Gemini Earn customers will likely receive 100% of their assets despite the Digital Currency Group owing Genesis $1.7 billion.
A creditors committee representing crypto exchange Gemini and other creditors has proposed a plan to liquidate crypto lender Genesis Global Capital’s assets after Genesis paused withdrawals in the aftermath of the FTX liquidity crunch in Nov. 2022.
Gemini Earn Funds Locked Up In Illiquid Loans
Despite having sufficient assets, Genesis faces the challenge of raising adequate liquidity to fulfill short-term obligations to its creditors. Gemini believes the lender will become liquid if it can drum up liquidity through a capital or debt raise or restructure some of its debt obligations. Gemini partnered with Genesis in 2021 to offer Earn customers up to 7.5% returns on crypto deposits.
Genesis can also raise liquidity through a debt-restructuring program that would compel parent The Digital Currency Group to pay off a $1.7 billion liability sooner.
DCG reportedly owes Genesis about $1.7 billion through a promissory note ($1.1 billion) and an intercompany loan ($575 million). The repayment deadlines for the liabilities are June 2032 and May 2023. These dates render the loans unsuitable to help Genesis quickly restore liquidity.
Should investigators determine that Genesis has a balance sheet insolvency, which is more or less a bankruptcy situation, then Gemini’s Earn customers can lose money.
On the other hand, if Genesis is illiquid, customers will likely receive 100% of their funds. On Dec. 3, 2022, the Financial Times reported that DCG and Genesis owe Gemini customers about $900 million.
The creditors’ committee awaits a response to its plan by Dec. 23, 2022.
Will Genesis Go the Way of FTX?
The recent collapse of crypto exchange FTX and its sister firm Alameda has exposed how intercompany lending can turn sour, leading to a liquidity crisis for the lender and eventual insolvency.
FTX loaned customer funds to help keep Alameda afloat after the latter borrowed heavily to bail out ailing crypto firms during the spring and summer of 2022. FTX’s own FTT token collateralized the loans.
Customers raced to withdraw FTT from the exchange after a tweet from Binance CEO Changpeng Zhao in early Nov. 2022, leading to a liquidity crisis at FTX. As the price of FTT fell, FTX’s loans to Alameda grew increasingly undercollateralized, widening the gap between FTX’s assets and liabilities, eventually leading to FTX’s insolvency.
In other words, FTX’s illiquidity and bankruptcy were tightly coupled.
While details of the DCG’s promissory note have not been publicized, the mere use of such a debt instrument raises questions.
Unlike a loan agreement entered into with a bank that allows the bank to foreclose the borrower’s assets if the borrower can’t repay the loan, a promissory note contains the interest rate of the loan, the loan’s maturity date, and the principal amount. Notably absent from the agreement is what recourse the lender has if the borrower fails to repay the money.
The lack of recourse poses a risk to the lender, which may not have the resources to survive a default.
Genesis admitted that bankruptcy could be on the cards if it fails to raise capital. And the $1.1 billion DCG promissory note could catalyze its downfall.
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