sam's point, they're inextricably linked. A few other points. One is, there's no question that after the three errors capital impairment that Genesis was insolvent, you had a $2.6 billion loan that was non-performing. So long as write downs are greater than retained earnings, you're insolvent. However, DCG did come to the rescue by swapping out this bad asset, a loan to three euros capital. There's not worth much.

You can't collect that. You've got to go through bankruptcy process. It's going to take some time with a good loan to DCG. So in doing so, DCG did restore the solvency of Genesis. However, let's look what happens here. You've got a $1.1 billion loan to Parenthood DCG, which is payable in 10 years. So Genesis is technically solvent. What's the present value of that loan?

Depending on the discount rates, between $250,000 to $350 million. So it's technically solvent. But if you truly were to liquidate the assets and liabilities, there would be a shortfall in the assets and be insufficient capital to go pay back your creditors. So if you look at the DCG letter, they start out by saying, look, there's a market dislocation. People have been impacted. Third sentence. Now there's a duration issue. That duration issue is the consequence of DCG attempting to save Genesis.

They borrowed a 10-year duration loan. So they replaced that solvency issue with the liquidity and duration issue. And although it's technically solvent, the assets on a fair value basis are still less than the liabilities. I just wanted to add earlier when Ron was saying that the whole created by three arrows was 2.7. What did you what did you say? No, 2.3 billion? Right.

That I read, I think this was in Sam's newsletter that that represented 47% of their loan book. So that's just to make clear just, you know, why we're saying that that is what made them and solve it. But anyway. Yeah. I think maybe just hone in on a couple points there that Laura, you just touched on and Ram explained for us. So in terms of how Genesis got into this mess, the GDPC trade was part of it that Ram explained how that worked. But there was also like incredibly reckless loan underwriting at the Genesis level, right?

And they tried to kind of cover over this. So in July 6th, the then CEO of Genesis tweeted that, you know, we've got exposure to 3AC. Don't worry. There's roughly 80% collateralization on the loans that were extended to them. We've liquidated. We've kind of hedged. DCG has kind of stepped into assume some liabilities. It was all very vague.

But in the wake of like Celsius block five voyage or collapsing, you're like, okay, Genesis seems to have like operated pretty quickly or pretty well. DCG has kind of come in. We don't really know what worked or what happened because nothing was really disclosed, but it seems to be okay. And then 12 days later on July 18th, the 3AC bankruptcy filing comes out and it notes that there's a $2.3 billion loan outstanding to Genesis. So that means Genesis had loaned $3.3 billion. And you're just like, wait, what? Like didn't the CEO just say like everything was fine? And now you've got this $2.3 billion claim on the 3AC bankruptcy because Genesis had loaned $2.3 billion to 3AC. And then you look at Genesis's quarterly filings, and you can see that as of June 30th, 2022, there was $4.9 billion of loans outstanding, right?

Now, $2.3 billion of that was to 3A.C. So that meant that 47%, as Laura, you explained, of your loan book was issued to one entity. Like, that is absolutely bonkers, right? And it almost got worse from there because in that loan, that $2.3 billion loan was a USD denominated loan, but the collateral for that loan was in crypto-linked assets. So as crypto-priced crisis crashed, the value of the collateral totally declined, but yet you still owe $2.3 billion. The third issue was this 80% of the collateral, like, was not actually there, right? And you can go through, which I've done and looked at the 3AC bankruptcy filings and look at what

the collateral value is. at most it could have been like 60% and by the time 3AC collapsed it was 15% right so you ask yourself like why did Genesis have like such reckless loan underwriting and it's one of two reasons it's either you're like totally stupid right or you're making a ton of money doing this and there's other reasons and my suspicion is that is a bit of both and they actually made a ton of money doing this for the reasons ram explained of like this three the gbTC trade three aces three Genesis and Grayscale all needed to be part of that, those three entities. And Genesis and Grayscale made a ton of money doing this. At its peak, Grayscale's revenue was $144 million a quarter.

That was revenue that had very little costs associated to it that was flowing right into DCG. That's why Genesis was underwriting very lenient loans to 3AC is because they were making up for it both in their trading volume through Genesis and in the revenue that Grayscale was generating. I'll clarify one piece. So it's clear that with the demise of three euros capital that Genesis took action to call in loans or if they could. It was revealed through some of the FTX issues last week that, for example, there's like a $2.6 billion loan to Alameda, which they called in successfully. So what happens is when you're calling in your loans, you're going to start increasing your concentration risk to certain counterparties, especially the bad ones that can't pay back the loan. So, but yeah, clearly there were issues here.

there are a number of issues. I don't know if you want to go around that. There were secured loans, but there was no perfection of the security interest via control, meaning having the collateral in a vault or even better yet on chain. That's one. Second, there are these unsecured loans. Third, there was counterparty underwriting challenges that Sam mentioned. And fourth, there's no liquid loan market for the asset. So that's the challenge. If you're a non-bank printing to be a bank, then you're borrowing short-term liquid deposits and you're lending against long-term ill-liquid assets. And when there's a crisis of confidence, you cannot liquidate your asset side of the balance sheet fast enough.

So the number of issues. And overall, my view is that Genesis lending is a great business in an up-only market. But when the tide goes out, any business, it's broader than like a management issue. No business should be doing this, the capital markets infrastructure. are not mature enough for a number of reasons to have a successful lending operation. And I do think that in a way, all the different entities that we're talking about, all their incentives went pretty much just in the same direction. Because you could imagine that if Grayscale and Genesis weren't owned by the same parent

company, that probably some of the risks they took, they wouldn't have taken otherwise. So I think, you know, when just everybody has incentives in one direction, that means when things shift in the opposite direction, then everybody gets wrecked here. Well, they trusted. They trust it as well. This is the greatest irony, right? They trusted counterparties in a trustless world. So there's some information, obviously, that we don't have. And so I was curious, what do you think we don't know that could be relevant to kind of figuring out where this could go? Like, what do you wish you could ask, Barry? Silbert or the people at Genesis. That's a lot of questions I'd like to ask. Sam, you want to go first? Sure.

There's a ton of questions we're going to ask, maybe to boil it down into kind of three. I think a key thing for Barry, he probably has the best view on this, is where do things actually stand on converting the GBTC into an ETF? And the reason that is so important is the entire DCG complex is levered to like the Bitcoin price, but more specifically, it's levered to the GBT premium or discount to Bitcoin spot. And the larger that discount is, which now it's like plus 40% discount, the more insolvent and the bigger the problem DCG has. As that discount goes more to par and potentially even a premium, but like back to no discount or no premium,

DCG has less of a problem because its asset value goes up and its various collateral values go up. And there's reason to believe that there was a period when Rayscale may have been pushing for an ETF conversion, but maybe they didn't actually want to. And this is where the incentives, you know, Lori, you're talking about like kind of having perverted incentives. This is where the incentives come in is because the reason why, gray scale may not have really wanted an ATF is because they gray scale charges a 2% management fee on the Bitcoin asset value in the GBTC trust and that 2% management fee is enormous right like a standard ETF charges like a quarter of a percent right so you're like if you convert to an

ATF, then eventually we're inviting a ton of other competitors into doing this because it's easier to set up an ETF than a trust and all of a sudden, fee compression comes down. That issue is a bit taken off the table now, but like previously that was a concern. Now they're, you know, if they can convert GBTC into an ETF, that would be value creative for everyone. They filed suit against the SEC and they've publicly laid out a roadmap to convert to an ETF and they don't take those actions as a fiduciary, they could be sued. So I give them the full credit. I understand your point. It's a captive asset, great fee machine, and why wouldn't they capture it? But if they don't take those actions, they're liable. Here are a few questions I would ask. There are a few technical ones and then

some strategic ones. The technical question I would ask is around that $1.1 billion loan. What is the nature by which DCG, quote unquote, assume the liability, e.g. the bad debt of three hours capital. That has to be an arm's length fair value transaction, which would have crystallize the impairment on the Genesis balance sheet. It's not clear what that transaction was. So I have a question around what happened there. It's a puzzle. And the public disclosures haven't been able to address that. Oh, actually, wait, before you keep going wrong, just one thing that I meant to ask earlier, just for my understanding, but also the audiences. So, because Sam, when he initially talked about how much money it is that DCG owes to Genesis,

sort of combine these two loans, but the $575 million that's due next May, that was taken out because DCG, I guess, was funding more purchases of GPTC, but then the $1.1 billion, that was the $1.1 billion was the rescue to restore the health of the DCG balance sheet made in connection with the assumption of quote-unquote certain liabilities per the DCG shareholder letter. The $5.75 million loan was for a broader set of purposes, which appears to include the purchasing of GBTC. It may have been a corporate loan, which is a kind of a distinction as compared to a loan fully secured by GBT. So one question is, what were this precise set of transactions to transfer the risk and that $1.1 billion loan? That was one.

The second is, has DCG been selling GBT in the open market? Now, I know in the public financials that they report quarterly, as of September 30s, they have not. Now, again, they've been purchasing over some of the million dollars of GBTC while Bitcoin was riding high before and after the Bitcoin bubble and crash. They stopped purchasing the three hours of capital, which is smart because they're harvesting liquidity. But the GBTC discount continues to widen. We'll find out in February in the next following whether they sold GBTC to create liquidity, which would be horrible because their average purchase price. is $40, now GPC is $9, so they get a 75% loss on an unrealized basis, and they may be realizing the losses.

Then fundamental strategic question is this. DCG has this prized asset called grayscale, but the revenues of grayscale are directly driven and correlated by the price of Bitcoin, to Sam's point. So when Bitcoin was riding high, the fee generating power of gray scales enormous. Now it's dropped. If you look at the last quarter, multiply by four, you have 250 million revenue. We don't know the earnings. We don't know the margin.

I'd ask that question. It's somewhere probably between 50 to 75%. So it's going to come down to this. Very has to make a decision around is he going to raise money at a substantially lower price than the $10 billion valuation they raised at the top of the market, exquisite timing, which appears to be a secondary transaction in November 21. it's going to be a much lower valuation because gray scales revenues are 25% of what they used to be. And if he's willing to do that, he can save Genesis.

He can make the creditors hold. If he's not willing to do that, then there's pain. So Barry can control his destiny, but he's going to have to, you know, economic. Yeah, there's a lot of unknowns. Yeah, I do wonder also if they're selling the GPTC. So let's talk about some of the ways that DCG slash Genesis might work its way out of this. But before we do that, we're going to take a quick word from the sponsors who make this show possible. Join over 50 million people using crypto.com, one of the easiest places to buy, earn, and spend over 250 cryptocurrencies.

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Get started at minima.global. eager to make more informed decisions around crypto using data you can trust, chainelysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigation support for all crypto assets for organizations like Gemini, Crypta.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting Chainelysis. slash Unchained. Back to my conversation with Rom and Sam. So there's a few different ways that all of this could go. So these are some of the options we've seen discussed.

DCG could raise equity. It could sell some of its assets. It could have Genesis file for bankruptcy. And Sam wrote a little bit about how it could do a prepackage restructuring. Let's walk through each of the options. I'm curious to hear the details on each of these. Sure. So those are kind of the four main options. I'll tick through all four of them quickly. And I suspect we'll want to spend most of the time discussing this potential prepackage restructuring and that could look like. So the raising equity, there's two real challenges with raising equity is one is Genesis is a capital intensive business. And it's capital intensive because it's requiring money to come into the business to then go out and loan it. So if you raise equity and just provide that new. cash infusion to Genesis, withdrawals, you know, it'll go to fund withdrawals and then what?

Like, you're left with, if Genesis has no capital to originate loans, it has no business. And so that means that like raising equity for Genesis directly doesn't make a whole lot of sense unless you can capitalize it sufficiently to fund withdrawals and additional capital thereafter. And this, the second issue with raising equity is what Ram already explained is that Genesis was just valued at $10 billion at the end of last year, it's going to have to take a massive write down to raise the type of equity that's required. And like, that doesn't make a whole lot of sense. You'd have to either your valuation would either have to come down significantly and or you'd have to make up your returns on the rest of DCG's business. The second thing is

monetizing existing assets. So whether that's gray scale in terms of selling it to another asset manager, which it's a crown jewel, you could sell. But if you end up selling it, there's not much left at DCG. You could unwind it as in like sell, there's various regulatory things you'd have to go through, but you could conceivably sell unwind GBT, which means you could sell the Bitcoin at current price as opposed to, as opposed to at the discounted rate. You could raise $285 million-ish dollars by doing that. But that's actually not really feasible. There's all sorts of regulatory challenges, and it actually would take a really long time to be able sell all that. So that doesn't really work. There's three AC claims that could be worth a few

hundred million dollars. There's other assets that could be worth a few hundred million, but there's not much monetizable beyond like gray scale. So that doesn't really work. You could put Genesis in a bankruptcy, but then you're kind of at the same position you're in now. It doesn't provide like any additional benefit to the creditors or to DCG right now to put Genesis into bankruptcy. And we can explain kind of why that would be. But maybe just for the purpose of brevity right now, moving on to the prepackage, that in my opinion probably makes the most sense because in all other scenarios, it's the death of one or two prize assets, Genesis and Grayscale. And by killing either of those two assets, it reduces the overall value of DCG. And by reducing the overall value of

DCG, the Genesis creditors, right, which are the ones kind of driving this process right now, have less potential value to make them whole on their deposits, right? And so you want to create a situation whereby there's the most value possible at DCG and the most potential value could accrue to the Genesis creditors. And a prepackaged restructuring would enable both entities, Grayscale and Genesis, to continue operating and create value. I have a tweak on this. I think Genesis lending will be sure.

shut down because it's a negative enterprise value business. It hasn't generated a retained earning through an entire cycle and the writedowns actually expose DCG. So they got to shut that thing down, right? What happened here is an impairment to capital and the remedy for an impairment of capital is raised fresh equity. That's just the reality of it. DCG, as was noted earlier, now has a $1.1 billion liability that's payable in 10 years. Creditor is going to have a claim on that one way or another, either directly to DCG, if Genesis goes through Chapter 11 or directly or indirectly, one way or another. So they have to raise capital. That's just the only path. And yes, it's unpalatable, but it's reality. So I think you're going to see that happen. And, you know,

Barry is doing this negotiation with multiple counterparties. He has to negotiate with his own subsidiary, Genesis, who at this point likely has retained separate outside counsel. There's also these Gemini earn creditors and other asset managers that have claims here. So it's a very complicated process. Now, Barry is a former restructuring bankruptcy banker. So he's got the skills to do this. But I think the right approaches raise equity, take the lump, save the prized asset gray scale, and move forward. So you were saying, because Sam basically kind of said that he felt that that was not really going to be on the table for,

DCG, but you're saying you disagree that you think raising equity is the best option. But Sam, did you get to walk through your prepackaged restructuring? Yeah. So let me just explain how the prepackage restructuring would work, because I think we'll discover Ram and I kind of agree on this. Part of the prepackaging restructuring would include some form of capital raise. Maybe let me just step back first and explain what a prepackaged restructuring is. So kind of pre-packaged restructuring is when all stakeholders come together and negotiate a deal kind of between themselves. It usually leads to better outcomes. It avoids like a costly drawn-out bankruptcy process.

And the key in this is, in my mind, to raise some equity, some cash to fund some of the withdrawals and then having enough kind of operating capital for the businesses to continue running. And so how this would work is there's kind of four steps to it. The first step would be some form of liquidity and fusion, right? Around 500 million, I believe, would work. And that would be funded through. either or both of monetizing some of the assets, which I walked through wouldn't really work, with the exception of probably the venture portfolio. They could sell assets there and like raising

equity at the DCG level. Now, raising a few hundred million of equity is far more palatable than raising a billion dollars of equity. So if you need about 500 million and some of that can be funded by selling some assets, particularly the venture portfolio and raising some equity, that becomes far more realistic. Secondly, you'd have a partial withdrawal. So partial withdraw. So partial withdrawal of the Genesis depositors. So in order for, this is where I think Genesis, both trading and lending, maybe Ram and I disagree a bit on this, but I think keeping Genesis operating, both the trading and lending business would actually be value accretive, but it needs capital to do that.

And so you ask your depositors, Genesis depositors, to say, okay, we'll give you part of your withdrawals now. That's what the $500 million cash infusion goes to fund, a price. partial withdrawal. And then you ask them to leave most of their capital at Genesis. And they'd be willing to do that, potentially in exchange for what in restructuring terms is generally known as like a debt to equity swap. So in exchange for leaving some of their capital at Genesis, which enables Genesis to keep operating, and can ensure that the rest of the DCG empire kind of keeps running as it is as well, you offer them equity in the DCG parent company. Right. And so you're giving them kind of a carrot for like, okay, you're going to give you part of your withdrawals now. You're going to leave some of your capital here so that everything can keep operating. And exchange for that will give you equity in DCG. In addition to that, I also think there should be like improved loan underwriting standards at Genesis. And that would be part of their, you know, part of the terms of restructuring agreement to ensure that the like the reckless loan underwriting cannot continue in a in kind of a post restructuring business.

In general, and you're referring to prepackaged bankruptcy at the Genesis entity or Genesis lending entity specifically, right? Not DCG. Yeah. So at like at Genesis. Yeah. Got it. So a few tweaks. I think I'm broadly in alignment with the overall approach, but I'll just call out a few contrasts here.

Keep Genesis trading. Keep Genesis. Custody. Those are fine businesses. Makes sense. They make money too. Genesis lending got to go away. We can agree.

Disagre. It's all good. It just got to go away. It doesn't make any money. It doesn't make any sense. So the challenge, and as you pointed out, there are ways through a bail and conversion to debt to equity to improve the position of Genesis. The challenge is that those creditors include unaccredited retail investors who have no business opening a piece of DCG. Neither the creditors want to own it.

These are retail depositors that thought they had money, good savings this account. And DCG doesn't want them on their balance sheet either. So I don't think the bail in or principal forgiveness of. approach will matter. And if those creditors aren't made whole, the retail clients, their regulatory considerations around this. Now, we also don't know the priority of standing of those retail creditors. Are they secured creditors or unsecured? I've looked at the terms of conditions. It says the loans may be secured or not secure. So it's not terribly helpful. So it's, you know, something's got to give away here. They have DCG, you've got Genesis, you've got the creditors.

I think what has to give way is DCG. Now, what are the assets? Coin desk, it's a good asset. It's a great business. Is it worth over $100 million? I'm not sure. I'm not sure. I don't think the venture portfolio is worth much.

Venture in crypto is down double digits. These are not profitable businesses. I don't think there's a liquid market to buy a portfolio of these companies. The prized asset that DCG can raise money off of is gray scale. DCG, up until these recent events, was the. most profitable global institution in crypto, more profitable than Coinbase. Call me it's not profitable. The driver is DCG. That is gray scale. That is what investors are going to focus on. Hey, everyone. Just inserting a note here, after we wrapped, Sam said he had some pushback on what

Rom was saying about the value of Grayscale, and he didn't necessarily see it as a crown jewel. He said that he felt the long-term prospects for Grayscale's value are questionable, because he believes the current construct of the trust cannot continue due to how low it's trading compared to the underlying. He said that since the trust can't continue in this fashion, then the high 2% fee margin goes away. Either the trust gets resolved or it is turned into an ETF and thus that fee margin drops to 0.25%. Rahm agreed and said that if gray scale's value is less than what they were initially saying, then DCG will have an even harder time raising money since an investment in DCG is essentially a levered bet on gray scale. And Sam added that it was not only levered bet on

gray scale, but also a levered bet on Bitcoin, and that there are actually better ways to be levered long on Bitcoin. Rom, however, did add that if DCG, which has 67 million GPCC, were to unwind the gray scale trust, then, yes, the price of Bitcoin would. drop. However, DCG could also sell futures in order to offset the price decline from Bitcoin. He then added that this would also be possible for an acquirer of DCG to do the same. And finally, Sam added that there isn't a large pool of buyers for DCG in Genesis because this is obviously a pretty complicated situation and any potential buyer would need to also be pretty crypto savvy, which further limits the poll. All right, back to the conversation.

Oh, and just out of curiosity, this is, I know a small point, but when you said that you didn't know if selling CoinDusk would bring in $100 million, I don't know if you saw that report from Semaphore where apparently DCG did receive an offer of $300 million for Coin Desk, and that was dismissed for being too low. So it's not a critical analysis that I have. I'm just, maybe it's worth more, who knows, but on CoinDesk, it's not the focus of an investor is what I'm saying. The focus is gray scale. Yeah. Yeah. I have a few just kind of thoughts on what Ram shared in terms of the challenges at Genesis, both particularly to the various entities and this depositors and then kind of a lot of value at gray scale.

My view, I've kind of lumped everything Genesis as one entity, which it's not, but there's the trading business, there's the lending business, there's a custody business. The reason why I've lumped it all as a one entity is that like none of this stuff is public. we don't really know enough about it. So to me to be able to say like this entity versus that entity needs to be gone is a little bit hard to do at this stage. We may get into the weeds and realize like RAM is absolutely correct. Like this lending business, like cut that off and keep the other two Genesis businesses.

We'll find that. We'll find that out soon enough. The second point around Genesis depositors, this is again a point we don't really know. But my understanding is that actually there are most of the capital, in deposits at Genesis are from high net worth individuals and family offices. There is some money from Gemini Earn and from Circle. The Circle yield product is tiny and almost irrelevant. There's a significant amount of capital from Gemini Earn.

And so this becomes a question for like the restructuring and kind of like the terms of service of the Gemini Earned capital. Is the creditor Gemini, like the organization, which is like pretty sophisticated. or is, are they just an agent for all the depositors? If they're an agent for all the depositors, then a debt to equity swap can potentially become more complicated. The reason why I may not be as complicated is because if the Gemini earned depositors are a small portion of the overall depositors of Genesis, which means that the majority

of Genesis deposits are from high net worth individuals and institutions, which like reading through Genesis, like stuff on their website suggests that, then like a debt to equity stop becomes far more feasible because Gemini earned deposits are not driving the process. The high net worth individuals and the family offices that have money deposited in Gemini, they're the ones who are going to be driving the process. It's a good question. You're right, Sam. We don't know the composition and the exposure to retail.

They should be in the same class of creditors, though. So the resolution has to apply to retail as to high net worth. unless high net worth is willing to take it on the chin. I don't see why they have an interest in doing so. And there are retail non-accredited investors in Gemini Earn. Let's take a step like, why were these programs built? Let's zoom out for a moment. So Genesis lending, they are a non-bank bank bank.

They're making these loans. They make money on the interest, but they need these deposits. Like, how do we fund? So Gemini says, gee, people want something like a savings or earnings account, and they've got these customers. So Genesis and Gemini talked together and say, gee, let's put a program together. And Gemini has distribution to these retail accounts. They create a program and an offering for these retail accounts to deposit.

And then those are ultimately invested through some kind of vehicle into Genesis, right? So the issue with that is that Gemini retail creditors were never at the table to negotiate these terms with the lender. and they aren't able to underwrite the credit risk of Genesis, nor should they even be in the business of doing that. So the whole set of securities laws questions here. For example, was Gemini offering a security to retail? Was that security registered, if not, under what exemption from securities laws? Were there appropriate and full complete disclosures? Now, when you invest generally of a private placement memorandum of so private security, as this is the case, I've not seen that.

So Gemini has some exposure here. If you offer a security to an unaccredited retail investor without appropriate disclosures, in some cases you may be subject to the full liability of losses. So Gemini has a strong interest in seeking the restitution of those retail clients. So I know this is super sticky, and I'm about to throw a couple other wrenches into this because there are other potential issues with all this. One is there could be a clawback of, I believe, $200 million that FTX owed Genesis. And then as I believe it was Sam discussed earlier, obviously, if the price of Bitcoin falls further, that could be another issue.

So maybe talk a little bit about how you see the... scenarios potentially playing out? Yeah, one of the potential factors here, somewhat calibrated unknowns, is the exposure to FTX. Now, we know based on, I put like the FTX balance sheet in air quotes that they've balanced that I'm referring to is the one that was leaked by the FT. That was the spreadsheet that seemingly Sandbankman FRIB put together. And anyway, on that, it suggested that there was a $200 million loan, they received $200 million from Genesis. So how that plays out is kind of unclear.

The reason why I say it's somewhat calibrated is because if it's only $200 million in like the overall size of DCG and Genesis, like it's an issue, but it's not like an insurmountable problem. Where things, what we don't know, which is conceivable, is that if there were, let me just pause on that point to explain Genesis is lending, business. Their lending business generates a huge amount of loan origination, sometimes in the like tens of billions of dollars a quarter. And so they're all very short-term loans, spanning a few days, weeks, maybe months. And we know, given the size of Genesis and how active

they were in the market, they must have like loaned money to FTX or Alameda at some point. And given those two factors, it is possible that Genesis would have loaned a, a, a much larger loan than the $200 million that we saw on the like quote unquote balance sheet. And it's possible that that loan was repaid back. Depending on how the FTX bankruptcy plays out, it is possible if, again, these are like I'm putting together two big ifs. So it's a hypothetical situation that if a lot more money, if Genesis had loaned a lot more money to FTX or Alameda and those loans were repaid back to Genesis. then conceivably those loans could be clawed back if they were viewed as some form of like preferential treatment. Backed, they could be clawed back to the FTX bankruptcy estate.

And that would really complicate the entire DCG slash Genesis restructuring. But again, a huge hypothetical, but like the people inside Genesis and DCG and their credit, like, they know the answer to that. And so that could be one reason why like we haven't heard a whole lot or things are going to get way more complex. complicated is because there is that potential risk factor there. Yeah. A few scenarios here. And again, zooming out, what's going on here is DCG has operating leverage and financial leverage to the price of Bitcoin.

It's the driver of gray scales revenue. It's another carry trade. The first carry trade to impact DCG was the unwind of GVTCC. The second carry trade is the leverage to Bitcoin. So if Bitcoin moons, because the Fed pivots and QE is resumed, is not going to happen. That is a way for a successful resolution. You get capital raised at a better valuation, et cetera. If Bitcoin stays where it is, then the assets of DCG are sufficient enough to address the liabilities here,

although there's pain that will be felt from dilution. If Bitcoin drops substantially, then the revenues are impacted proportionally, but it gets worth. So the nature of operating financial leverage is this. So there's these fixed costs that Grayscale has to pay to operate GBT and a number of other trusts. Those fixed costs don't decline, right? So if your revenue is declining, your margins are also declining. And if they're not able to drive at a resolution, then those worst case scenarios that Sam identified earlier start to come into the fore.

Are you a four seller of GBTC on the open market where you're again, your average cost basis was 40 bucks. Now it's at nine. Is there selling now? Or, you know, do you look at that defecon option? I, again, I don't expect that to happen. I really don't expect that to happen. And this is why Barry has urgency to seek a financing to take the tail risk off the table.

He needs to do that financing now because he's exposed. to this volatile asset, not in his control. The factor in his control is his ability to raise money. So he needs to de-risk, do that now. All right. So at this point, what are the odds you would say, well, so what do you each think is the most likely scenario to play out? He raises money, takes a bunch of dilution, and then creditors are made whole, and then Genesis lending shuts down. There could be a Chapter 11 process, and the longer this goes without resolution, the more likely that is because depositors are owed their interest payments. Failure to pay is default.

And you're talking about it would be bankruptcy or Chapter 11 for Genesis, not DCG. Correct. Not DCG. I know there's been some rumors and thought around these. DCG is a quality business. These are institutions acting in their lawful commercial interests. I do believe these are high integrity players. I think Grayscale is a prized asset.

I think Coind Us is a great business as well. and, you know, they've had a set of issues which we've discussed here, and they'll get through to the other side. And Barry's very skillful. And Sam, what would you say or is the most likely outcome? So I think we're in a stalemate and we're going to continue to be in a stalemate for a period. And the reason we're in a stalemate is because to our knowledge, which again, we don't know everything, there is nothing imminent to put Genesis in bankruptcy or for some sort of fallout. at DCG. And the reason there's nothing imminent is how the two things that could be really imminent are either someone has run out of money. We know Genesis has run out of money or they've at least

halted withdrawals, but we know it's in the best interest of the depositors not to put, not to enforce on the assets right now. We talked about the assets go back to DCG and then how does DCG monetize all this stuff? Kind of hash that out already. So the Genesis creditors are unlikely to enforce right now. They're willing to have a conversation. The second thing is there's no impending debt maturities for DCG, right? There's $500 million that's due in the beginning of next year, but that's money that's due to Genesis. So it doesn't really get it's like there's no real third party capital that's imminently due. And so because of that, there's no like gun to anyone's head of like, you need to fix this right now. So that gives them a little, that can be a bit of a

benefit that like they can give them some breathing room to negotiate how things could play out. So with that backdrop, like, I don't expect like an imminent solution because it's not absolutely necessary right now. I do expect a solution. And I think that solution will include some form of capital raise in the form of assets being sold and equity raise at like a much lower valuation than the 10 billion that was previously raised. And I do expect, you know, my view is that there's going to be some sort of prepackaged restructuring where depositors may take a, bit of a haircut and they will be made up for that haircut in some sort of form of sweetener with equity value in DCG or something like that. Those are pretty complicated things to work through.

So it takes a bit of time. But as I explained, like time is a bit on their side right now. I'll take a different contrast in view on that. I love the, I love Stans analysis too. And it's great to have the back and forth around this. I do think they have urgency around this. I think bankers and lawyers are working nights and weekend. I don't think Barry's getting much sleep. I think he's looking at his Bitcoin price. Oh, absolutely. Everyone's working on this around the clock right now, but it's not like a panic that we need to get a deal done like tomorrow.

I think there is, I think there's motivation to get it done quickly. And here's why they're two drivers. One is the restitution of the Gemini earn payments. Those creditors are owed payments and failure to pay is at the fault. That's one. Second, that $575 million is a big number to do in May. $575 million in liquid cash isn't lying around. the DCG balance. I haven't seen that balance sheet. In general, it's not the case that that capital

would be lying around. Again, they plowed back over $750 million in revenue. They plod back the revenue from Graysdale to buy GBTC. So they've got assets in these GBTC assets, but they can't liquefy them. If they sell them, they're selling into a discount to N.AV between 40 to 50% the price moves against them. They could try to borrow against that. That's not a good move. Adding leverage for the situation. So they need to raise money. And they need to raise money. The first calls they should make are to the investors that participate in November 2021 financing. Because if you liked DCG at a $10 billion price, you should like it a lot better now. You're going to get better terms. You're going to have better governance. And I think that is where the focus is. There's that $575 million

payment's a big, big number to me. It's going to be another source of pressure in addition to Gemini I earn. So look, BlockFi recall had a $100 million SEC enforcement action for the payout of interest to retail depositors. BlockFi was acting as a bank, but they're not licensed as a bank. So the SEC said, that's an unregistered securities offer made to the public. The longer this goes on, the regulators start to get closer and closer. And the risk of enforcement actions will go up. I think it's highly likely an enforcement action, but the longer goes on, the severity is of actions increase. Yeah. Let me just clarify a couple things. The Gemini retail point that Ram explained very well, that is a real problem. And that is actually probably the biggest point of time pressure.

The point around the $575 million loan, absolutely, that's a big number and no one's got that money sitting around. The reason why that's less of an issue is because if you've, a couple of company finds itself in a situation where it can't meet its maturity. It's got $575 million due in the beginning of next year. I think it's May of next year. Then you go to the person who lent you the money and you look for what's commonly known as some form of like cure of like, listen, we can't make, we can't make this payment? Can you give us, you know, can you give us some leniency? Maybe we can extend the maturity. And in this case, you're going to Genesis to ask you this. It's the same, like these companies are owned by the same people.

Here's why I hear you. Look, if I look, what you're describing is like they would seek out a term out financing, for example. However, there's a complicating factor. One is this is an affiliate lending relationship. And the creditors to Genesis would not, would say, look, that's not an independent transaction. Isn't the mere fact of control by the parent insufficient. They have to retain separate counsel. Genesis has to act in their commercial interest. They can't give DCG a break. If they did that, that would expose them to more liability from the creditors. Yeah, that makes sense to me. One other thing I wanted to just bring up, and I don't know how important this is, but I do believe that there is an additional loan that they owe to some entity called Elridge or something like that, and it's $300 million roughly. I don't know if that's important at all.

I just wanted to raise that. It may be, we don't know the terms of it, but the, way the DCG shareholder letter read was that that facility is a revolving credit facility, but generally revolving credit facilities are like senior secured and like the most senior instrument in the capital stack. There's various covenants that generally go with revolving credit facilities, usually on like incurring additional indebtedness. But they usually can't prevent like some form of like equitization of subordinated instruments. So it's potentially an issue, but again, I don't view it as like a deal breaker because everything we're talking about is like equitizing subordinated instruments.

And so an RCF revolving credit facility, you probably can't thwart that process. Yeah, a revolver is a good source of financing. Again, we don't know the terms. So long as there's no unwind of that facility in the near term, it's a good, it's a good form of finance. But the other issue, we actually haven't talked about. It's a great point, Laura. Eldridge can say, I'm not going to approve this workout. I'm not going to prove DCG loan forgiveness.

Eldridge also has a stay at the table. Getting a bilateral deal done is hard on its face. Getting a three-party deal done is much harder. Getting a four-party deal done, the probability of successful resolution, is dramatically higher. Wait. Wait. It's higher?

Sorry, is a higher likelihood of failure or issue. So it's the only thing that can give way. Sorry, much harder. Thank you. Therefore, who's going to give up? It's DCG, DCG, because these other parties have significant claims as creditors. Okay. I do want to touch on the issue of regulation that Rom just sort of very briefly touched on.

What do you think this might prompt in terms of regulation, if anything? I'm happy to, I'm happy to chime in there. Actually, regulation here is working. These are commercial loans. Consumer loans are highly regulated. If you have a commercial loan, then commercial terms apply. There are laws on the books today. I don't think you need another law.

You don't think you need another regulation. So I think the main lesson here is that non-banks acting like banks doesn't end well. Second, carry trades don't end well either. I guess third is putting a product into a security format and then adding leverage. That doesn't end well. The lessons of history, right, crypto speed running, things we've learned over decades. And then define that term carry trade. You used it earlier and I'm not familiar with it.

Sure, sure. Thank you for clarifying that. So a carry trade is when you borrow in one asset and then you make an investment in other. Usually this term is referenced in like FX markets. For example, sometimes like a hedge one. would borrow Japanese yen because the borrowing cost of the Japanese yen was low in local currency yen terms because of the local interest rate. And then they would turn around and lend in a high interest rate country and capture the spread. So that trade works well up until there's a

change in the FX rate between these two or there's a change in interest rates. So again, the GVTC is an example of that. They, they were betting that this premium be maintained. and they're buying spot Bitcoin, and then they're selling for Bitcoin. It's not perfectly a carry. It's not actually a carry trade, but the same concept applies here, too. It's against borrowing short, lending long. You have some assumptions around that. All right.

Let's also touch on whether or not we might see further contagion. Are there any concerns with holding crypto at Coinbase Trust? I'm hearing some things about Silvergate. Yeah. So address some of the FUD, I guess. Excellent question. So look, trust companies, trust companies are highly regulated. Look, would we love to have assets and liabilities and proof of reserve and liability on a chain?

Absolutely. And we need to go in that direction. That's not going to happen tomorrow. But trust banks like Anchorage and Coinbase Trust and Gemini Trust are highly regulated institutions. There's a whole ecosystem of verification agents and. and auditors and third parties to ensure that assets are held one for one. So that's very important. Now, what's happening?

The international exchanges, like FTX Global is not subject to U.S. laws, and that's why they're blowing up. But what you want to look for is this. One, has the exchange done lending? If they've done lending, their high-risk institution. Second, are they non-U.S.? They're non-U.S., and they don't have to comply with U.S. law and their high-risk. institution. Will you see more blowups? Yeah, I think you're going to have some smaller exchanges go away. You know, DCG is a source of strength for this industry. So we want to root for DCG.

They've got a balance sheet. They got a great asset. They can absorb losses and help to stem the tide of contagion to some degree. Okay, but you also think there's no risk of contagion to Silvergate because I have seen, yeah, more about that. But I believe I used to work there. So maybe you I have a view on this, but we have a research piece coming out on this next week. I'll post it at my Twitter handle at Ramalo Al-a-Wa-Wa-a-take-look probably after Tuesday. Probably after Tuesday. If you want to reach out to us, reach out to us. We have to share that with our clients first.

That's the main thing. Oh, I see. Well, Sam, do you have an opinion about that? About broader contagion? I'll answer two ways. In terms of Silvergate, I don't have a specific opinion. and I generally reserve my opinions for things I'm far more knowledgeable about, and I'm just less up to speed on Silvergate is something I'm working on.

So I'll save that for now. In terms of broader contagion, there's a few points. I generally look at like prices and kind of other entity, like related entities, knock on effects and so forth. If we just generally look at prices, what I think has been a bit surprising is subsequent to the FTX collapse, crypto markets are off about 20, 25%. And that's not a huge amount given the amount of destruction that FTX and this potential kind of DCG genesis that we've discussed could create.

And the reason that what that indicates to me is two things. One is the positioning of investors like crypto investors was far more conservative by the time the kind of end of summer, fall, like fall rolled around. And the second thing it indicates is that, like, a lot of leverage was already taking out of crypto markets, right? So those two things are, like, generally helpful if contagion were to spread that, like, it won't necessarily be contained, but the pain from it may not be as severe, right? Now, you're also putting that in the context. They're like, well, yeah, that's because prices already dropped, like, 70%. So eventually, like, it's kind of hard to squeeze more blood out of a stone. The second thing, in terms of contagion,

is like looking at like the different entities and like what else out there could be ensnared in this in this being FDX and DCG and Genesis. You know, that is, that becomes far harder to determine because the whole point of this is like, well, we don't know all the intercompany workings and the loans that go on between all these different entities because they're not on chain. They're private transactions that like no one is aware of until they surface. We also run the third thing in terms of like the entities, like we're starting to run out of entities here. Right.

And so whether it's like one of the largest exchanges out there, via finance or like one of the like bigger stable coins like Tether, like if those two entities start becoming in trouble, then it's like it's really troublesome. Is there any reason to believe, you know, tether aside like, listen, we just we don't we don't know. So I don't want to like suggest either those two entities are in significant trouble. when they, you know, I have no reason to believe that. We'll talk a few quick names here. So, Nexo, look, if someone tells me how many loans nexor originate, I can tell you whether they're going to be solvent or not. If it's a large number of loans, they're not going to be solvent.

Because the analysis is really simple. You've got to say, what's the impairment to the balance sheet relative to the equity calculation of the balance? Just assuming 5% equity capitalization, good rule of thumb. If they originated a billion dollars in loans, even $500 million, they're going to go away. They're one of the few non-bank bank crypto lenders that somehow has survived all this. I think I'd put them in the red zone. That's one.

The second is Tether. So the Wall Street Journal reported yesterday that Tether has been issuing secured loans. Why are they doing that? Secured loans are not liquid. And secured loans to the earlier point, the mere fact that they're secured is insufficient if you don't control the collateral in a vault. what a secured loan is, if you don't control the collateral, is you rely on a legal process to recover your collateral. You rely on a court system.

You're relying on a UCC filing system. Tether is a money market, but it's not a money market in the sense that it doesn't benefit from all the regulations, capitalization requirements, oversight, and transparency that investors are afforded to in the U.S. capital markets. So tether is a concern. Yes. the other concern I'd have, when I say concern, I want to be very precise. I'm not saying they're going to blow up or not, but there's a concern. Absolutely, there's a concern. The third is, you know, Binance.

So Binance BUSD, how do we know that BUSD is fully reserved? But where's the reporting on this? You know, we know they raise a $2 billion rescue fund. It's another kind of show of confidence and show of strength very much similar to the pattern we saw from FTCS. and who's regulating Binance? Is it do do Obie Dhabi at this point? You know, so I have, I have concerns around that. So I hear all those concerns.

Maybe are those concerns any more heightened now? Like none of that stuff has changed subsequent to DCG. They're heightened, yes. They're heightened because when you see dominoes start to fall, then other dominoes fall. You know, in 2008 to 2009, we call a cockroach there. You see one or two cockroaches? You know there's 50 behind the wall.

And it's not a question of management or having the operations better than the other person. It's because these loans are defaulting. So when those loans default, they create impairments on the balance sheet. It's not as if one party originated better loans than another party or they had better operational risks. They weren't doing it on chain anyway. So those loans are impairing the balance sheet. And what drives the collapse, of course, is when the withdrawals happen. So you can be insolvent but liquid when those redemptions happen and they cannot liquidify that asset that's not worth that much.

Then, you know, these institutions shut down. So, yeah, I think the urgency is heightened now that the risk factors are heightened right now. Oh, yeah. And by the way, I just wanted to say earlier that NXO is a former sponsor of my show. should disclose that. So a couple of things before we head out, this has, by the way, just been such an amazing discussion. But I was curious, last thing, you know, what are some lessons you think the industry can take away from this whole debacle? I got a few, but Sam, we want to go ahead. Go for it. Yeah. There's a, I mean, we've got, I feel like we've touched on a few

lessons here already. The two, like, biggest things here that, like, it's not. It's not, just DCG and Genesis. This was pervasive throughout the entire industry. One is leverage. Like, leverage really crushes people, right? And that's been the, you know, that's been the driver of the massive bull run that we had, both, you know, CFI and DFI contributed to the huge amount of leverage that was out in the system. And so we just got to get that in check that, like, we can't have these like incredibly like levered long positions. Second, like we need regulation, right? And the reason we need regulation is you end up having these kind of shadow entities and Ram described this perfectly of like these non-bank entities that start acting like banks. And the problem when you

mix that with like these perverted incentive systems is they end up extending loans that like they really should not be doing. And as we discussed with Genesis and Grayscale, like the reason they did that is they were, you know, they were loaning out money over here and making a ton of money over there so it worked out until it didn't and everything imploded. The leverage and regulation need to be in check. Wait, but one thing is I thought earlier, Ron was saying that because these are regulated institutions that we're not seeing, you know, certain other effects that we might have seen, but are you saying what that we need more regulation or that the regulation that was in place is helpful or I'm not sure what you're?

what you're saying. Okay. So on the point of regulation, I think if I can paraphrase what was saying, in the case of some of the intercompany loans that were going on at DCG within the DCG empire, like all that stuff is regulated and we kind of know how that should play out. What is not regulated is these non-bank entities that operate as banks. And specifically what I mean by that is they operate as banks in the sense that they take in deposits and they lend. money out, right? That's a fine business model. The problem is, is they don't adhere to the same types of capital requirements that regulated banks do. And so what does that mean? A regulated bank needs to hold certain assets on its balance sheet, right, and has to have a certain equity ratio

to ensure it remains both solvent and liquid. In addition to that, a regulated bank is usually backstop by the Federal Reserve in case they have for like real emergency situations. None of that exists in these like crypto shadow banks, right? They still take in deposits and they lend money, but there's no requirement in terms of how much capital they need to have on hand, what their loan portfolio should look like, how loans are being underwritten, the type of capital that they need on hand. And that causes these shadow crypto banks to implode as we've seen in, you know, the last few months now. I think the need for regulations on the international side, right? So So FTX Global blown up, right?

These, where is finance regulated? Those are where the primary issues are. Non-banks aren't putting depositor or taxpayer money at risk. There are plenty of non-banks that do just fine. And there are also non-banks that blow up. And that's okay. That's part of a private capitalist market system. And investors and entrepreneurs and VCs can lose their money or make money.

So long as you don't hurt the public, so long as you don't hurt retail non-accredit investors. And that Gemini Earn opened a window to that. But there are existing laws on the books that prohibit the marketing offering of unregistered securities to undercredit investors. I don't think you actually need much incremental U.S. regulation. There's a clarity issue on certain crypto securities regulations. We published an out there on the Wall Street Journal with former SEC Chair Arthur

I've been talking about some of that. But it's really a separate set of issues. It's on the international. So you're seeing international regulators look at this and saying, okay, you're seeing international regulars look at this and saying, okay, we need to start harmonizing. We need to start taking some action. I think the last lesson learned is trust still matters in a trustless world. Trusted institutions still matter. If you want to broaden crypto adoption, access, and usability to the next billion people, you need on ramps and gateways that are trusted. So I think you're going to see Web 2.5 be the next step.

I know there's this push for the, you know, not your, not your keys, not your coins. And I'm sympathetic to that as a crypto-native person. However, it's not applicable to the broad majority of the world population. It's not something they can relate to. And you're trading off another risk factor as well. You're exposing individuals to a certain personal, personal security kinds of risk as well. So trust all matters in a trustless world. You need trust in institutions.

Ironically, you need banks. You need banks because banks have regular. banks have oversight. And banks, to your point, Sam, have the capitalization requires. They have limits on the kind of counterparty risk. They have to have the lending programs approved by the board and the regulators as well. And the banks have done well. Anchorage has done well. The trust banks all doing just fine. Well, we're going to have to see how all this plays out. This has just been, yeah, just incredibly fascinating to go through all the different potentialities and all the tangled factors that landed us in the situation.

Where can people learn more about each of you and your work? Sure. So you can find me on Twitter. Samuel M. Andrew is my Twitter handle. And on there, you'll see the link to my, to crypto clarity. Or you can find crypto clarity on substack. You can find me at at Ram Alawalia. It's a mouthful.

Or lumida.com, L-U-M-I-D-A dot co. We're a digital asset, private wealth management company advising crypto whales on how to navigate and invest in this space. Great. And the links to all that will be in the show notes. Thank you both so much. It has been such a pleasure having you on Unchained. Thank you, Lauren. Sam. Really enjoyed it. Have a good one. Take care. Thank you. Thank you. Thank you both. Thanks so much for joining us today to learn more about Genesis, DCG, and the contagion effects of FTC. Check out the show notes for this episode. Unchained is produced by me, Laura Shin with El Primp Anthony Youne, Mark Murdoch, Matt Pilchard, Wynarvanavich, Sam Shri-Ram, Pamajumdar, Shashonk, and CLK transcription.

Thanks for listening.