Cryptocurrency: Noting The Carnage

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2023 Starts Off With A Bang: Winklevoss Slams Barry Silbert's Genesis,
Accuses Of Commingling Funds

If anyone expected that the bursting of the crypto bubble and the
resulting unprecedented tidal wave of failure and fraud would somehow
be confined to 2022 we have some bad news.

As if the collapse of Sam Bankman-Fried’s crypto empire wasn't bad
enough, its fallout just got much messier after digital-asset
entrepreneur and Facebook billionaire, Cameron Winklevoss, accused
fellow crypto businessman Barry Silbert of “bad faith stall tactics”
and the commingling of funds within his conglomerate that Winklevoss
says have left $900 million in customer assets needlessly in limbo
since FTX’s meltdown.

First, some background: in early November, shortly after FTX imploded,
Gemini Trust which was founded by the Winklevoss twins, paused
redemptions on a lending product called Earn, which offered investors
the potential to generate as much as 8% in interest on their digital
coins. It did so by lending them out to Genesis Global Capital, one of
the companies owned by Silbert’s Digital Currency Group. The Earn halt
came after Genesis suspended both redemptions and new loan
originations at its lending unit because of its exposure to FTX.
Genesis has told clients that it could take “weeks” to find a path
forward, and that bankruptcy may be one possibility.

Which brings us to today: this morning, facing pressure of his own
from angry customers locked out of their Gemini accounts and a lawsuit
alleging fraud, Cameron Winklevoss published an open letter saying he
had provided Silbert with multiple proposals to resolve the issue,
including as recently as Dec. 25. He told Silbert “this mess is
entirely of your own making,” citing some $1.675 billion owed to
Genesis by DCG, which it used for other business purposes within
Silbert’s conglomerate. “This is money that Genesis owes to Earn users
and other creditors.”

“It’s not lost on us that you’ve been working desperately to try and
firewall DCG from the problems that you created at Genesis,”
Winklevoss added, strongly hinting that the relationship between DCG
and Genesis is similar to that between FTX and Alameda. And in case
that wasn't clear, the next sentence strikes it home: “You should
dispense with this fiction because we all know what you know — that
DCG and Genesis are beyond commingled.”

    Earn Update: An Open Letter to @BarrySilbert pic.twitter.com/kouAviTho4
    — Cameron Winklevoss (@cameron) January 2, 2023

    An Open Letter to Barry Silbert

    Barry — today marks 47 days since Genesis halted withdrawals. I am
writing on behalf of more than 340,000 Earn users who are looking for
answers. These users aren’t just numbers on a spreadsheet, they are
real people. A single mom who lent her son’s education money to you. A
father who lent his son’s bar mitzvah money to you. A husband and wife
who lent their life savings to you. A school teacher who lent his
children’s college funds to you. A policeman, and so many more. All
together, these people entrusted more than $900 million of their
assets to you. They deserve concrete answers and we are here to get
them.

    For the past six weeks, we have done everything we can to engage
with you in a good faith and collaborative manner in order to reach a
consensual resolution for you to pay back the $900 million that you
owe, while helping you preserve your business. We appreciate that
there are startup costs to any restructuring, and at times things
don’t go as fast as we would all like. However, it is now becoming
clear that you have been engaging in bad faith stall tactics.

    For example, on December 2nd we expressed our belief “that getting
everyone in a room together as soon as possible will be the most
productive path towards reaching a resolution." You agreed, but stated
you would only do so after there was a proposal on the table. On
December 17th, a proposal was delivered to you. On December 25th,
Christmas Day, an updated version of this proposal was delivered to
you. Despite this, you continue to refuse to get into a room with us
to hash out a resolution. In addition, you continue to refuse to agree
to a timeline with key milestones. Every time we ask you for tangible
engagement, you hide behind lawyers, investment bankers, and process.
After six weeks, your behavior is not only completely unacceptable, it
is unconscionable.

    The idea in your head that you can quietly hide in your ivory
tower and that this will all just magically go away, or that this is
someone else’s problem, is pure fantasy. To be clear, this mess is
entirely of your own making. Digital Currency Group (DCG) — of which
you are the founder and CEO — owes Genesis (its wholly owned
subsidiary) ~$1.675 billion. This is money that Genesis owes to Earn
users and other creditors. You took this money — the money of
schoolteachers — to fuel greedy share buybacks, illiquid venture
investments, and kamikaze Grayscale NAV trades that ballooned the
fee-generating AUM of your Trust; all at the expense of creditors and
all for your own personal gain. It is now time for you to take
responsibility for this and do the right thing.

    It’s not lost on us that you started your career as a bankruptcy
restructuring associate. And it’s not lost on us that you’ve been
working desperately to try and firewall DCG from the problems that you
created at Genesis. You should dispense with this fiction because we
all know what you know — that DCG and Genesis are beyond commingled.
Everyone takes orders from you and always has. And anything you have
done after the fact to pretend otherwise, won’t hold up. If instead,
you had put all of this energy towards finding a resolution, we would
have been done by now. Everyone would be in a better place, including
you.

    Earn users are tired. They’re scared. Many are now in dire
straits. And yet despite all that they have had to endure, they have
been remarkably patient and supportive. But there is only so much more
they can take. They deserve a resolution for a recovery of the assets
they lent to you and an end to this nightmare. To that end, and for
the final time, we are asking you to publicly commit to working
together to solve this problem by January 8th, 2023. We remain ready
and willing to work with you, but time is running out.

    Sincerely,

    Cameron Winklevoss

Winklevoss claims the $1.675 billion borrowed by DCG from Genesis was
used “to fuel greedy share buybacks, illiquid venture investments, and
kamikaze Grayscale NAV trades,” referring to another of Silbert’s
businesses, Grayscale Investments, whose largest vehicle is the
Grayscale Bitcoin Trust. This came, he said, “all at the expense of
creditors and all for your own personal gain.”

Winklevoss also asked Silbert to “publicly commit to working together
to solve this problem,” which he says affects more than 340,000 Earn
customers, by Jan. 8. He didn’t say what would happen if no agreement
was reached by then.

Silbert prompted responded in kind, tweeting a refutation to several
of Wilkevoss’s accusations, saying “DCG did not borrow $1.675 billion
from Genesis” and “never missed an interest payment to Genesis and is
current on all loans outstanding,” without providing more detail.
Silbert also claimed DCG delivered a proposal for resolving the
dispute to Genesis and Winklevoss’s advisers on Dec. 29, but had
received no reply.

    DCG did not borrow $1.675 billion from Genesis

    DCG has never missed an interest payment to Genesis and is current
on all loans outstanding; next loan maturity is May 2023

    DCG delivered to Genesis and your advisors a proposal on December
29th and has not received any response
    — Barry Silbert (@BarrySilbert) January 2, 2023

That would not be the last of it, and moments later, Cameron
Winklevoss doubled down, urging Silbert to "stop trying to pretend
that you and DCG are innocent bystanders and had nothing to do with
creating this mess. It's completely disingenuous. So how does DCG owe
Genesis $1.675 billion if it didn't borrow the money? Oh right, that
promissory note..."

And then, in an apparent attempt to avoid the nuclear option and
filing a notice of default against Genesis - an event that will likely
lead to even more havoc and mayhem across the crypto community -
WInklevoss tweeted "Will you, or will you not, commit to solving this
by January 8th in a manner that treats the $1.1 billion promissory
note as $1.1 billion?"

    Will you, or will you not, commit to solving this by January 8th
in a manner that treats the $1.1 billion promissory note as $1.1
billion?
    — Cameron Winklevoss (@cameron) January 2, 2023

Previously Silbert's DCG has been trying to emphasize that it’s
separate from Genesis and insulated from its troubles. After Genesis
suspended redemptions, DCG said in a tweet that “this temporary action
has no impact on the business operations of DCG and our other wholly
owned subsidiaries.”

Silbert, in a letter to shareholders last month, said that
intercompany loans were made “in the ordinary course of business.” He
noted that DCG has a liability of $575 million to Genesis. In the
letter, he also described a $1.1 billion promissory note, due June
2032, which he said came about as the parent company stepped in to
assume liabilities from Genesis related to the collapse of
digital-assets hedge fund Three Arrows Capital.

As Bloomberg notes, Winklevoss’s aggressive stance comes as Gemini and
its founders faces a lawsuit from investors who accuse the company of
fraud, claiming the Earn product was in effect an interest-bearing
account that it failed to register as a security.

As for the public spat between Winklevoss and Silbert, which is all
too reminiscent of what happened between CZ and SBF in the days before
the failure of FTX, as twitter user Jeremey Padawer summarizes "When
these sorts of issues become public, almost every single time the
worst is still to come… good luck crypto community." Indeed.

    When these sorts of issues become public, almost every single time
the worst is still to come… good luck crypto community. 💔
    — Jeremy Padawer (@JeremyCom) January 2, 2023

And even Edward Snowden is bracing for what's coming.

    *sigh* gonna be a big week https://t.co/E0QQzX0rvO
    — Edward Snowden (@Snowden) January 2, 2023