It looks like the bear cycle will claim another high-profile crypto company. On January 19, Digital Currency Group’s (DCG) credit subsidiary, Genesis, filed for Chapter 11 bankruptcy. Here we have another industry giant with a history of incestuous lending, little risk management to speak of and opaque reporting policies.
For market participants, the gathering storm clouds in DCG represent a failure that would be unthinkable in 2021. Founded by CEO Barry Silbert in 2015, DCG has become a mainstay in cryptocurrency’s short existence. Genesis’ filing revealed the full range of creditors affected by its implosion, including notably Gemini, the crypto exchange created by Winklevoss twins Cameron and Tyler, which Genesis said is owed $765 million; metaverse project Decentraland ($55 million); and fund manager VanEck ($53 million).
The company listed more than 100,000 creditors and said it owed $3.4 billion to its top 50 creditors.
The super sketch that Barry owned owed Decentraland $55 million when DCG and Grayscale were $MANA investors.
Did they buy from the team and then just lend them cash? How the hell does Decentraland have $55 million left over these days?
— Adam Cochran (adamscochran.eth) (@adamscochran) January 20, 2023
Some of the debt inspires new questions, including why Genesis held the loan from Decentraland when DCG’s separate subsidiary — Grayscale — holding 18 million project tokens. (The stake was valued at $11.74 million as of January 20, down from $105.8 million at its peak in November 2021.)
Genesis first shook the fall of Three Arrows Capital (3AC), which lost a little more than 500 million dollars in loans from Genesis. FTX’s fall proved too much for the lender, prompting it to suspend withdrawals. Genesis also signaled serious trouble this month laid off 30% of its employees.
Related: Will Grayscale be the next FTX?
As a bear market drags on, more fundamental systems break down – systems like credit platforms, over-the-counter colleges and exchanges. Failing systems and the relationships between the companies that operate those systems represent a structural market breakdown that is certainly crucial to be aware of. Still, these are mechanical systems that can be refactored and rebuilt. Trust is a different story. Trust is hard won and easily lost. Trust is an elusive but critical force that simply must exist for any industry to thrive. And it is trust in these markets that is at risk.
The epidemic exposed hidden connections and undermined public confidence
The rapid collapses of 3AC, Voyager, BlockFi, FTX and Celsius shocked the market. But then the connection between these groups began to become known, and shock turned to apoplectic rage. It turned out that while these companies purportedly operated in finance, few, if any, actually operated as if they were in finance, and certainly not in the way industry leaders claimed they were—especially when it came to risk management.
6/ If Barry and DCG do not come to their senses and make a fair offer to the creditors, we will file a lawsuit against Barry and DCG in the near future.
— Cameron Winklevoss (@cameron) January 20, 2023
Bad policies became standard, with companies borrowing with very little or no collateral from one counterparty to pay another, and some even using their own “currency” as collateral. What’s more, the collateral was accepted by the creditors. The market frenzy of 2020 and 2021 set the stage for the proliferation of unsavory behavior and bad business practices. As the true depth of malpractices and bad decisions became apparent, trust in these companies was substantially eroded.
It will be difficult to restore trust in ecosystems
Asset prices may rise and fall, but most assume that the basic fundamentals of market construction and mechanics will still apply. That was the main problem with this bear market. As it turns out, manipulation, collusion and insider dealings were the norm. And this behavior wasn’t relegated to new companies – most industry players seem to have participated at one level or another. This is the case with DCG. Bad credit, bad risk management and confused financial reporting they return home to the castle.
Cryptocurrency prices will eventually rebound and new companies will enter the market. Hopefully the industry’s collective memory will expand a bit. A return to deep scrutiny and skepticism is necessary. It should be challenging for companies to earn trust through their actions. It seems obvious, but it’s clear we’ve forgotten.
We are left with an unfortunate reality. Trust will need to be restored not only in the companies operating in the space, but it will also need to be rebuilt in the ecosystem that enables the company.
Joseph Bradley is Head of Business Development at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry in 2014 as an independent researcher before working at Gem (which was later acquired by Blockdaemon) and subsequently moving into the hedge fund industry. He received his master’s degree from the University of Southern California with a concentration in portfolio construction and alternative asset management.
This article is for general informational purposes and is not intended and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.