The contagion of the FTX crash is spreading throughout the cryptocurrency market and all eyes are currently on the Genesis cryptocurrency lender, which is reportedly on the brink of bankruptcy. Reports say that Genesis is desperately looking to raise $1 billion to avoid a liquidity crisis and facilitate withdrawals on its platform.
A WSJ report suggested that Genesis had approached cryptocurrency exchange Binance and Apollo Global Management to bid on its lending book. However, Binance has denied this proposal stating that any investment in Genesis could create a conflict of interest in the future.
Digital Currency Group (DCG), the parent company of Genesis is facing a major time crisis as of now. The reports also suggest that if Genesis fails to raise the funds, DCG could be selling Bitcoins in massive quantities from its other subsidiary, grayscale.
Grayscale Bitcoin Trust is one of the largest holders of Bitcoins to date. But rumors suggest that DCG has also bought up a large amount of bad debt that it used to buy GBTC. If true, it could make Genesis’ situation much worse.
Reg M for the Grayscale Trusts
One option that is being heavily considered, for now, is Reg M for Grayscale’s Trust. Messari founder Ryan Selkis is one of the biggest proponents of this solution. With Reg M, GBTC and ETHE holders can exchange them for underlying assets at a 1:1 ratio.
Considering that GBTC is currently trading at a 40% discount to its NAV, investors could receive $1 of BTC against 60 cents of GBTC. The Messari founder points out that DCG and Genesis can use this money to pay off lenders and avoid insolvency.
Now the fact is that Digital Currency Group is the largest holder of GBTC. Therefore, GBTC’s massive discount to the spot price of BTC provides DCG with a great arbitrage opportunity. Reg M would signify redemptions that are different from a full dissolution. It means that people could exchange shares of the trust for cash shares, but it will not be a forced liquidation of the full shares.
But popular cryptanalyst Will Clemente said:
Many of the people who hold GBTC do so because they cannot access the BTC point for compliance purposes. These people will not have BTC in the Reg M distribution.
But Ryan Selkis believes that even if the SEC approves these types of Bitcoin swaps, they won’t hit the market. Selkis further explained:
It is a relatively small figure. $10 billion. If $5 billion is sold, it could be a temporary hit of 5 to 10 percent in the spot market. But recover faster and remove a structural black cloud.
Selkis also asked Grayscale CEO Michael Sonneshien to approach the SEC and ask for relief from Reg M. The wrote:
The right thing to do for Grayscale shareholders now is to approach the SEC and ask for Reg M relief under the circumstances. The ETF is not happening. The sponsor of the trusts and APs must do the right thing by the investors.
In-kind swaps would be trivial to execute given that Coinbase is the custodian, and the SEC will be sympathetic to the request given the extreme damage that has been done to investors and the contagion that GBTC continues to cause as toxic collateral. Do the right thing!
Can Genesis raise funds? Or will you file for bankruptcy?
Frank Chaparro, publisher of The Block, has learned through his sources that Genesis has cut its fundraising goal in half.
Sources tell The Block crypto trading firm Genesis—which has been struggling to raise emergency capital to shore up its lending unit’s liquidity profile—has slashed its raise target from $1bn to $500 million. As Bloomberg reported, it faces potential bankruptcy w/o funding.
—Frank Chaparro (@fintechfrank) November 21, 2022
On the other hand, a Genesis spokesperson has confirmed that they will not file for “imminent bankruptcy”. the spokesman said:
Our objective is to resolve the current situation in a consensual manner without the need to declare bankruptcy. Genesis continues to have constructive discussions with creditors.
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