Market News

Jan 20 (Reuters) - The lending unit of crypto firm Genesis filed for U.S. bankruptcy protection on Thursday, owing creditors at least $3.4 billion after being toppled by a market rout along with exchange FTX and lender BlockFi.

Genesis Global Capital, a leading crypto lender, froze customer redemptions on Nov. 16 after the collapse of major exchange FTX sent shockwaves through the crypto sector.

Genesis is owned by venture capital firm Digital Currency Group (DCG).

Its bankruptcy filing is the latest crypto failure triggered by a market collapse that wiped about $1.3 trillion off the value of crypto tokens last year. While bitcoin has rallied so far in 2023, the market collapse has kept reverberating through the highly interconnected sector.

The bankruptcy "doesn’t come as a shock to the markets," said Ivan Kachkovski, currency and crypto strategist at UBS. "It remains to be seen if the chain effect would go on."

The company's filing with the U.S. Bankruptcy Court for the Southern District of New York estimated it had more than 100,000 creditors, that its assets were worth $5.3 billion and debts, including intercompany liabilities, were worth $5.1 billion as of Nov. 30.

Genesis outlined a plan to exit the bankruptcy by May 19, according to court filings. It will try to sell its assets at an auction within three months to repay creditors, court filings say.

Genesis Global Holdco, parent of Genesis Global Capital, also filed for bankruptcy protection, along with another lending unit Genesis Asia Pacific.

Genesis Global Holdco said in a statement it would contemplate a potential sale or stock-related transaction, to pay creditors, and that it had $150 million in cash to support the restructuring.

It added that Genesis' derivatives and spot trading, broker dealer and custody businesses were not part of the bankruptcy process, and would continue their client trading operations.

Genesis' owner DCG said in a statement that neither DCG nor its employees, including those sitting on the Genesis board, were involved in the decision to file for bankruptcy.

"Genesis has its own independent management team, legal counsel, and financial advisors, and appointed a special committee of independent directors, who are in charge of the Genesis Capital restructuring," the statement said.

CREDITORS' CLAIMS

Genesis owes its 50 biggest creditors $3.4 billion, according to Reuters' calculations from the bankruptcy filing. It owes $765.9 million to its largest creditor, crypto exchange Gemini, founded by identical twins Cameron and Tyler Winklevoss, cryptocurrency pioneers and former U.S. Olympic rowers.

Genesis was locked in a dispute with Gemini over a crypto lending product called Earn that the two firms jointly offered to Gemini customers.

The Winklevoss twins have said Genesis owed more than $900 million to some 340,000 Earn investors. On Jan. 10, Cameron Winklevoss called for removal of Barry Silbert as chief executive of Genesis parent DCG.

About an hour after the bankruptcy filing, Cameron Winklevoss tweeted that Silbert and DCG continued to deny creditors a fair deal and threatened to sue them unless they "make a fair offer to creditors"

In December, Amsterdam-based crypto exchange Bitvavo said it was trying to recover 280 million euros ($302.93 million) it had lent to Genesis. On Friday, Bitvavo said in a blog post that talks on the repayment "have not yet led to an overall agreement that works for all parties concerned" and it would continue to negotiate.

The bankruptcy filing "brings the process of negotiations to calmer waters," Bitvavo said.

LENDING BUSINESS

Genesis brokered digital assets for hedge funds and asset managers and had almost $3 billion in total active loans at the end of the third quarter, down from $11.1 billion a year earlier, according to its website.

Last year, Genesis extended $130.6 billion in crypto loans and traded $116.5 billion in assets, its website showed.

Its two biggest borrowers were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading company closely affiliated with FTX, a source told Reuters. Both are in bankruptcy proceedings.

Genesis parent DCG assumed Three Arrows debt to Genesis and then filed a claim against Three Arrows. DCG's portfolio companies also include crypto asset manager Grayscale and news service CoinDesk.

A special committee is investigating transactions that occurred in months leading up to the bankruptcy to determine if Genesis has legal claims it could pursue, court filings say.

Those claims include Genesis Global Capital lending $850 million to DCG and transferring its bankruptcy claim against Three Arrows Capital to DCG in return for a $1.1 billion promissory note. The special committee is also investigating if Genesis could void some of its obligations to Gemini, according to the filings.

Crypto lenders, which acted as the de facto banks, boomed during the pandemic. But unlike traditional banks, they are not required to hold capital cushions. Earlier this year, a shortfall of collateral forced some lenders - and their customers - to shoulder large losses.

($1 = 0.9243 euros)

Reporting by Tom Hals in Wilmington, Delaware, Akanksha Khushi, and Elizabeth Howcroft in London; Editing by Lananh Nguyen, Clarence Fernandez, Kim Coghill, Ira Iosebashvili, Sharon Singleton and David Gregorio