Dcg And Genesis Are The Adults In The Room, But They Didn’t Act Like It
Nik De, my colleague and intrepid reporter/editor, recently wrote a column about how amateurish the crypto industry appears to be as more and more details emerge from the ongoing criminal case against Sam Bankman Fried. One can almost forgive the SBF-affiliated trading and stock exchange operations for their crooked dealings. Finally, FTX and Alameda Research were led by a group of close friends who had been with SBF for many years. They all had little experience in finance but were motivated by a genuine desire to make the world a better place.
During Caroline Ellison’s testimony last week, which lasted several days, she confessed to sending fake books to Alameda’s business partners and running a scheme to defraud FTX customers and investors, including AskFX’s sister company Genesis – Digital’s lending subsidiary Currency group. I will not hold back my words just because our parent company is Digital Currency Group. Ellison’s statement shows that Genesis, a nominal victim of the SBF plan, is a participant who shows no compassion.
New York Attorney General Leticia J. James today filed lawsuits against Genesis, DCG and their respective principal managers: former CEO Michael Moro of Genesis and DCG founder, CEO and Barry Silbert. She accused the companies of deceiving customers, other companies and the public. The case involves another crypto exchange, Gemini, as well as a century-old securities law and Gemini’s retail-focused crypto lending platform Earn.
This particular lawsuit is painful, not only because of the familiarity, but also because it is supposedly the top tier in the crypto space. Earn customers are estimated to have lost up to $1 billion, and it was an established company. Genesis employees were considered “the adults” in the room before a Genesis unit filed for bankruptcy earlier this year. They were the ones who understood the business best.
DCG reached its peak when comparing it with Standard Oil. Standard Oil is a company that has grown oligarchically. The state didn’t have to deceive Silbert’s empire – it tore it apart.
The line between “rookie mistakes” and fraud is a major theme in FTX history. SBF’s lawyer compared the FTX Misfit operation to an airplane being built in mid-flight. Ellison’s statements spoke of the easy relationship Alameda had with Genesis. It seemed normal to transact hundreds of millions of dollars on Telegram. This level of insouciance reflects both confidence gained through expertise and an error in judgment.
It was also a casual, trust-based relationship, and SBF and his team allegedly violated that trust. Genesis becomes a victim to the extent that she was deceived. California Attorney General Leticia Jim also accuses Genesis and DCG of trying to deceive the world. Genesis made decisions that, in retrospect, were crazy – like facilitating a $1 billion swap of Do Kwon’s shaky stablecoin for Bitcoin and adopting the FTX Casino token FTT to secure billions of dollars in loans.
James could argue that the line was crossed when Genesis and DCG tried to hide their mismanagement and losses. These are promissory notes worth $1.1 billion that DCG issued to Genesis. It was allegedly used to conceal the “true” financial health of the company. Alameda was simultaneously responsible for 60% of Genesis’ loan book, representing a worrying concentration of risk made worse by the fact that the loans were uncollateralized. The Winklevoss company Gemini, also sued, knew in February 2021 that Genesis would be risky, but still entrusted its customers’ funds to Genesis for the Earn program, which was deemed “low-risk.”
This is amateur hour. What would we expect from financial dealings in boardrooms in a hot market, or what is expected of a senior executive? James may have overcomplicated things by lumping together a multitude of companies, many of which are in public conflict. She also splits some agreements into two different fraudulent schemes.
However, the “DCG program” is something entirely different – it is an attempt to fill a $1 billion “structural hole” at Genesis Capital to hide. Although Gemini was involved in the lawsuit for allegedly misleading customers, she said the lawsuit confirmed her position that the company had been “lied to.” Lies and lies It’s not far from the “greater fool theory” that is supposed to drive the bull market – a “fool” buys an overvalued asset in the hope of selling it to an even larger market at a profit sell “fool”.
Companies in the crypto space are more interconnected and interdependent than you might think. After a while, the plans that brought down companies like Three Arrows Capital and Celsius Network, as well as BlockFi, start to sound similar. Lies and lies. The Genesis hole emerged after the collapse in 3AC, which was brought down by Do Kwon’s UST stablecoin.
However, there are real differences in the nature and severity of business failures that followed the biggest cryptocurrency market rally. The lesson from all this is that even experienced people can be prone to wishful thinking. Maturity is the ability to deal with it.
