Home / Markets / Cryptocurrency /  Is crypto brokerage Genesis next in cue to go bankrupt?

The FTX fiasco has continued to topple cryptocurrencies hysterically as investors' sentiment falters. The global crypto market valuation which was once around $1 trillion a couple of weeks ago, has dropped to below $800 billion with many cryptocurrencies correcting drastically. Billions of dollars of wealth have been wiped out! Can crypto investors handle more shocks? Bankruptcies seem to have become a trend in the past few months among crypto exchanges as illiquidity continues to be one of the major problems among them, and yet it sweeps off investors' trust leading to a free fall in the market. Looks like, the bankruptcy dilemma is not likely to end anytime soon and there are speculation that crypto brokerage Genesis Trading might be on the cue to get bankrupt.

Although FTX announced bankruptcy on November 11, investors were already in a panic selling the exchange's native token FTT a few days before the actual announcement. FTX's issues came into the limelight when its sister company Alameda's balance sheet raised questions about whose foundation was largely stacked with their native token FTT instead of an independent asset like a fiat currency or other cryptocurrencies. Despite Sam Bankman-Fried's assurance of everything was fine with FTX and the Group as a whole, however, everything came crumbling down eventually when FTX filed for Chapter 11 to begin an orderly process to review and monetize assets for the benefit of all global stakeholders.

Currently, at the time of writing, on CoinMarketCap, the global crypto market cap is around $781.26 billion down by 1.77%. The largest cryptos Bitcoin and Ethereum are below $15,800 and $1,100 --- down by around 2% each in the last 24 hours. Meanwhile, FTX tokens are struggling to hold the $1 mark. FTX has nosedived by over 29% in the last 7 days, while its monthly drop is more than 94%.

But why does FTX's crisis concern, Genesis? Why are there speculations of Genesis going bankrupt?

Genesis has been active in updating its relationship with FTX in the past few days when Alameda's balance sheet was in question and FTT tokens were tumbling.

On November 9, Genesis tweeted, "Genesis has a trading relationship with FTX, amongst other exchanges. Our exposure to FTX has no impact on our ability to serve our clients." On the same day, the brokerage said, "in anticipation of the extreme market volatility...we hedged and sold collateral resulting in a total loss of ~$7 million across all counterparties, including Alameda."

Then, Genesis later said, to reemphasize, Genesis has no ongoing lending relationship with FTX or Alameda.

On the day when FTX filed for bankruptcy, Genesis tweeted that its "derivatives business currently has ~$175 million in locked funds in our FTX trading account, adding, "this does not impact our market-making activities."

The latest tweet on FTX would be on November 16, where Genesis said, "we have hired the best advisors in the industry to explore all possible options. Next week, we will deliver a plan for the lending business. We’re working tirelessly to identify the best solutions for the lending business, including among other things, sourcing new liquidity."

It added on its tweet threads that "we recognize how challenging this past week has been due to the impact of the FTX news. At Genesis, we are entirely focused on doing everything we can to serve our clients and navigate this difficult market environment."

On Monday (November 22), Bloomberg reported that Genesis is struggling to raise fresh cash for its lending unit, and it’s warning potential investors that it may need to file for bankruptcy if its efforts fail, as per people with knowledge of the matter. The sources revealed that Genesis has spent the past several days seeking at least $1 billion in fresh capital -- which included talks over a potential investment from crypto exchange Binance.

A representative for Genesis informed Bloomberg that "we have no plans to file bankruptcy imminently," adding, "our goal is to resolve the current situation consensually without the need for any bankruptcy filing. Genesis continues to have constructive conversations with creditors."

Will Genesis be impacted by FTX bankruptcy?

Amanjot Malhotra, Country Head - India, Bitay said, research shows that Genesis has been processing millions in stablecoin redemptions over the past few days.

He added that popular crypto lender Genesis received billions in FTT tokens from bankrupt crypto firms Alameda Research and FTX over the past year. For context, Genesis received $932.56 million worth of FTT tokens from FTX within the last three months, while it received $141.1 million worth of struggling tokens from Alameda Research during the same period.

Further, he pointed out that the crypto lender recently halted all customer withdrawals due to the FTX’s collapse. Genesis stated that the incident resulted in “abnormal withdrawal requests" that exceeded its liquidity. Meanwhile, reports revealed that the lender had failed to get an emergency loan of $1 billion from investors in the wake of the collapse.

However, Amanjot explained that the extent of FTX’s collapse on Genesis business is telling when one considers the value of trading assets under its possession. At its peak, Genesis trading assets were almost $5 billion. As of press time, the firm’s trading assets are worth roughly $238 million, according to the research. Genesis is processing large amounts of redemptions.

Notably, on November 16, a Genesis-labelled address processed its single-largest transactions. Over $100 million in USDCoin (USDC) were transferred to the Genesis over-the-counter (OTC) address, which subsequently deposited $105 million USDC to Circle. This was likely a large customer that withdrew from the Genesis OTC platform, Amanjot pointed out.

On November 16, a Genesis-labelled address processed its single-largest transactions.
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On November 16, a Genesis-labelled address processed its single-largest transactions. (Bitay report)

He said, "the significant transaction was not a one-off. Instead, it was one among many such redemptions the lender had processed recently."

Bitay India's head cited that as per research, Genesis OTC has processed $250.9 million USDC redemption within the last seven days. During the same period, the OTC also processed $18.3 million USDT redemption and $20 million DAI redemption. Cumulatively, the OTC processed roughly $290 million in stablecoin redemptions over seven days. Meanwhile, Circle is also seeing massive USDC redemptions for fiat as it has been burning millions of USDC. USDC is burned when USD is redeemed as fiat. The dashboard shows that the stablecoin the issuer has burned $100 million twice in the last 24 hours.

The dashboard shows that the stablecoin the issuer has burned $100 million twice in the last 24 hours.
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The dashboard shows that the stablecoin the issuer has burned $100 million twice in the last 24 hours. (Bitay report )

Shivam Thakral, CEO of BuyUcoin said, "Recent developments at Genesis global may have an impact on investor sentiments in the coming weeks. Strong regulations and strict investor protection measures are the need of the hour and will help in boosting investor confidence in the long term."

However, Rajagopal Menon, Vice President, WazirX said, as usual, this is being played out on crypto Twitter. Andrew Parish, the co-founder of ArchPublic, claims that Genesis has "zero interested parties." On the other hand, analyst Dylan LeClair expressed his skepticism and advised everyone to treat these rumours with caution.

As per Menon, Much debate has centered on whether DCG's assets are sufficient to close the $1 billion gap on its own. DCG could try to sell its portfolio companies, including Luno, Foundry, and Coindesk, as well as a sizable venture portfolio. Hitting that $1 billion looks overly optimistic as not many entities would bid on with a secondary. Grayscale, Genesis, and Luno are likely to be DCG's top priorities, in that order. So, to reach $1 billion, they would have to sell some of the equity, all their ventures, all of the liquid assets, and Luno/Coindesk/Foundry.

Further, Menon explained that to save its prized asset, DCG would have to have a fire sale of all its assets. Only if this fails would a liquidation of the Grayscale Bitcoin Trust be considered. Grayscale has, previously dissolved its XRP trust. This was in response to the US Securities and Exchange Commission's lawsuit against Ripple Labs. Another stumbling block for GBTC in allowing a one-time redemption for Genesis to meet liquidity is that it would require SEC approval. Given the SEC's recent opposition to GBTC, it is unlikely to happen anytime soon.

But miracles are possible and the unexpected could happen, Menon believes that just like how Saudi Arabia pulled off an astonishing win, the crypto community is hoping that Genesis can pull this off.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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