Crypto’s MASSIVE Hidden Risk: DCG, Genesis & Gemini Updates!

An unexploded bomb sits ticking below The crypto Market If it blows it could take us much much Lower I am of course talking about the Risk from Genesis and dcg a saga that Has played itself out on Twitter where The Gemini exchange Founders have openly Accused dcg CEO of fraud so how did we Get here will the situation be resolved And what impact could this all have on The crypto Market that's exactly what I'll be answering in the video today so Sit tight and don't go anywhere Okay A bit of background first dcg Digital currency group is a holding Company that owns a number of different Companies in the crypto space some of These are wholly owned and some of them Are part of dcg's venture portfolio now Dcg was founded by Barry silbert an Ex-banker who's considered to be one of The ogs in crypto In terms of dcg's wholly owned Subsidiaries the most well-known are the Coindesk news site the grayscale Bitcoin Trust Genesis trading and The Foundry Mining pool however the most relevant For this story are grayscale and Genesis As you probably already know grayscale Is a digital currency asset management Company it was founded in 2013 and was The first to launch a Bitcoin trust in The same year This was as a private placement for

Institutions and high net worth Individuals for a Time grayscale gbtc Shares were the only way that Institutions could get Bitcoin exposure Through a regulated wrapper Genesis is perhaps less well-known than Grayscale it was one of the first and Largest prime brokers in the crypto Space its primary business lines Included OTC trading custody of assets As well as lending and borrowing now Genesis had a number of institutional Clients that it had trading and lending Relationships with one of the most Well-known of these was three arrows Capital which collapsed in June of last Year more on that later Genesis didn't only enter into Agreements with large institutions Though it also offered its services to Retail-facing exchanges and that's how Gemini The Exchange founded by the Winklevoss twins came to be embroiled in This Saga more specifically Gemini ran a Lending program Gemini earn with its Users where they could loan out their Crypto and generate passive income on The exchange the only thing was that Gemini did not do this itself but Instead entered into an agreement with Genesis This was signed back in 2020 and was Launched in February 2021 so Gemini was Acting as an agent for Genesis whereby

Gemini earned users would get interest For Lending their crypto to Genesis Gemini would get a cut of this interest Given that they were the agents making The connection It's also important to stress here that Urn was completely different from the Broader Exchange Gemini earn grew considerably since it Was launched and by November of last Year there were over 340 000 earned customers with 900 million Dollars locked up there All was well until a fateful day in November last year when Gemini earned Users learned that they would not be Able to withdraw their assets This was because of the fact that Genesis was functionally insolvent and Had taken a final Blow from the collapse Of FTX this resulted in a very public Spat between the winklevi and Barry Which has played itself out on Twitter This recently came to her head with open Letters from Cameron Winklevoss to dcg Which detailed fraud accusations and Demanded that Barry stepped down as dcg CEO but our story starts much earlier Than that so let's roll back As mentioned three arrows Capital were Big borrowers from Genesis in total There were about 2.3 billion dollars Worth of loans made to 3ac and these Were under collateralized hence if 3ac

Was ever to default on any of these Loans Genesis wouldn't have been able to Recoup all of the funds with posted Collateral And default is exactly what happened as You no doubt know 3ac blew up and the Founders ghosted their lenders only to Surface months later on crypto Twitter To say that they were launching a Lifestyle podcast and raising for a new Fund and no that is not a joke but I Digress 3ac lost a lot of money on some Pretty bad trades now one of these was The terror collapse which evaporated Billions of dollars of crypto wealth but 3ac also made big bets on another trade And that was on the grayscale gbtc Premium Now the mechanics of this trade Are important because they form part of The broader complaint from Gemini so It's worth explaining it all in a bit More detail As previously mentioned for a number of Years grayscale's product was the only Regulated way that institutions were Able to get Bitcoin exposure hence the Price of the gbtc shares traded at a Premium to the net asset value of the Bitcoin in the trust This premium also existed because it Wasn't easy to Arbitrage it more Specifically gbtc shares weren't easily Converted back into Bitcoin as you could Only do this at designated unlock

Intervals so this premium provided a Unique opportunity for some traders to Extract as much value as possible Especially institutional traders that Had the ability to buy gbtc shares on Issue and these returns could be Multiplied especially if leverage was Applied ah yes leverage when the poop Hits the turbine you can be sure it's Never far away anyway how did this trade Work then well one of the theories out There is that 3ac would engage with Genesis in a recursive lending scheme That would help inflate the value of Gbtc increase the fees for grayscale and Increase the profits for 3ac now this Was well detailed in a blog post from Last year by data phenovation which I'll Leave link to in the description for you Folks The tldr of what happened though is that 3ac would post some collateral to Genesis in order to borrow Bitcoin this Bitcoin was then sent back to Genesis to Issue gbtc shares at grayscale This was because Genesis was an Authorized participant in grayscale Which I must admit just screams conflict Of interest anyway once these gbtc Shares were issued then they were traded At a premium to the net asset value of The Bitcoin that was locked up there now This can be viewed as magic free value Then the theory goes 3ac would use these

Gbtc shares as collateral and post them Back to Genesis this would enable 3ac to Borrow even more BTC what did they do With that BTC well they went back to the Trade that got them this free value in The first place give it to Genesis by Gbtc use gbtc as collateral and so on And so on Now if that all sounds like recursive Borrowing to you in layman's terms a High-level institutional circle jerk Well that's exactly what it is you can See what it looks like right here now I Should also add that if this was being Done by Genesis and grayscale to inflate The value of gbdc for the benefit of dcg Then it could even be considered Fraudulent something termed a quote Daisy chain and what's even crazier than That is that a certain Barry silbert Even tweeted about these over leveraged Daisy chain borrowers back in June of 2021. Now according to Cameron's open letter The way that these trades were accounted For by Genesis was misleading they were Seen as collateralized loans whereas in Actual fact they were swap transactions Of Bitcoin for the gbtc shares as I've Just shown Cameron said quote 3ac was acting as a Mere conduit for Genesis allowing it to Enter into what were effectively swap Transactions

And that quote 3ac was a mule shuttling The assets between the parties and as a Result Genesis ended up owning massive Risk anywho this trade worked just fine When gbgc was trading at a premium The whole thing would be a lot less Peachy if it ever became a discount and That is exactly what happened in early 2021 When gbtc traded at a discount to the Net asset value of the Bitcoin this Created a number of problems for both Genesis and 3ac that's because the value Of the collateral that had been posted To run this trade was now trading at Below the value of the loans themselves That meant that the longer the discount Persisted the more the collateral would Degrade over time According to Cameron's open letter this Is where things started to go a bit Pear-shaped for those involved in the Trade as Cameron details Genesis was Placed in a uniquely bad position where It didn't really benefit from the gains In this trade when gpdc was trading at a Premium in fact it always ceded them to 3ac so now that gbtc was at a discount Genesis was stuck in a position where it Would only be participating in the Losses from the deterioration of the Trade now if these accusations are Indeed true well the Risk Managers at Genesis were probably getting their tips

From the folks over at Alameda Of course like Alameda once you've dug a Hole instead of stopping and admitting To said hole you keep digging in the Hope that you can somehow find a way out According to Cameron not only did Genesis not disclose this position when The premium inverted but they also Continued lending to 3ac they allowed The same trade to be made with Attractive terms while still accepting Said gbtc as collateral there was a Short-term benefit to this of course in That the gbtc collateral being posted to Genesis kept it from hitting the open Market and further widening the premium And Cameron used some pretty colorful Language and metaphors in his letter to Dcg including quote the Bitcoin this Swap was stuffing into the grayscale Trust like a Thanksgiving turkey is Stuck there forever I particularly like This reference here quote Barry was come Comfortable with Genesis loading up more And more on this toxic trade because it Was a Gambit to feed the grayscale trust Barry's Financial Hotel California that Would print money for the dcg universe In perpetuity yep you can enter the Trade anytime you like but you can never Leave Q guitar solo Now of course the music stopped when 3ac Went under they disappeared and left Lenders like genesis with holes in their

Balance sheets although these loans did Have collateral they were under Collateralized which meant that after The collateral was liquidated Genesis Was still left with a shortfall of about 1.2 billion dollars By this point Genesis was in trouble According to Cameron there were two Options open to them one was to Restructure the loan book and the other Was to fill the 1.2 billion dollar hole However it appears as if Genesis and dcg Engaged in some interesting accounting Gimmickry to make it look as though this Hole had in fact been filled if you'll Recall back in June 2022 then Genesis CEO Michael Morrow claimed that dcg had Assumed certain liabilities of Genesis This was in this tweet thread as you can See dcg was also tagged in this tweet so They knew about the representations that Were being made to the public about Genesis's financial position and dcg's Help In reality however what dcg did was Issue a 1.1 billion dollar promissory Note to Genesis now this note had a term Of 10 years and came with an interest Rate of one percent now that interest Rate is mind-boggling to me that's Because there is no way that a 10-year Unsecured promissory note will come with An interest rate that is three times Less than the cost of borrowing of the

US government it would at least have to Be in the double digits to make sense This is also peculiar as in Barry's Letter to dcg shareholders last year he Said that all terms of the inter-company Dealings between dcgs related companies Were done as arms length transactions With current market terms I.E not Favorable in any way well this Promissory note clearly was unfavorable Terms things may even have been more Suspicious in the way that Genesis Accounted for this promissory note in Documents that it shared with creditors Including Gemini There was a section that talked about The quote financial position per asset That according to Cameron had two main Misrepresentations One was that the promissory note was Accounted for as a current asset of Genesis while the other was that it was Valued at 1.1 billion dollars now on the First point I don't know how Genesis Could see this asset as being a current Asset these are assets such as cash and Cash equivalents or other assets that Can be converted into cash in less than A year a 10-year promissory note is none Of those things secondly it's hard to Imagine that the market would value an Unsecured promissory note of this type At face value I mean think about it if You had lent money to dcg that was being

Paid back in 10 years time would you Expect to get all of that money back Especially given the current market Conditions it doesn't make a shred of Sense unfortunately in Cameron's note he Says that this promissory note could be Considered written down by at least 70 Percent so there were questions about The way in which Genesis was accounting For this promissory note the effect of This was that it gave the perception That Genesis was solvent when it had in Fact received no a additional Capital The whole was still very much there and Gemini users in the earn program Were None the wiser Well the chickens came home to roost in Late November when FTX collapsed as that When the withdrawal requests started Coming in of course there wasn't the Required capital on hand and this led to A suspension of withdrawals from Gemini Earn this led to concerns about the State of health of Genesis and the Broader dcg group Genesis had to cut a Number of staff and it was then Disclosed that they'd hired a well-known Restructuring firm to help them assess Whether to declare bankruptcy Barry Meanwhile issued a shareholders letter Last year that was supposed to dispel The flood but many questions still Remained one can also imagine that there Was a fair bit of commotion behind the

Scenes as the winklevi and Barry were Trying to hammer out a solution that Could help the Gemini creditors but alas No such solution was reached which one Can only assume was the reason for the Very public Twitter spat this all came To a head in the last week where Not Only was it disclosed that the Department of Justice was looking into Dcg but also that the SEC reliably late To the party as always was taking action Against Gemini and Genesis Barry also Came out with a long-form shareholders Letter that attempted to address some of The accusations and questions that had Been leveled I've linked to this letter Below for your perusal now perhaps the Most important section however is the Q A where Barry attempts to give more Color on dcg Gemini his own relationship With others in the space and that Promissory note more specifically Barry Denies that there was any commingling of Funds in dcg he maintains that the Grayscale business units are completely Separate and operate as any independent Businesses would there were no attempts By dcg to inflate or otherwise impact on The price of gbtc shares moreover Barry Has never had any personal relationship With the three AC principles or with SPF Dcg had a lending and trading Relationship with Alameda but nothing More than that

Dcg did admit that some of the loans That were taken from Genesis were used To buy gbtc shares given their Market Discount These were legal and fully disclosed However as it relates more specifically To the promissory note and the Genesis Bailout dcg viewed Genesis as an asset That they couldn't let fail given that They thought the institutional lending Market would rebound later in the year This promissory note was apparently Structured on the advice of Financial And legal professionals it was an Attempt to assume the liabilities of 3ac And Grant Genesis an asset that was Supposedly more credit worthy than a Borrower that was in default quote dcg Effectively assumed genesis's risk of Loss on the three arrows Capital loan With no obligation to do so There were some material emissions here Though and that's how this promissory Note was treated in the communications With Gemini I.E as current assets Something else that was disclosed in the Letter was the fact that dcg has no Knowledge of any doj investigation into It or Genesis so that is interesting Either way I do encourage you to read The shareholders note in depth as it's Good to get both sides of the story Something that's clear to me however is That if there is any fraud it won't be

As easy to identify as it was in ftx's Case for example the lines are quite Blurry and right now there is a great Deal of speculation so what does this Really mean for dcg Gemini and more Importantly the broader crypto Market Well it seems that dcg is now trying to Raise Capital through whatever means Necessary There have been reports that they're Weighing up offloading their broader Venture portfolio of close to three Billion dollars now this would of course Be bad news for those projects that have Taken investment from dcg and whose Tokens dcg holds the worst kind of Seller is after all a forced seller and These smaller illiquid alts could get Crushed should dcg unload the clip Then there's the broader question about What happens to grayscale the jewel in Dcg's Crown the gbtc discount has Recovered recently but still sits at 36 Below the net asset value of the Bitcoin Holdings Grayscale has been holding out in the Hope that the SEC would allow them to Convert the trust into an ETF and Thereby help to alleviate the massive Discount given the easy convertibility Well they have a better chance of Getting their money back from Sue and Kyle if you ask me There is one particularly Keen Suitor

However and that is Justin's son who has Said that he is willing to spend one Billion dollars off his own money to buy Some of dcg's assets This comes on top of the recent news That Valkyrie Investments has made a Proposal to take over greyscale as the New sponsor and manager it's worth Noting that Justin sun is the owner of The vast majority of Valkyries assets so It's clear that Justin is looking for a Deal on greyscale That would be the most favorable outcome To be frank that's because it would ward Off some of the most damaging Eventualities if dcg was ever to go Under namely if the grayscale trust was To be Unwound in order to redeem the Dollar amounts for investors in gbtc Shares That would mean that all the Bitcoin That's currently inside of it would have To be sold on the open market the market Impact of this dump could be Catastrophic something that I detailed In a video last year which I'll leave in The description for you folks So that is the immediate Market risk From this however what does it mean for Gemini earn users well it seems that This is likely to be a long drawn out Process Barry is well skilled in the art Of restructuring given his tradify Background

Hence he will be doing his utmost to try And protect the Assets in the broader Dcg portfolio from any sort of Bankruptcy of Genesis It's for that reason that I also think Requests for him to be replaced at dcg Are going to fall on deaf ears it seems As if a court battle could be the only Route out here One thing is for certain though and That's that the sec's late and quite Frankly counterproductive suit against Gemini and Genesis won't do much to help If anything it could slow down any sort Of recovery and further spread their Legal teams thin One wild card here however is what the Doj has to say if it is indeed true that It is investigating grayscale and Genesis then there are bigger concerns Here if the fraud accusations are true Then this could lead to another collapse In the crypto space a Collapse by a Company that has considerably more Crypto to offload which could bring us Back down to further lows One thing is for sure guys this is a Story you're going to want to be keeping A very close ion I know I will and That's it for my video today folks but I'm really Keen to get some feedback Though so do you think that dcg will be Able to make earn customers whole was This fraud and where do you see it going

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