Genesis Capital Files for Chapter 11 Bankruptcy Protection: What it Means for Digital Currency Group and the Crypto Industry

The Genesis lending entities filed for Chapter 11 bankruptcy protection in the Southern District of New York yesterday. The filing includes Genesis Global Holdco, LLC, Genesis Global Capital, LLC, and Genesis Asia Pacific Pte. Ltd. (collectively, “Genesis Capital”). Notably, Genesis Global Trading, Inc., the company’s spot and derivatives trading entity, will continue to operate as usual and has not filed for bankruptcy protection.

A special committee of independent directors in charge of the Genesis Capital restructuring decided to file for bankruptcy. Digital Currency Group (DCG), a holding company with a majority stake in Genesis Capital, and its employees, including those on the Genesis board of directors, were not involved in the decision to file for bankruptcy. As a result, DCG will continue to operate business as usual, as will its other subsidiaries, including Grayscale Investments LLC, Foundry Digital LLC, Luno Group Holdings Ltd., CoinDesk Inc., and TradeBlock Corporation. DCG owes Genesis Capital approximately $526 million, due in May 2023, and $1.1 billion under a promissory note due in June 2032. DCG fully intends to address its obligations to Genesis Capital during a restructuring. In addition, DCG continues to engage with Genesis Capital and its creditors to reach an amicable solution for all parties.

DCG’s Role in Genesis Capital’s Financial Troubles

The financial troubles at Genesis Capital can be traced back to June 2022, when Three Arrows Capital, one of Genesis Capital’s largest creditors, defaulted on a loan. DCG stepped in to help Genesis after the Three Arrows Capital default by agreeing to assign and exchange Genesis’ $1.1B unsecured loan receivable from Three Arrows Capital, the recovery on which was highly uncertain, with the promissory note from DCG. Unfortunately, DCG did not receive any cash, cryptocurrency, or other forms of payment for the promissory note and effectively assumed Genesis’ risk of loss on the Three Arrows Capital loan with no obligation to do so.

In addition, after Three Arrows Capital defaulted, DCG contributed approximately $340 million of new equity across Genesis entities.

What Chapter 11 Means for Genesis Capital

Chapter 11 is a chapter of the U.S. Bankruptcy Code that governs court-supervised corporate restructurings. Genesis Capital may seek to reorganize, sell its assets, or restructure its business. The special committee of independent directors will make that decision with input from Genesis Capital’s creditors. Any restructuring will ultimately be subject to the approval of the bankruptcy court.

What Does This Mean for the Crypto Industry?

Genesis Capital’s filing for Chapter 11 bankruptcy protection is a significant event in the crypto industry. The company was one of the most prominent institutional players in the crypto lending space, and its financial troubles are a reminder of the inherent risks of the crypto market.

However, it is essential to note that Genesis Capital’s troubles are specific to the company and do not necessarily reflect the health of the broader crypto industry. DCG and its subsidiaries, including Grayscale Investments and CoinDesk, continue to operate business as usual, and other companies in the crypto lending space have not reported similar financial troubles.

In Conclusion

Genesis Capital’s filing for Chapter 11 bankruptcy protection is a significant event for the company and the crypto industry. However, it is essential to note that the filing only affects the Genesis lending entities, not DCG or its other subsidiaries. DCG continues to engage with Genesis Capital and its creditors to reach an amicable solution.