Move over FTX, Genesis is the new scandal

In Token Issue this week, we look at what’s happening with the Genesis bankruptcy case. [Read from your browser]( Token Issue Welcome to Token Issue! Delivered every Friday, this free newsletter breaks down the biggest stories in Asia’s crypto scene and beyond. View past issues [here]( or [sign up here]( to receive future newsletters. Written by Scott Shuey Crypto journalist Hello {NAME} and Happy Lunar New Year! The professor who taught me business law had a droll way of introducing his class. “Welcome to [Three-card Monte]( for millionaires,” he’d say with a predatory smile that made it clear he wasn’t really joking. The next four months were filled with stories and examples of how corporations had stacked the deck to protect themselves and their money when things went pear-shaped. That professor would have loved the [Genesis bankruptcy case](. If you missed that news, that’s OK. We’ll recap. Genesis' problems started in July last year when it admitted that it [lost US$1.2 billion]( in the collapse of Three Arrows Capital. In November 2022, Genesis - which promoted itself as the premier institutional digital asset financial services firm - announced it had US$175 million locked in FTX, which had just declared bankruptcy. That same month, Genesis halted withdrawals and new loans, warning about a possible bankruptcy itself. Earlier this month, it cut about [30% of its staff]( and then filed for bankruptcy protection in New York. The paperwork is filled with surprises. According to [documents filed]( in New York, Genesis now owes its creditors about US$3.4 billion. And aside from the Chapter 11 proceedings, the US Securities and Exchange Commision (SEC) is also [suing Genesis]( for illegally selling securities. But we’ll come back to this in a minute. Now here’s the part my old professors would have loved. The bankruptcy covers three companies: Genesis Global Capital, Genesis Asia Pacific, and their parent company Genesis Global Holdco. What the bankruptcy does not include is Digital Currency Group (DCG), the parent company of Holdco. This was curious because DCG borrowed over US$1.6 billion in unsecured loans from Genesis Global Capital months before the bankruptcy. The question on everyone’s mind, including a special committee investigating the matter, is what game does CEO Barry Silbert think he’s playing what possible legal reason could DCG have for borrowing US$1.6 billion from subsidiaries it likely knew were about to go bankrupt? Not surprisingly, the lawyers in the case are already talking about “avoidance actions,” which in legal terms means “put that money back.” If that happens, DCG - which is also the parent company of Bitcoin mining pool [Foundry]( media house [CoinDesk]( and asset management company [Grayscale]( - could find itself dragged into bankruptcy proceedings. And this isn’t the only game of silly buggers being played, according to legal papers. Genesis is also trying to pass a US$485 million loss directly to investors at [Gemini]( the crypto exchange owned by brothers Cameron and Tyler Winklevoss - aka the [Winklevoss twins](. This game of Find the Lady starts with a product that both Gemini and Genesis promoted called [Gemini Earn]( which allowed investors to stake assets and earn rewards. Earn is also the protocol that is getting both Genesis and Gemini sued by the SEC. According to the commission’s prosecutors, the Earn project raised billions in crypto assets. But in November of last year, Genesis announced it was [halting Earn]( and would not allow investors to withdraw those assets because it “lacked sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market,” according to an [SEC statement](. At the time, Genesis still held US$900 million in investor assets from 340,000 Earn investors. Unlike the loans that DCG took from Genesis, the assets in Earn, according to legal documents, were partially backed by Genesis with 30.9 million shares of Grayscale Bitcoin Trust (GBTC), a digital currency investment product, as collateral. But at roughly US$10 a share, the collateral covered only about one-third of the assets in the Earn protocol. On November 16, 2022, the day that Genesis froze withdrawals, it also sold the GBTC collateral at US$9.20. This netted US$284.3 million for the firm, according to an affidavit by Michael Leto, managing director of law firm Alvarez & Marsal. Then, in an act of ultimate cheek, Genesis sent the funds to Gemini and declared that - according to a behind-the-scenes deal - its obligation to the investors was paid. Genesis argues that since Gemini had accepted the GBTC as collateral, it had to accept any losses not covered by the stock. The remaining US$615.7 million was Gemini’s problem. Needless to say, the Winklevoss twins are challenging Genesis’ declaration in court. So what’s next? All of this - and much, much more - will go in front of a US bankruptcy judge. So go get your popcorn. This is likely to be the best courtroom drama in 2023, at least until the FTX trial starts in October. -- Scott  --------------------------------------------------------------- ⭐ TO THE STARS A look at what’s pushing Web3 forward UAE sees major role for cryptocurrency Cryptocurrency will soon play a “major role” for trade in the United Arab Emirates (UAE), according to Dr. Thani Al Zeyoudi, minister of state for foreign trade, in an [interview with Bloomberg](. The minister said that crypto’s role will focus on regulations and governance. “We started attracting some of the companies to the country with the aim that we’ll build together the right governance and legal system, which are needed,” he told Bloomberg. The minister's comments came after the UAE’s virtual assets regulator said that no crypto entity has been granted the license to [operate an exchange](.  --------------------------------------------------------------- 🌙 TO THE MOON Promising crypto projects we’re noticing. 1️⃣ [Proceed w/ Caution]( This is not a good week to be involved in NFTs. The top two new projects barely even made it out of the gate before they faced problems. Porsche launched an NFT collection based on its iconic 911, with a planned drop of 7,500. But a steep opening price of 0.911 ether caused a backlash, which has raised concerns that the project might not sell out. Probably the second most anticipated drop of the week was Yuga Labs’ Sewer Pass, but headlines have already started to complain about the collection’s “limited transfer capabilities,” meaning concerns about royalties are being brought up. So this week’s To The Moon pick is the aptly named Proceed w/ Caution, an NFT project from Lucrece, a Norwegian-born Vietnamese artist living and working in the US. Lucrece has a very distinct style, which apparently resonates with his fan base. His art [is inspired]( in part by ​​the hate he saw spreading online - especially hate directed at Asians - during the pandemic. If the art isn’t enough for you, data from [Nansen]( shows that the 24-hour floor price of Proceed w/ Caution has jumped 167%, far more than any other project this week. --------------------------------------------------------------- 🌏 BACK TO EARTH The week’s biggest roadblocks 1️⃣ [Busted for manipulating MNGO]( On January 20, the US Securities and Exchange Commission charged Avraham Eisenberg, a US citizen living in Puerto Rico, with manipulating market prices and stealing US$116 million in crypto assets. According to the [SEC complaint]( Eisenberg used an account under his ownership on Mango Markets, a Solana-based decentralized exchange, to “sell a large amount of perpetual futures for [MNGO tokens]( the exchange’s governance token. He then used another account on the same platform to purchase the perpetual futures that he sold. By issuing and buying the futures in an illiquid market, Eisenberg was able to push up the price of MNGO tokens, which were then used as collateral to take US$116 million in loans from Mango Markets. 2️⃣ [BlockFi selling loans backed by Bitcoin mining machines]( BlockFi, the bankrupt crypto lender that lost more that US$1.2 billion in the collapse of FTX, is now selling off US$160 million in loans that used Bitcoin mining machines as collateral, according to Bloomberg. However, a number of these loans have already gone into default. Considering the recent fall in price for Bitcoin mining equipment, some of the loans are likely to be worthless. 3️⃣ [US arrests Russian in Miami for “transmitting illicit funds”]( Anatoly Legkodymov, founder of crypto exchange Bitzlato, was arrested on January 21 for “transmitting illicit funds,” according to a report by the US Department of Justice (DOJ). The DOJ said Bitzlato’s largest counterparty for crypto transactions was Hydra Market, which the government agency described as “an anonymous, illicit online marketplace for narcotics, stolen financial information, fraudulent identification documents, and money laundering services that was the largest and longest running darknet market in the world.” The report also revealed that users of Hydra Market exchanged over US$700 million worth of crypto assets with Bitzlato.  --------------------------------------------------------------- STILL A PONZI SCHEME “I’m sure there were people saying the same thing when the printing press, automobiles, and the internet were first invented. You are missing the forest for the trees. Bad actors are always some of the first to adopt new technologies as they are most incentivized to.” - [AJ Nelson, co-founder of @rain.]( Nelson was responding to a tweet thread by [John Stark]( the former SEC chief for internet enforcement. Stark had just brought up what he called 12 egregious examples of why crypto is a ponzi scheme. I am not sure what Nelson means to imply with the last line, but he may not be sending the message he thinks he is. He makes "bad actors" sound like an inconvenience instead of the reason for the trillions of dollars in losses over the last year. I would take him more seriously if he had called them unethical, unscrupulous, or even criminal. As it is, he sounds like he's one keystroke away from defending them. --------------------------------------------------------------- MORE TO CHEW ON Essential news you should know. 1️⃣ [Deribit heads to Dubai]( Deribit, the world's biggest Bitcoin and Ether options exchange, is making plans to relocate to Dubai by as soon as the third quarter of this year. The trading platform has been based in Panama since 2020. 2️⃣ [QuickNode raises US$60 million]( [QuickNode]( a startup focused on Web3 infrastructure, announced that it had raised US$60 million in a series B funding round led by [10 T Holdings](. According to the company’s blog, it is now valued at US$800 million. 3️⃣ [$50m million recovered from small bank in FTX case]( We can’t let a week go with some news about FTX, so here’s an update on Farmington, one of the smallest banks in the US. For reasons still unclear, this bank captured Sam Bankman-Fried’s (SBF) interest. According to [court documents]( SBF deposited US$50 million into the bank, which prosecutors said they had seized as of January 18. Alameda Research, the sister company of FTX, bought an [US$11.5 million stake in Farmington]( in March last year. 4️⃣ [Jim Cramer, host of CNBC’s “Mad Money,” says stick with gold]( Jim Cramer is the guy known for calling it wrong. He said Bear Sterns was fine. ([It wasn’t.]( He also recommended [Merrill Lynch]( [Wachovia]( and [Lehman Brothers](. (All gone.) He said Meta stocks had nowhere to go but up. (Ouch.) Now he’s saying stick with gold. “[Y]ou need to ignore the crypto cheerleaders now that Bitcoin’s bouncing,” Cramer said. “And if you seriously want a real hedge against inflation or economic chaos … you should stick with gold.” On Monday, @WatcherGuru posted: Fun fact #Bitcoin is up 35% since Jim Cramer said it was a good chance to get out 12 days ago.  --------------------------------------------------------------- That’s all for this issue - we hope you liked it. WAGMI! P.S. Don't miss out on the biggest tech news and analysis. Add newsletter@techinasia.com to your address book, contacts, or safe sender list. Or simply move us into your inbox. Too many emails? Switch to a different frequency or get new content through our [preference center]( or [unsubscribe](. 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