Crypto Contagion Is Spreading, Fast

Crypto Contagion Is Spreading, Fast

The fallout from the collapse of FTX just won’t stop—and now it’s threatening one of crypto’s most important institutions. On November 16, Genesis Global Capital’s lending unit suspended withdrawals due to “unprecedented market turmoil.” Now, the firm is seeking emergency funding of at least $500 million to ensure it has enough cash on-hand to pay its customers. All the while, the crypto industry watches nervously.

On November 21, Genesis said it had “no plans to file for bankruptcy imminently,” but has since appointed an external party to advise on its financial predicament. Such moves have done little to calm twitchy customers. Putting a halt to withdrawals has been the precursor to multiple previous crypto collapses this year, including at FTX and Celsius. Genesis did not respond when asked to confirm whether bankruptcy was under consideration.

If Genesis were to fold, it would deliver another gut-punch to an industry already reeling from the fall of FTX, one of its most highly-regarded companies. If an institution the size and standing of Genesis is vulnerable, can trust be placed in the stability of any crypto firm? Yes, the industry is expected to survive the ordeal, but the days of minimal oversight, generous funding and rapid expansion are over.

The impact from the potential fall of Genesis should not be underestimated. It might not be as well-known as FTX and other exchanges, but it’s crucial to the day-to-day operations of the crypto world. In 2021 alone, the company issued $131 billion in loans and set up $116.5 billion in trades; the Financial Times has described it as the Goldman Sachs of crypto. To fund these loans, Genesis borrows from individuals and institutions that own large quantities of coins, also known as whales, who receive a cut of profits in return. 

While the market was hot, so was Genesis. But as the price of crypto tumbles, and trust in large crypto companies bleeds away, Genesis risks becoming the latest example of a crypto giant failing to prepare for the worst. Not only might customers lose their money, but the collapse of an intermediary like Genesis threatens to “set crypto back several years,” says Brad Harrison, founder of decentralized lending protocol Venus. That’s because of how Genesis enables the flow of money between organizations—which is essential to the functioning of any industry.

When it launched in 2013, Genesis was the first over-the-counter bitcoin trading desk—somewhere traders could go to buy and sell large quantities of coins. But the company is now the largest crypto lender too, as well as the backbone for yield farming services provided by exchanges, which let customers earn interest on their holdings.

Harrison says Genesis has worked with many of the largest crypto organizations over the years, and wound its way into practically all corners of the cryptosphere. “It’s a household name.”

Genesis has been in trouble since July, when the hedge fund Three Arrows Capital (3AC) collapsed, taking with it $1.2 billion of the $2.36 billion it had borrowed from the firm. If someone defaults on their mortgage, the bank can seize the property to recoup the full value of the loan, but in this case Genesis didn’t have that option, because only part of the loan was secured against 3AC assets.


via Wired

November 25, 2022 at 10:24AM

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