FTX’s bankruptcy – one of the largest in US corporate history – not only unleashed a ferocious wave of volatility across the crypto sphere but also froze liquidity across key market participants as a convoluted web of rehypothecated tokens became a strangling noose. Now, however, it seems that the worst might finally be over for FTX’s stakeholders.
— CoinDesk (@CoinDesk) January 11, 2023 To wit, FTX’s attorney, Adam Landis of Landis Rath & Cobb, declared in the bankruptcy court on Wednesday: This, of course, bodes well for key FTX stakeholders, all of whom have been jostling over asset recoveries. This development also bodes well for the Gemini exchange, Genesis, and Digital Currency Group. To wit, the lending arm of Genesis, formally known as Genesis Global Capital, suspended all redemptions and loan creations back in November, shortly after revealing that $175 million of its funds were trapped within the now-defunct FTX. The firm had $2.8 billion in total active loans at the end of Q3 2022. This suspension then prompted Gemini to pause withdrawals from its Earn program.
— Cameron Winklevoss (@cameron) January 10, 2023 Recently, Cameron Winklevoss, the co-founder of Gemini, leveled striking allegations against Genesis and its parent company, Digital Currency Group (DCG), in the aftermath of the FTX saga. Bear in mind that DCG also controls Grayscale Investments, the firm behind the Grayscale Bitcoin Trust (GBTC). In a public letter, Winklevoss leveled accusations that Genesis lent $2.36 billion to Three Arrows Capital (3AC) hedge fund on extremely lenient conditions. For the uninitiated, 3AC went bust in the summer of 2021 following the collapse of Terra’s stablecoin USDT, resulting in a $1.2 billion hole in Genesis’ loan book. Coming back, Winklevoss believes that Genesis and 3AC were engaged in a swap transaction of sorts to the benefit of DCG, where Genesis lent the funds to 3AC, which then invested these funds in the GBTC while posting GBTC shares as collateral to Genesis. This swap trade prevented GBTC shares from being sold in the open market and depressing the trust’s share price. For those who might be unaware, GBTC shares can only be created and not redeemed. This means that investors can only unload their shares in the open market, resulting in an increasing discount in the current environment where there is no viable way to rebalance the Grayscale Trust. This trade continued even when GBTC shares started trading at a substantial discount to Bitcoin’s spot price. The net effect of this illicit swap trade was that Genesis’ balance sheet appeared much healthier than in reality, as Genesis mischaracterized its swap transactions as collateralized loans instead of risky derivatives. When FTX went under, and Genesis halted all loan creations and redemptions, it also trapped the funds of 340,000 Gemini Earn users. It is for this reason that the $5 billion recovery in FTX’s lost liquidity and investments is such a big deal as it will begin the cumbersome process of unlocking the frozen liquidity pathways that continue to pose sizable contagion risks.
