Genesis, the world's largest encrypted lending platform, suspended withdrawals. What happened?

By 0x49, Jack, BlockBeats

November On the 16th, Genesis Trading held a conference call for less than 10 minutes to all creditors and customers at 21:00 Beijing time. Not so much a meeting as an announcement. During the meeting, Genesis announced that its lending arm, Genesis Global Capital, will suspend redemption and new loan issuance services, and subsequent arrangements will be announced next week. After all, the call will end.

After Celsius, Voyager, 3AC, Babel, FTX and other well-known institutions or platforms have been thundered one after another, the world's largest cryptocurrency lending platform has also announced that it will stop Withdrawals have been made, and lending has also been suspended.

Three Arrows Capital and FTX were two considerable influencing factors in the conference call and the explanation on Genesis’ official Twitter. Genesis said Three Arrows' default had a negative impact on the liquidity of Genesis Global Capital, Genesis' lending arm. Since then, Genesis has been reducing book risk and strengthening its liquidity position and collateral quality. But the FTX crash created unprecedented market turmoil, leading to abnormal withdrawal requests beyond Genesis’ current liquidity.

At present, if no new liquidity or so-called "savior" is found, It was only a matter of time before Genesis' lending unit declared bankruptcy.

We have experienced half a year of chain leverage and thunderstorms between centralized platforms, and in one year In the unprecedented leveraged bull market of institutions, no matter how amazing the financial reports of institutions were, the impact of this chain of liquidation would be as great. Now even this leading crypto lender, which has bailed out many other institutions, is on the verge of bankruptcy. How exactly was Genesis influenced by Three Arrows Capital and FTX?

The impact of Three Arrows Capital and FTX on Genesis Trading

The original origin of Genesis and Three Arrows Capital can be traced back to GBTC. GBTC is a Grayscale Bitcoin Trust launched by Grayscale. One of the biggest features of GBTC is that BTC can be used to purchase GBTC shares, but BTC cannot be redeemed through GBTC. This mechanism opened a window for the rapid rise of Sanjian Capital, but it is also destined to leave a mess in the end.

Long term premium. Facing the seemingly risk-free arbitrage opportunity, Three Arrows Capital entered the market. According to public information, as of the end of 2020, Three Arrows Capital is the largest holder of Grayscale GBTC, holding 5.6168% of GBTC shares, and the market value at that time was about 1.24 billion US dollars. At this time, GBTC has a 23.5% premium to BTC.

In fact, in order to complete rapid capital accumulation, Three Arrows Capital obtained BTC off-site, subscribed for GBTC, pledged GBTC to Genesis to lend BTC at a high premium, and repeated the cycle of purchase, pledge, and loan.

With the introduction of BTC ETFs such as Purpose Bitcoin ETF, 3iQ CoinShares Bitcoin ETF, etc., diluting GBTC Due to the scarcity of GBTC, the premium of GBTC began to decline, and even started a negative premium. Due to its inability to redeem BTC mechanism, speculators have little incentive to buy GBTC in a low liquidity market.

Encrypted assets have entered a down cycle, and GBTC has also seen a negative premium. Three Arrows Capital's collateral in Genesis is at risk of being liquidated. As we all know, GBTC cannot be redeemed and can only be sold in the secondary market. If Sanjian wants to make up the Margin call, it can only sell GBTC in the secondary market. And this may lead to a further expansion of GBTC's negative premium.

Three Arrows Capital was betting on GBTC 2 weeks before bankruptcy liquidation Customers promote GBTC arbitrage products. In hindsight, Three Arrows Capital always believes that the negative premium of GBTC can be reduced. Even if it cannot be reduced, Genesis has a great probability that it will not liquidate its collateral.

Three Arrows Capital’s self-confidence comes from the fact that Genesis is a subsidiary of DCG, and at the same time, its pledged GBTC is also a trust launched by Grayscale, a digital asset management company established by DCG in 2013. Once Genesis liquidates the collateral of Three Arrows Capital, it will inevitably affect the development of Grayscale.

However, Genesis is not the only creditor of Three Arrows Capital, according to the liquidator of Three Arrows Capital According to the document, Sanjian Capital owes 27 encryption companies a total of about $3.5 billion, of which Genesis owes about $2.36 billion in defaulted loans. Genesis liquidated 17.4 million GBTC, 446,000 ETHE and other assets pledged by Three Arrows Capital.

Genesis Parent Company DCG Bears Full Claims of $1.2 Billion Following Three Arrows Capital Default . Subsequently, Genesis also began to adjust its strategy to reduce book risk and improve collateral quality to mitigate the impact of the next thunderstorm on itself.

Three Arrows Capital The current liquidity crisis, coupled with the unilateral downturn in the market, has had a considerable impact on Genesis. As of Q3 this year, Genesis's outstanding loan balance was only US$2.8 billion, which was more than 100 million dollars smaller than a year ago. $10 billion. We will use the timeline below to list the related actions of Genesis since the thunderstorm of Three Arrows Capital.

After 5 months, the cautious players ushered in the thunderstorm of FTX again, The collapse of the world's second largest cryptocurrency trading platform within 3 days has spread more widely than we imagined. Although Genesis immediately stated after the incident that it manages the loan book and has no significant net credit risk exposure, only its derivatives department has $175 million in funds in the FTX trading account that have not been withdrawn. But judging from today's notice prohibiting redemption, the impact seems to be not small.

Even though they have tried to improve the quality of collateral, from the report of Genesis Q3 this year See, the effect of the new strategy is not obvious, because they have Solana's Token SOL in their collateral. This year’s Q3 report shows that Genesis’s SOL net inflows have seen the highest quarterly increase ever, up 217% from the second quarter.

The bankruptcy of Three Arrows Capital led to a sharp decline in the business volume of Genesis, but the mortgaged Altcoin reached a historical high. This is clearly at odds with its strategy of reducing book risk and improving collateral quality. SOL suddenly increased as a collateral in Genesis, and the FTX thunderstorm caused the price of SOL to plummet, falling from nearly $40 to $14 in two weeks. The bad debts formed by these collaterals caught Genesis by surprise. Although it is impossible to directly conclude that the plunge of SOL has put Genesis in crisis, it is clear that Altcoin price fluctuations have an increasing impact on Genesis.

Genesis half-year timeline, the leading lender under the double blow of the three arrows and the macro

Genesis was first established in 2013 and is the first Bitcoin OTC platform in the United States. As an important pawn in the layout of the encryption market, Genesis and Grayscale have been the killer twin stars of DCG in the past few years. Grayscale is responsible for GBTC securities services, and Genesis is responsible for trading, lending and custody services, providing liquidity support for GBTC. Since then, Genesis has expanded its business to derivatives trading, cryptocurrency lending and custody, and is one of the largest comprehensive service providers in the cryptocurrency market. In 2018, Genesis became the fifth company to receive a BitLicense from the New York Department of Financial Services (DFS). In Q4 of 2021, the outstanding loan balance of the Genesis platform will exceed US$16 billion, reaching its peak. But with the market down and Three Arrows capital thundering, Genesis also had to take measures.

On June 18, Genesis Trading CEO Michael Moro said on Twitter that this week In the event that a large counterparty (BlockBeats Note: Three Arrows Capital) failed to call for margin, Genesis has taken measures such as selling and hedging collateral to mitigate losses. In addition, Genesis will actively recover any potential losses through all available means. Losses, but potential losses are limited and can be deducted from the balance sheet, and the company is currently free of risk.

On June 30, a person familiar with the matter said that Three Arrows Capital and Babel Finance caused Genesis to lose About a few hundred million dollars. Genesis CEO Michael Moro issued a statement, "As stated in mid-June, we mitigated our losses with a large counterparty who failed to meet margin calls against us. We sold collateral, hedged Our downside risk is that our business continues to operate as normal and meet customer demand.”

July 7 On the 2nd, CEO Michael Moro stated that Sanjian Capital is its large counterparty, but it has been forced to liquidate the relevant collateral because it failed to meet the huge margin call requirement in June. DCG has covered some of the losses. The weighted average margin requirement for Sanjian Capital loans is 80%, according to Michael Moro. Once that level is breached and additional margin is posted, Genesis will sell collateral to hedge against further downside risk.

On July 19, The Block reported that Genesis had provided Three Arrows Capital with $2.36 billion Loans, and the average margin requirement exceeds 80%. Once the margin call requirement cannot be met, Genesis will sell collateral to hedge further downside risks.

While these debts are currently undersecured, last month Genesis attempted to recover them by initiating arbitration proceedings against Three Arrows Capital at the American Arbitration Association (AAA) in New York  

The arbitration process was suspended after consulting firm Teneo was hired to oversee the liquidation of Three Arrows Capital in late June.

On August 17, Genesis CEO resigned and announced a 20% layoff.

On September 1, Noelle Acheson, Head of Market Insights at Genesis, left.

On September 29, Matt Ballensweigm, Co-Head of Sales and Trading at Genesis, resigned.

On October 6, Grayscale, also under DCG, launched a dedicated broker-dealer "Grayscale Investments" has replaced most of the business previously handled in cooperation with Genesis Global Trading, and stated that although Genesis Global Trading will no longer be an authorized participant of Grayscale products, it will continue to be a liquidity provider for Grayscale.

On October 21st, Genesis' new Chief Risk Officer, Michael Patchen, was only three months into the company resigned later.

On November 8, the address marked as Genesis Trading: OTC Desk by Etherscan was divided 6 times A total of more than 3.2 million FTT (approximately US$53 million) was transferred to 5 addresses.

On November 9th, the FTX thunderstorm caused violent market fluctuations. Genesis tweeted, " With regard to today's market events, it manages the loan book and has no significant net credit exposure. Additionally, Genesis does not hold any centralized exchange-issued tokens. We continue to serve the needs of our global clients across all products."

On November 10, according to The Block, cryptocurrency market maker and lending company Genesis Trading said on Twitter that in anticipation of violent market volatility, it reduced risk by hedging and selling collateral, but still caused a loss of $7 million. Genesis Trading stated that it does not hold a large amount of risk exposure to tokens issued by FTT and other centralized exchanges. 95% of the collateral in the lending business consists of US dollars or US dollar stablecoins, Bitcoin and Ethereum. FTX has a transaction relationship but no lending relationship. At present, Genesis Trading's spot and derivatives lending and trading business is still operating normally.

On November 11, Genesis, a market maker and lending company under Digital Currency Group (DCG), Trading stated, "Genesis Trading's derivatives business currently has approximately $175 million in locked funds in its FTX trading account, which will not affect its market making activities, and our working capital and net position in FTX are not material to the business. In addition, Genesis Trading does not have an ongoing loan relationship with FTX or Alameda.”

November On the 11th, Genesis will receive a $140 million equity injection from its parent company Digital Currency Group. The capital injection will be used to strengthen Genesis' balance sheet and strengthen its position in the crypto market. Previously, Genesis Trading disclosed that $175 million in assets related to its derivatives business was locked in FTX accounts.

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On November 16, Genesis Trading held a conference call with bondholders and customers, announcing the suspension of lending and redemption of collateral, and the specific plan will be announced next week.

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