Early this morning Beijing time, Cameron Winklevoss, co-founder of the US cryptocurrency trading platform Gemini, published another long article.
Cameron claims that DCG founder and CEO Barry Silbert and other key personnel misled everyone through false statements, making all parties believe that Genesis had recovered from the losses of Three Arrows bankruptcy, thereby inducing lenders to continue to provide loans. Cameron believes that the $1.1 billion promissory note provided by DCG has not actually been honored, and its actual value will be greatly discounted - a 70% discount, and it may only be sold for $300 million.
In addition, Cameron also revealed to the DCG board of directors how its executives colluded with Genesis and Three Arrows Capital to illegally manipulate GBTC, but ultimately failed, causing Genesis to pile up in debt and triggering the DCG Group to fall into a liquidity crisis. The article also suggested that the DCG board of directors remove DCG's current CEO Barry Silbert and appoint a new CEO.
In response to Cameron’s request, Barry Silbert and DCG officials said that this was another desperate and non-constructive publicity stunt by Cameron, aimed at shifting the dissatisfaction of Gemini platform Earn users to DCG.
As early as January 3, Cameron sent an open letter to Barry Silbert, asking him to repay the more than $900 million he owed. Cameron also accused Barry Silbert of refusing to cooperate and maliciously adopting delaying tactics. Barry Silbert then responded: "DCG did not borrow $1.675 billion from Genesis. DCG has never defaulted on interest payments to Genesis and is currently repaying all outstanding loans; the next loan is due in May 2023."
The following is a long article, translated by Odaily Planet Daily. Please be sure to indicate the source when reprinting
An open letter to the DCG Board of Directors:
I am writing to let you know that Gemini and over 340,000 Earn users were defrauded by Genesis Global Capital, LLC (Genesis), parent company Digital Currency Group, Inc. (DCG), DCG founder and CEO Barry Silbert, and other key personnel. These individuals conspired to make false statements and mislead Gemini, Earn users, other lenders, and the general public about Genesis’ solvency and financial health. They did this to mislead lenders into believing that DCG had absorbed Genesis’s massive losses from the collapse of Three Arrows Capital (3AC) and to induce lenders to continue lending to Genesis. By lying, they hoped to buy time to extricate themselves from the quagmire they had caused themselves.
We learn more every day, but here’s the basic story: Genesis had loaned $2.36 billion in assets to 3AC, a Singapore hedge fund that collapsed in June 2022; after the collateral was liquidated, Genesis said it lost at least $1.2 billion. At this point, Barry Silbert (DCG founder) had two reasonable options—either restructure Genesis’ loan structure (inside or outside of bankruptcy court) or simply fill the $1.2 billion hole. Unfortunately, he did neither.
At the time, Genesis’ loan book was worth about $8 billion, which means 3AC’s $1.2 billion loss was about 15% of the loan book. (Note: DCG’s latest article states that Genesis’ loan book is currently worth about $12-15 billion.) At the time, a restructuring could have closed the gap, fully recovering the assets of all lenders (including Earn users) in a short period of time and giving them direct access to liquidity. But Barry Silbert didn’t do that. He didn’t fill the $1.2 billion gap—instead, he pretended that he had.
Beginning in early July 2022, Barry Silbert, DCG, and Genesis began an elaborate campaign of lies to convince Gemini, Earn users, and other lenders that DCG had injected $1.2 billion in actual backing into Genesis.
1. Big lies to cover up problems
Public lies. On July 6, Genesis CEO Michael Moro tweeted: “DCG has assumed certain liabilities of Genesis related to 3AC to ensure we have the capital to operate and scale our business over the long term.”
This statement is false and misleading. In reality, DCG did not ensure that Genesis had sufficient funds to operate, and DCG did not provide Genesis with a penny of actual funds to cover 3AC's losses. Instead, DCG entered into a 10-year promissory note with Genesis at 1% interest, due in 2032. This note was a complete gimmick and did nothing to improve Genesis' immediate liquidity position or make its balance sheet solvent (more on this later). Michael Moro also @ed DCG on Twitter at the time, but no one from DCG (including Barry Silbert) corrected his misstatement.
Private lies. Behind the scenes, multiple Genesis and DGG staff began to spread more lies. For example, on the same day that Moro tweeted (July 6), Matthew Ballensweig, then head of trading and lending at Genesis, emailed a document titled "Three Arrows Post-Analysis" to multiple Gemini employees who were responsible for managing the Earn project (Note: Ballensweig announced his resignation in September last year and joined the crypto wallet company Exodus). The "Key Facts" section of the document stated: "The losses were primarily absorbed by the DCG balance sheet, leaving Genesis with sufficient capital to continue operating (business as usual)."
This statement is false and misleading. In fact, DCG did not "absorb" 3AC's losses on its balance sheet. Doing so would have required DCG to inject live support into Genesis. As I will explain below, DCG's promissory note did not leave Genesis with sufficient capital on its balance sheet to continue normal business.
Accounting Fraud. Ballensweig perpetuated this lie by attaching a document titled “Gemini Risk Measurement Requirements” to the same email he sent to Gemini employees. We found that the “Per Asset Financials” section of that document contained at least two serious misrepresentations: (1) characterizing the DCG promissory note as a “current asset” (in a subcategory called “other assets”) and (2) valuing it at $1.1 billion.
First, according to generally accepted accounting principles and consensus, "current assets" are cash, cash equivalents, or other assets that can be converted into cash within one year. A promissory note with principal due in 10 years does not fall under the definition of "current assets" at all.
Second, there is no market in the world that will value an unsecured, long-term promissory note at par. The net present value (NPV) of this note will be discounted significantly (about 70%) to reflect its current value (perhaps $300 million). (Note: Gemini means that if DCG's $1.1 billion promissory note is to be sold, it will need to be discounted and may only sell for $300 million.)
The above improper accounting practices are also reflected in the balance sheet of Genesis sent by Ballensweig (as of June 30, 2022). These false statements (repeated in many documents sent to Gemini and other lenders in the following months) are actually a ruse to make Genesis appear solvent and able to meet its obligations to lenders, without DCG actually promising to provide the necessary financial support to achieve this goal. DCG wants to eat its cake and eat it too. If it weren’t for the collapse of FTX, Barry Silbert and DCG might have concealed the truth. (Note: DCG’s latest response stated that during the period after Three Arrows Capital defaulted, DCG invested approximately $340 million in new equity in the Genesis entity to provide it with additional capital.)
2. Related Transactions between 3AC, Genesis and Grayscale
How did it get to this point? Greed. As an independent business, it’s hard to imagine Genesis lending 3AC so much money given the poor quality of the collateral it provided.
Genesis made these loans because it was part of a larger scheme to make DCG richer. More specifically, Genesis was willing to loan 3AC money regardless because 3AC was using that money to make Grayscale’s NAV trades — a recursive trade that dramatically inflated the AUM of the Grayscale Bitcoin Trust (ticker: GBTC) and the fees earned by its issuer, Grayscale Investments, LLC (Grayscale), a wholly owned subsidiary of DCG.
Note: The logic of the transaction is that 3AC borrows from Genesis to create shares of the Grayscale Bitcoin Trust, and then 3AC pledges these GBTC shares at Genesis, borrows more Bitcoin and repeats the above steps (repeated pledge). When the 12-month (later 6-month) lockup of a specific portion of GBTC shares expires, GBTC is at a premium (trading above net asset value), and 3AC can sell GBTC shares and collect the premium. This trick has always worked, but in early 2021, GBTC shares began to trade at a discount to NAV - and the discount has continued and widened since then. This not only killed the NAV trade, but also meant that the GBTC collateral posted by 3AC at Genesis was depreciating, further exacerbating the liquidation of 3AC's loans.
Genesis recorded these interactions with 3AC as true collateralized loans. However, this was not the case at all. In reality, 3AC was just a conduit (bridge) for Genesis, allowing Genesis to efficiently swap BTC and GBTC shares with Grayscale Trust. 3AC was a mule that transported assets between the two parties, with BTC connected to one end and GBTC connected to the other. In this transaction, Genesis was betting that GBTC shares would be worth more than BTC in the future. Ultimately, Genesis' risk factor increased dramatically.
In fact, before 2021, Genesis was the winner of this zero-sum trade, because GBTC was always at a positive premium. Starting in March 2021, the positive premium of GBTC disappeared and gradually became discounted, and Genesis could no longer make money. Usually, all things being equal, gains and losses will offset each other. In other words, Genesis is both a loser and a winner. However, surprisingly, Genesis never seems to win, because it apparently always cedes them - the GBTC stock premium - to 3AC. This means that Genesis only participates in losses, turning the original zero-sum trade into a negative-sum trade.
Disturbingly, when the NAV traded in reverse (as any rational, independently operated business would do), not only did Genesis not liquidate its 3AC collateral, it continued to lend to 3AC on attractive terms and accept GBTC as collateral. For Grayscale, this had the effect of not allowing shares of GBTC to be sold into the market, which would have driven down the share price, further widening the discount. But for Genesis, it had the undesirable effect of keeping its risk position open and continuing to grow.
Why would Genesis enter a toxic and risky position when the best it could do was not lose money? The truth comes into focus when you truly realize that the Bitcoin in the Grayscale Trust is stuck there forever like a Thanksgiving turkey. GBTC can never be redeemed, or at least not until Grayscale, at its sole discretion, implements a redemption program that allows GBTC shares to be converted back into Bitcoin.
The end result is that Barry is comfortable with Genesis investing more and more money in this toxic trade because it is a ploy to fund the Grayscale Trust - Genesis is like a money printing machine that works forever for the DCG universe. The ends justify the means.
Original accounting fraud. Rather than book these swaps as risky derivatives, Genesis truncated and mischaracterized these swaps on its balance sheet as collateralized loans. This made Genesis’ balance sheet appear healthier than it actually was, fraudulently inducing lenders to continue making loans.
In June 2022, the show ended. 3AC collapsed, exposing the radioactive fruit. Barry did nothing to fix the problem he had created, and despite having earned more than $1 billion in fees—all borne by Genesis’ creditors—he refused to take responsibility. Instead, he resorted to fraud to protect his ill-gotten gains.
3. Remove the CEO and move on
In summary, we do not see a bright future as long as Barry Silbert remains the CEO of DCG. He has proven himself to be unfit to manage DCG and is unwilling and unable to reach a fair and reasonable solution with creditors.
Therefore, Gemini, on behalf of 340,000 Earn users, asks the board to immediately remove Barry Silbert as CEO and appoint a new CEO to correct the mistakes that occurred during Barry’s tenure. Genesis borrowers, including Earn users, have been seriously harmed and they deserve a solution to recover their assets.
I am confident that, under DCG’s new management, we can work together to reach a positive out-of-court resolution that provides a win-win outcome for everyone, including DCG shareholders.
