Due to the fact that your humble blogger is not feeling so hot, forgive me for giving you a thin treatment of the wobbles and likely-looking collapse of a key crypto concern, Genesis. However, two excellent tweetstorms cover most of the key ground, and I will direct you to them shortly.

The unwind of FTX is certain to dominate business press, pundit, and politician attention due to how its uber connected and very recently idolized top brass have been revealed as drug-addled business incompetents who neverless seem to have done a very good job at disappearing a lot of the moolah, presumable for their personal use. The level of media noise and coming prosecutions (both the Southern District of New York and Bahama are reportedly ginning up filing) and the failure of supposedly sophisticated player to find anything amiss will presumably chill interest in crypto, particularly if other firms fall over due to FTX contagion.

If Genesis is one of them, it has the potential to be particularly damaging to the ambitions of crypto promoters for these speculative coins to become a serious alternative to fiat. Genesis provided a traditional suite of investment services together called prime brokerage to institutional investors, as in big money players. Importantly, as I understand it, Genesis was the only real contender in that space. That might sound really attractive (who doesn’t want to be a de facto near monopoly provider?) but it’s dangerous when you are the big market-maker trading (and more important, therefore holding large positions in) highly volatile assets.

So major institutions may have direct exposure if Genesis fails. And even if they don’t, the prospect that they could have will dampen institutional investor enthusiasm, particularly if unflattering facts come out during a bankruptcy.

Genesis took a body blow when hedge fund Three Arrows Capital failed. Genesis has lent to the tune of $2.4 billion. Genesis’ parent Digital Currency Group, filed a claim in bankruptcy court in July or $1.2 billion.

An update from the Financial Times in August:

Crypto broker Genesis will cut a fifth of its staff and replace its chief executive as it counts the cost of lending $2.4bn to hedge fund Three Arrows Capital…

Many of the industry’s best-known names, including Voyager Digital, BlockFi and Deribit, were also forced to liquidate some of Three Arrows’s positions when the investment shop failed to meet margin calls. Court documents showed that Genesis had lent Three Arrows $2.4bn in undercollateralised loans.

Genesis’s parent company Digital Currency Group, founded by investor Barry Silbert, has taken over the trading firm’s liabilities related to Three Arrows and lodged a $1.2bn claim in the US bankruptcy case.

You can see how the story changes as FTX unravels:

Bloomberg reported on November 21 that Genesis was trying to raise money and might have to file for bankruptcy.

To spare you further suspense:

Some of the highlights:

And here is why Genesis is particularly important to the crypto ecosystem. Again the entire tweetstorm is very much worth your attention, but some highlights:

So you heard about a probable big Bitcoin leg down here early.

And for those interested in the prospects for the crypto field regrouping, this tweetstorm explains how Genesis is a particularly important infrastructure provider.

Again, the entire tweetstorm makes for important reading. To whet your appetite:

As we’ve repeatedly pointed out, the supposedly anti-institutional crypto entrepreneurs have over time wound up replicating the key component of the modern finance system. Genesis provided some essential plumbing. Even if it manages to fail gracefully, current customers will have positions frozen and eventually paid out at a loss. And in the catastrophic scenario of a big bitcoin dump, who knows what the knock-on effects will be.

This entry was posted in Credit markets, Currencies, Investment management, Payment system, Regulations and regulators, Ridiculously obvious scams on by Yves Smith.