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No One Will Escape The FTX Fallout

Genesis Global Trading, one of crypto’s oldest and most storied institutions, is in dire straits. In November, in the wake of the implosion of the crypto exchange FTX, the company’s lending unit was forced to freeze customer withdrawals—never a good sign. Almost two months later, Genesis is reportedly on the brink of bankruptcy.

Although Genesis has not said publicly that bankruptcy is imminent (Derar Islim, interim CEO, says he remains “focused on finding a solution”), the firm is reported to have laid off 30 percent of its workforce this week—the latest sign of its financial ill-health.

Founded in 2013, Genesis has become central to the crypto industry’s day-to-day operations. In 2021 alone, the company issued $131 billion in loans and set up $116.5 billion in trades. To fund these loans, Genesis borrows from individuals and institutions that own large quantities of coins, also known as whales, who receive a cut of profits in return.

While the crypto hype train barreled on unchecked, Genesis was on a hot streak—but its luck ran out in 2022. The lender has been in trouble since July, when hedge fund Three Arrows Capital collapsed, taking with it $1.2 billion of the $2.36 billion it had borrowed from the firm. Genesis again found itself on the wrong side of a collapse in the autumn; when FTX filed for bankruptcy on November 11, the firm lost $175 million stored with the exchange.

Digital Currency Group (DCG), parent company of Genesis, swooped in with bailouts on both occasions. Despite the assistance, the “unprecedented market turmoil” created by the FTX situation forced Genesis to freeze withdrawals and begin to hunt for emergency funding. But just like FTX, a rescue package for Genesis has not materialized.

The frothiness of the crypto market in 2021 spread fear of missing out among investors that attracted huge sums of money. But that FOMO is now long gone, replaced by a suspicion of both the promises and accounting practices of large crypto companies in light of the allegations of fraud at FTX.

Venture capital investment in crypto is drying up, according to a recent paper released by market data house PitchBook. After a “breakout year” in 2021, in which $21 billion of capital flooded into the industry, appetite for crypto investment is collapsing rapidly. By Q3 2022, funding was down 34.3 percent year-on-year, and the volume of deals had fallen to a two-year low.

In Genesis’ case, investors have been put off by a lack of clarity over the size of the cash injection necessary to plug the hole, says David Bailey, CEO at Bitcoin Magazine, who also leads an activist group that represents the interests of investors in Grayscale Bitcoin Trust, a DCG subsidiary. He describes the shortfall as “massive and unknown in scope.”

Brad Harrison, who leads the team behind decentralized lending protocol Venus, paints a similar picture. A Genesis bankruptcy would come as no surprise in the aftermath of the “tectonic” events that shook the crypto industry over the past year, he says. But as for the specifics, “we’re all just guessing what happens behind closed doors.”