It looks like the bear cycle is going to claim another high-profile crypto company. On January 19, Digital Currency Group’s (DCG’s) lending subsidiary, Genesis, Filed for Chapter 11 bankruptcy. Here we have another industrial giant with obscene debts, little risk management to speak of and vague reporting policies.
For market participants, the storm clouds gathering over DCG represent a failure that could not have been imagined in 2021. Founded in 2015 by CEO Barry Silbert, DCG has become a mainstay of crypto in its short existence. Genesis’ filings revealed the full range of lenders affected by its implementation, including notably Gemini, the crypto exchange created by Winklevoss twins Cameron and Tyler, which Genesis said it But $765 million is owed. Metaverse Project de Centralland ($55 million); and fund manager VanEck ($53 million).
The company listed more than 100,000 creditors in the money and said it owed $3.4 billion to its 50 largest creditors.
Super chart that lender Miz Berry owns Decentraland owes $55m while DCG and Grayscale are $MANA Investor
Did they buy from the team and then just get cash back? How did DeCentraland get away with $55 million these days?
— Adam Cochran (adamscochran.eth) (@adamscochran) January 20, 2023
Some of the loans raise new questions, including, for example, why Genesis borrowed from Decentraland when a separate DCG subsidiary—Greyscale— keeps 18 million tokens of the project. (The holding was valued at $11.74 million as of January 20, at a peak of $105.8 million in November 2021.)
Genesis was first rocked by the fall of Three Arrows Capital (3AC), which lost little more than that. $500 million In debt from birth. FTX’s decline proved too much for the lender, prompting it to suspend withdrawals. Birth also indicated serious trouble in this month when it laid off 30 percent of its staff..
Related: Will Grayscale be the next FTX?
As the bear market continues, more fundamental systems are collapsing—systems like debt platforms, over-the-counter rails and exchanges. The relationships between failed systems and the companies operating those systems represent structural disturbances in the market, which are certainly important to note. After all, these are mechanical systems that can be refactored and rebuilt. Confidence is another story. Hard won and easily lost, trust is an elusive but vital force that must exist for any industry to thrive. And it is confidence in these markets that is at stake.
The contagion revealed hidden connections, undermining public trust
The sharp fall of 3AC, Voyager, BlockFi, FTX and Celsius shocked the market. But then connections between these groups began to emerge, and shock turned to anger. It became apparent that while these companies purported to be in finance, few, if any, actually acted as if they were in finance, and certainly not as the industry leaders that many made them out to be. Maintained — especially when it came down to it. Risk management.
6/ Until Barry and DCG come to their senses and make a fair offer to the creditors, we will immediately file a lawsuit against Barry and DCG.
— Cameron Winklevoss (@Cameron) January 20, 2023
Bad policies became the norm, with companies borrowing little or no collateral from one counterparty to pay another, some using their own “currency” as collateral. Moreover, the borrowers accepted the guarantee. The market frenzy in 2020 and 2021 set the stage for unethical behavior and bad business practices to spread on a large scale. As the true depth of corruption and poor judgment has become apparent, trust in these companies has largely eroded.
Rebuilding trust in the ecosystem will be difficult.
Asset prices may rise and fall, but most believe that the basic principles of market construction and mechanics will remain the same. This has been the main problem in this bear market. As it turns out, manipulation, collusion and insider deals were the norm. And this behavior wasn’t relegated to new companies – it seems most industry players participated at some level. This is the case with DCG. Bad loans, poor risk management and Ambiguous financial reporting The hens are coming home.
Related: Learn from FTX and stop investing in speculation.
Crypto prices will eventually bounce back, and new companies will enter the market. Let’s hope the industry’s collective memory extends a bit. Deep due diligence and a return to default skepticism are required. Companies must be diligent to earn trust through their actions. It seems obvious, but it is clear that we have forgotten.
We are left with an unfortunate reality. Trust will need to be rebuilt not only in the companies operating in the space, but also in the ecosystem that enables the companies.
Joseph Bradley Head of Business Development at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry before working at Gem (which was later acquired by Blockdaemon) as an independent researcher in 2014 and later moving into the hedge fund industry. He earned a master’s degree from the University of Southern California with a focus on portfolio construction and alternative asset management.
This article is for general information purposes and should not be construed as legal or investment advice. The views, opinions and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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