FTX Contagion hits the Winklevoss twins as crypto lenders come under fire
(Bloomberg) — The fallout from Sam Bankman-Fried’s rapid FTX collapse is rippling through the crypto world, trapping the Winklevoss billionaire twins in a liquidity squeeze at their lending partner, Genesis.
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Genesis is suspending redemptions and new loans in its lending business after the unit faced withdrawal requests that exceeded current liquidity. Gemini Trust Co., founded by Cameron and Tyler Winklevoss, later announced that its retail investor yield product would also stop redemptions because Genesis was a key partner in the program.
The crypto world, initially built on the principle of decentralization but which has evolved into a full-fledged financial ecosystem with loans of digital assets, is facing a settling of scores following the bankruptcy of FTX . Regulators are investigating whether Bankman-Fried and his associates misused client funds.
At stake is whether a crisis of confidence overturns the lucrative crypto borrowing, lending, and mining business and causes an industry-wide downturn.
Genesis, a counterpart to many in the industry, has been closely watched as an indicator of industry strength – or signs of contagion. Gemini, whose Earn program offers clients the chance to put their “crypto to work” in exchange for returns above 8%, is one of Genesis’ largest lenders. A year ago, it had issued $4 billion in crypto loans.
“We are working with the Genesis team to help customers withdraw their funds from the Earn program as quickly as possible,” Gemini said on its website. “We will provide more information in the coming days.”
“This does not affect any other Gemini products and services,” the company added. “All client funds held on the Gemini exchange are held 1:1 and available for withdrawal at any time.”
Crypto lenders BlockFi Inc. and Voyager Digital Ltd. are also under pressure.
BlockFi, which on Monday said it has “significant exposure” to FTX and its related entities, is preparing for a potential bankruptcy filing, The Wall Street Journal reported. Voyager, which Bankman-Fried was going to save in a $1.4 billion deal, is now writhing in the wind, trying to find a replacement buyer for its assets.
Investors such as crypto hedge fund Galois Capital, which has reported “significant” funds locked up on FTX’s platform, are also feeling the impact. Even miners are affected as the drop in crypto prices caused by the collapse of FTX has also put additional pressure on profits.
But it is crypto lenders who are feeling the most acute pressure after a year of persistent downward pressure on digital asset prices and multiple high-profile blowouts, including algorithmic stablecoin TerraUSD and hedge fund Three Arrows Capital.
Celsius Network Ltd., itself a crypto lender, was one of the main causes of these collapses earlier this year. He filed for bankruptcy protection.
Genesis said last week it would receive a $140 million equity injection from its parent company, Barry Silbert’s Digital Currency Group, after it revealed its derivatives business had $175 million tied up in a FTX trading account.
Although Genesis is one of the oldest and best-known crypto brokers, in recent years it has also created one of the largest digital asset lenders, allowing funds or other custodians marketers to borrow dollars or virtual currencies to profit from their transactions.
The loan business was already in trouble when Three Arrows collapsed. He had provided a $2.4 billion loan to the now bankrupt hedge fund, which was run by Su Zhu and Kyle Davies.
Requests to withdraw funds exceeded available cash at Genesis Global Capital, its lending arm, according to interim managing director Derar Islim. The New York-based company has hired advisers to explore all possible options, including raising new funds, and will outline a plan for its lending business next week, Islim said. Alvarez & Marsal and the law firm Cleary Gottlieb are advising Genesis.
The move will only affect lending businesses, according to Islim, who said Genesis’ cash trading and derivatives and custody businesses “remain fully operational.”
Lending activity declined significantly, with loans falling to $8.4 billion in the third quarter from $44.3 billion in the first three months of the year.
Genesis had downsized before its last cut. The company cut 20% of its then 260 employees in August and named Islim as interim CEO, replacing Michael Moro.
Announced departures include Noelle Acheson, who left her position as head of market analysis; Matthew Ballensweig, who stepped down as co-head of sales and trading and said he would take on an advisory role; and Michael Patchen, who left after three months as Chief Risk Officer.
Digital Currency Group also controls Grayscale Investments, which offers the Grayscale Bitcoin Trust, or GBTC, the largest investment vehicle in the crypto market. The trust is trading at around 40% discount to the market price of Bitcoin.
Crypto prices, which have been falling since FTX’s troubles began earlier this month, extended losses on Wednesday, with Bitcoin down as much as 2.9%. The world’s largest cryptocurrency has fallen about 75% from a record close to $69,000 hit about a year ago.
–With the help of Muyao Shen.
(Updates with Gemini program details beginning in the fifth paragraph.)
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