The Crypto Billionaires Boys Club confronts life after the FTX bust
Gemini founders Tyler and Cameron Winklevoss take on Barry Silbert and the Digital Capital Group empire—a competition where everyone will lose.
Another prominent crypto exchange, Gemini, has been hit by the FTX virus. Gemini was founded by the bitcoin billionaire identical twins Tyler and Cameron Winklevoss. They were infamous for suing Mark Zuckerberg for allegedly copying their idea for Facebook while they all were attending Harvard and settling for a $65 million payday.
Fast rewind to the summer of 2012, during a party in Ibiza, the twins learn about a new method of online payment with better privacy and transaction speed: bitcoin. Inspired by more than the EDM music playing in the background, this tip set them off on a crypto journey that led them to acquire over $2 million in bitcoin when it was trading in the $12 range and represented roughly 1 percent of all bitcoins in existence at the time.
Now the twins are calling foul again on Digital Currency Group and its founder and bitcoin billionaire Barry Silbert. Their complaint is DCG owes Gemini ~$1.675 billion in customer money Gemini gave DCG-owned Genesis Trading to manage. Gemini had offered their customers the opportunity to lend the platform money under their ‘Gemini Earn’ program in exchange for interest payments of up to eight percent — certainly a bold proposition in turbulent times.
Forbes pegged Barry Silbert’s net worth in February 2022 at $3.2 billion. Mr. Silbert is the founder and CEO of Digital Currency Group (DCG), a conglomerate of five cryptocurrency-focused companies that have invested in over 200 crypto startups. DCG’s biggest revenue generator is Grayscale, a digital asset manager of Bitcoin, Ether, and other established crypto assets.
Genesis Trading was allegedly managing those funds at the same time they were lending a large hunk of funds to FTX. When FTX collapsed, Genesis faced a liquidity crunch, and the rumors about Genesis’s solvency started to fly. As a result, Gemini halted the Earn program on November 16 and announced it laid off 30 percent of its staff. In a more recent development, Genesis filed for bankruptcy, leaving Gemini’s retail customers holding part of the bag.
The filing indicates that Genesis owes over $3.5 billion to its top 50 creditors, including Gemini, trading giant Cumberland, Mirana, MoonAlpha Finance, and VanEck’s New Finance Income Fund. The collapse of FTX was the final straw for Genesis, which earlier that year had already suffered losses of several hundred million dollars due to its exposure to Three Arrows Capital, the crypto hedge fund that failed for not meeting margin calls from its lenders.
Until the bankruptcy filing, Cameron Winklevoss had chosen to fight the battle of billionaire boys on Twitter, where he has been posting his open letters to Mr. Silbert. Below is an excerpt of an earlier rant posted before the Gemini bankruptcy.
DCG owes Genesis ~$1.675 billion. This is money that Genesis owes to Earn users and other creditors. You took this money — the money of schoolteachers — to fuel greedy share buybacks, illiquid venture investments, and kamikaze Grayscale NAV trades that ballooned the fee-generating AUM of your Trust; all at the expense of creditors and all for your own personal gain. It is now time for you to take responsibility for this and do the right thing.
In the meantime, two Gemini Earn investors, Brendan Picha and Max Hastings, have invited other investors to join a newly-filed class action lawsuit that ties the pair and their business to the collapse of FTX. The plaintiff’s claim Gemini led its customers to believe the Earn accounts were safe, interest-gathering parking spots for their crypto assets.
The SEC has also charged both Gemini and Genesis with selling unregistered securities. Regulators seek to recover any ‘ill-gotten gains’ from the interest-bearing account program. ‘We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,’ SEC Chair Gary Gensler said in a statement. ‘Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,’ Mr. Gensler added.
As early crypto bitcoin and crypto kingpins, the twins’ and Mr. Silbert’s troubles and the hits taken by both Gemini and DCG will undoubtedly lead to more crypto aftershocks. The SEC added to their public statement in the Gemini and Genesis case that ‘Investigations into other securities law violations and other entities and persons relating to the alleged misconduct are ongoing.’
The FTX contagion virus continues to spread
Beyond the turmoil amongst the Crypto Billionaires Boys Club, the FTX contagion virus continues to spread from the highest levels of Wall Street to the entrepreneurial streets of the global Silicon Valley. Since FTX filed for bankruptcy on November 11, a growing list of companies and funds have disclosed their ‘exposure’ to FTX and its related companies FTX US and Alameda Research.
Blockchain financial services company Galaxy Digital recently disclosed its $76.8-million exposure to FTX. Hedge fund Galois Capital has reportedly admitted that half of its capital — around $100 million — is still stuck in FTX. In a letter to their investors, Multicoin Capital, one of the top crypto-focused venture capital firms, acknowledged that approximately 10 percent of their fund’s total assets under management (AUM) are still pending withdrawals on FTX. The list of other investment and trading firms that have announced their exposure due to locked funds on FTX include is long and includes Galois Capital ($100M), QCP Capital ($97M), and CoinShares ($30M).
On the venture-back company side, the following companies are just a sampling of the financial havoc created by their connection to FTX:
- Crypto lending firm BlockFi, filed for bankruptcy, citing ‘significant exposure’ to FTX estimated to be $355 million.
- Binance Chief Executive Changpeng Zhao (a.k.a. CZ) told a Twitter spaces event that Binance held $580 million worth of FTT (more than 5% of the entire FTT token supply) before the FTX’s bankruptcy announcement. Binance received these tokens from FTX for their buy-out of Binance’s original equity investment in the company. Despite early efforts to sell their FTT holding just days before FTX imploded, Mr. Zhao admitted that ‘we only sold quite a small portion, we still hold a large bag.’
- According to Bloomberg, around 94 percent of the funds used to acquire the crypto trading app Blockfolio were denominated in FTT, the ‘exchange token’ FTX created in 2019 that entitled its users to discounts on trading fees.
- Voyager Digital was set to be acquired by FTX and announced the reopening of its bidding process.
- Crypto.com, a Singaporean cryptocurrency exchange, had moved roughly $1 billion to FTX over the course of a year prior to FTX’s collapse. However, Crypto.com’s exposure at the time of the FTX liquidity crisis amounted to only $10 million or less.
- Nestcoin laid off some of its staff because it could not withdraw its assets on FTX.
- Decentralized finance firm Liquid Meta announced that it also held around $7.5 million in FTX.
- LedgerX, one of the few solvent assets acquired by FTX, is for sale and attracting interest from a handful of would-be buyers, including Blockchain.com and Gemini.
- Crypto news publication The Block fired its CEO, Michael McCaffrey, after he failed to disclose a series of loans from Sam Bankman-Fried’s company, Alameda Research.
- Orthogonal Trading reported they were ‘severely impacted by the collapse of FTX and associated trading activities,’ making it unable to repay on a $10 million crypto loan.
- Major cryptocurrency exchange Coinbase Global Inc. (COIN) announced on November 8 that it has a relatively small exposure to FTX, with about $15 million in deposits on the exchange. Coinbase added that it had no exposure to FTT and no loans to FTX.
In the finest Wall Street bottom-feeding tradition, at least in early December, the venerable investment bank Goldman Sachs saw a buying opportunity within the carnage created by the FTX collapse. According to a report by Reuters, Goldman is poised to invest ‘tens of millions of dollars scooping up or taking stakes in beaten-down companies affected by the FTX contagion. ‘We do see some really interesting opportunities, priced much more sensibly,’ says Mathew McDermott, Goldman Sachs’ head of digital assets. Moreover, Mr. McDermott believes that crypto’s underlying technology ‘continues to perform.’ Goldman Sachs is an investor in various crypto-related organizations, including CertiK, TRM Labs, Elwood Technologies, and Coin Metrics.
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