Barry Silbert

Genesis CEO Barry Silbert should have come clean after FTX imploded. Instead, he’s still deflecting responsibility for his company’s bankruptcy.

Just two months after the collapse of FTX, Genesis is following suit.

Against an increasingly disheartening backdrop of “Big Cryptos” going bust, Barry Silbert’s cryptocurrency lender, Genesis Global Holdco, is the latest firm to file for bankruptcy, and if things always come in three, it might not be the last.

Genesis Capital’s parent company, Digital Currency Group, has denied any involvement in the bankruptcy filing, citing “a special committee of independent directors” in charge of the decision, seemingly without any input from Silbert himself. But both companies are already getting hit with fresh securities class-action lawsuits alleging violations of federal securities laws.

The complaint also alleges “securities fraud through a scheme to defraud prospective and current digital asset lenders by making false and misleading statement[s],” which translates to: Silbert knowingly and intentionally lied about the company’s health, profits and future viability, thereby violating section 10(b) of the United States Securities Exchange Act.

Well, this is easy to confirm.

Genesis’ derivatives business had $175 million exposure to FTX, but back in November, when the exchange collapsed, the firm wasn’t forthcoming about its precarious position and released a series of frustratingly contradictory statements that left the community more in the dark than ever.

Genesis Timeline

November 8: "No material net credit exposure"

November 9: We lost $7M

November 10: Okay, we have $175M locked in FTX

November 16: Sorry, no withdrawals or new loans

November 17: Okay, we need $1BN

November 21: We'll go bankrupt without the money

— Cred (@CryptoCred) November 21, 2022

Then, at the turn of a switch, it started reassuring the community with conciliatory, PR-perfect public messaging. As I wrote in early December, Silbert spent months dismissing the “noise” surrounding both his company and the crypto space at large while reassuring investors that despite the crypto winter we were all facing, the company was on track to reach $800 million in revenue and its separate entities were “operating as usual.”

Related: Will Grayscale be the next FTX?

Here’s the danger: Through Digital Currency Group — which also owns the asset manager running the world’s largest Bitcoin (BTC) fund, Grayscale, mining company Foundry, crypto investment app Luno and media outlet CoinDesk, among more than 200 others — Silbert controls a large portion of the crypto landscape, and so far, he has been somewhat responsible both for keeping spirits up and for keeping panic at bay.

Furthermore, Genesis’ clients include Circle, which operates the stablecoin USD Coin (USDC), pegged to the U.S. dollar, and the Winklevoss-backed Gemini, whose founders have called for Silbert to be removed as CEO.

A first discrepancy — which, in retrospect, we can perhaps recognize as a huge sign of alarm — came on Nov. 18, when DCG’s Grayscale stated it wouldn’t share its proof of reserves with customers. A second, very clear indication that something was amiss came on Jan. 5, when Genesis laid off 30% of its workforce — following a previous August restructuring that saw it cutting its workforce by 20% and CEO Michael Moro stepping down from his leadership position and moving into an advisory role.

“As we continue to navigate unprecedented industry challenges, Genesis has made the difficult decision to reduce our headcount globally,” a spokesperson told Cointelegraph in the wake of the January layoffs. “These measures are part of our ongoing efforts to move our business forward.”

Related: Crypto exchanges keep failing, so why do we still trust Changpeng Zhao?

Well, it appears that moving forward won’t be part of Genesis’ future, and perhaps — unbeknownst to us — it never was. So, why were investors kept in the dark for so long?

Since the bankruptcy announcement, Genesis’ public statements have shown no remorse, humility or accountability whatsoever. Silbert seems to think he can just move on with a simple “this is what happened” and not need to acknowledge that errors were made and billions of dollars were lost. That’s unacceptable.

Silbert could, and should, have come clean back in November in the wake of the FTX fiasco. Instead, he kept a low profile for months just when everyone had their eyes on him and declared bankruptcy like a thief in the night, yet again humiliating the crypto world and disappointing the community as a whole. That’s a pretty low blow, and just like in Sam Bankman-Fried’s case, it shows that crypto management needs a complete overhaul.

Sure, Genesis’ case might not be quite as bad as FTX, but who knows how long it could have gone on? Who’s to say what such terrible management could be capable of if left alone and undetected?

It’s not in my nature to be pessimistic. I’m young, and so is crypto — I believe the best is yet to come for the industry, but it won’t be easy, and it will require a degree of transparency and accountability that we haven’t yet seen.

If the cascading effect of the crashes of the last few months is anything to go by, Genesis might be the latest firm to collapse, but not the last. We need to keep our eyes open and our instincts en garde. If we don’t, we won’t survive, and neither will crypto.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Genesis, a subsidiary of Barry Silbert's Digital Currency Group, filed for Chapter 11 bankruptcy on Jan. 19. Its default could have big implications for the crypto industry.

It looks as if the bear cycle is going to claim another high-profile crypto company. On Jan. 19, Digital Currency Group’s (DCG’s) lending subsidiary, Genesis, filed for Chapter 11 bankruptcy. Here we have yet another industry giant with a tale of incestuous lending, little risk management to speak of and opaque reporting policies. 

For market participants, the gathering storm clouds at DCG represent a failure that would have been unthinkable in 2021. Founded by CEO Barry Silbert in 2015, DCG has become a mainstay in crypto’s short existence. Genesis’ filing revealed the full extent of creditors affected by its implosion, which notably included Gemini, the crypto exchange created by Winklevoss twins Cameron and Tyler, to which Genesis said it owed $765 million; metaverse project Decentraland ($55 million); and fund manager VanEck ($53 million).

The company listed more than 100,000 creditors in sum and aggregate liabilities between $1.2 billion and $11 billion.

Super sketch that the lending desk Barry owned owed Decentraland $55m when DCG and Grayscale are $MANA investors.

Did they buy from the team and then just get cash lent back to them? How the fuck did Decentraland even have $55m left these days?

— Adam Cochran (adamscochran.eth) (@adamscochran) January 20, 2023

Some of the debts inspire new questions, including, for instance, why Genesis held a loan from Decentraland when a separate DCG subsidiary — Grayscale — holds 18 million of the project’s tokens. (The holding was valued at $11.74 million as of Jan. 20, down from what would have been $105.8 million at its peak in November 2021.)

Genesis was first rocked by the fall of Three Arrows Capital (3AC), which lost a little more than $500 million in loans from Genesis. The fall of FTX proved to be too much for the lender, prompting it to suspend withdrawals. Genesis also signaled serious trouble this month when it laid off 30% of its staff.

Related: Will Grayscale be the next FTX?

As the bear market drags on, more fundamental systems are breaking — systems like loan platforms, over-the-counter rails and exchanges. Failing systems and the relationships between companies operating those systems represent structural breakdowns in the market, which are certainly critical to note. Nevertheless, these are mechanical systems that can be refactored and rebuilt. Trust is another story. Hard won and easily lost, trust is the elusive but critical force that simply must exist for any industry to thrive. And it is the trust in these markets that is at risk.

6/ Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.

— Cameron Winklevoss (@cameron) January 20, 2023

Contagion revealed hidden connections, smiting public trust

The rapid collapses of 3AC, Voyager, BlockFi, FTX and Celsius shocked the market. But then the connections between these groups started to become known, and shock turned to apoplectic rage. It became apparent that while these companies purported to operate in finance, few, if any, actually operated like they were in finance, and certainly not like the industry leaders so many held them up to be — particularly when it came to risk management.

Bad policies became standard, with companies borrowing with very little to no collateral from one counterparty to pay another, some even utilizing their own “currency” as collateral. What’s more, the collateral was accepted by the creditors. The market frenzy in 2020 and 2021 created the foundation for unsavory behavior and bad business practices to proliferate at scale. As the true depth of the malpractice and poor decisions has become evident, trust in these companies has been substantially eroded.

Trust in ecosystems will be hard to recover

Asset prices may rise and fall, but most assume that the underlying fundamentals of market construction and mechanics will still hold. This has been the core problem in this bear market. As it turns out, manipulation, collusion and inside deals were the norm. And the behavior was not relegated to new companies — it seems most industry players participated at some level or another. Such is the case with DCG. Bad loans, poor risk management and obfuscated financial reporting are coming home to roost.

Related: Learn from FTX and stop investing in speculation

Crypto prices will eventually return, and new companies will enter the market. Let’s hope that the collective memory of the industry extends a bit. A return to deep due diligence and default skepticism is needed. The onerous should be on the companies to earn trust through their actions. This seems obvious, but it’s clear we’ve forgotten.

We are left with an unfortunate reality. Trust will not only need to be rebuilt in the companies operating in the space, but it will also need to be rebuilt in the ecosystem that enables the companies.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.