Bitvavo's 280 Million Euro Recovery Plan: A Risky Gamble?

Overview

• Bitvavo is actively working to recover 280 million euros from Digital Currency Group (DCG) and its subsidiaries
• The funds were lent to a DCG subsidiary, Genesis Global Capital, to offer Bitvavo customers a product where they received interest on their cryptocurrency tokens
• Genesis froze withdrawals in November following the collapse of FTX, which caused total losses in the billions of dollars for estimated 1 million customers and other investors
• Bitvavo has guaranteed the outstanding amount and assumed the risk on behalf of its customers, so the current situation does not impact them or the platform's services
• Talks with DCG are ongoing, and a solution seems to be in sight, but diligence is essential, and it will take some time to reach a conclusion
• Bitvavo's strong, independent financial position allows them to act in their customers' best interest and will continue to inform them of any future developments actively

The DCG Update Statement (02-01-2023) can be reviewed here!

Furthermore, the Dutch cryptocurrency exchange Bitvavo has announced its intention to recover 280 million euros ($296.30 million) from US-based Digital Currency Group (DCG) and its subsidiaries. Bitvavo had lent the funds to Genesis Global Capital, a DCG subsidiary, to offer its customers a product where they received interest on their cryptocurrency tokens.

More Background

The problems at Bitvavo, the largest crypto exchange in the Netherlands, began in November when Genesis froze withdrawals following the collapse of FTX. In a letter to clients in early December, Genesis stated that it was crafting a plan to preserve assets. However, FTX filed for bankruptcy on November 11, leaving an estimated one million customers and other investors facing total losses in the billions of dollars. The collapse sent shockwaves through the crypto world, causing bitcoin and other digital assets to plummet.

Bitvavo's Plan to Recover Funds

Initially, Bitvavo stated that it expected to be reimbursed over time but had enough funds to cover the assets for its customers. In addition, Bitvavo's customers were assured they were not exposed and could withdraw all their funds anytime. However, Bitvavo has backtracked on this statement, with a spokesperson stating that it holds DCG responsible for the inaccessible funds.

“We are in discussions with multiple entities of the group, and given the mingling within the group we hold DCG responsible for the outstanding amount, for completeness' sake, we refer to the Digital Currency Group and its subsidiaries.” - Bitvavo spokesperson

Bitvavo Backup Plan: A Closer Look

• Thirty-four million equity: This refers to the money that currently resides in the company. However, it's important to note that if this is classified as equity, it may include other non-liquid assets. This means that the actual cash amount may be lower than stated.
  

• One hundred million possible deposit: According to Bitvavo, 110 million in dividends were paid to the three shareholders in 2021. These shareholders pledged to return 100 million in the company's financial statements. It's worth considering why such a large dividend was paid in the first place. If the company is experiencing financial difficulties, shareholders may hesitate to make this deposit.
  

• Credit line: Bitvavo management has claimed that the company still has a credit line with its bank. However, given the company's worsened financial situation and rising interest rates, this credit line may need to be revised.
  

• Tax refund: Bitvavo has stated that it paid 34 million in taxes in 2021 and will pay 65 million in 2022. However, the company's management argues that if DCG were to fall, they would be allowed to deduct another loss and request a refund from the tax authorities for that amount. While it is true that tax authorities may be willing to refund tax payments in certain circumstances, it is a complex process. For example, tax is typically paid on realized profit, and authorities are unlikely to refund the money. Additionally, a significant portion of the tax payment may be related to dividends, which cannot be refunded.
  

• Sale of assets: One of the steps in Bitvavo's backup plan is the sale of assets. This refers to the company potentially selling off certain parts of its business or physical assets to generate cash. This could include selling real estate, equipment, or intellectual property. By selling off these assets, Bitvavo could generate enough money to cover the 280 million euros it is trying to recover from Digital Currency Group and its subsidiaries. However, it's important to note that the sale of assets is often seen as a last resort, as it can significantly impact a company's long-term stability and success. Additionally, more than the value of these assets may be required to cover the amount Bitvavo is seeking to recover, and there is no guarantee that they will be able to find buyers for them.

Overall, it seems complicated for Bitvavo to secure the necessary liquidity if DCG fails. This is a cause for concern for platform users, as it could leave their funds stuck. This situation is a further example of the consequences of poor management, as the collapse of FTX has caused a domino effect leading to difficulties at Bitvavo and other companies.