Bankless: Genesis at stake
Original source: Bankless
Original author: Jack Inabinet
Original compilation: 0x214, 0x711, Kxp, BlockBeats
The deterrence of the aftermath of the FTX crash has not diminished, leading to a series of market doubts on the encrypted lending platform Genesis Among them, Jack Inabinet, the author of Bankless, published an article to sort out the whole incident. What is the relationship between Genesis, Grayscale and DCG? There is actually a "suspicious connection" with Sanjian Capital? What are the sources of risk for Genesis? How will the event ferment? BlockBeats organizes and translates it as follows:
Genesis, even you?
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Last week, Genesis Global Capital Suspended redemption and new loan origination services.
Subsequently, rumors began to circulate on Twitter that Genesis was about to go bankrupt.
Genesis’ solvency as the only full-service prime brokerage in the crypto market Being questioned. However, Genesis is not the only institution facing crisis, and the asset situation of the Bitcoin trust product GBTC has also been similarly questioned. Grayscale, its publisher, previously stated will not share its reserve audit certificate on the grounds that For "safety" considerations.
What do Genesis and Grayscale have in common?
First of all, they are both subsidiaries of the encryption company Digital Currency Group (DCG) .
Rumor has it that DCG sent GenesisAfter injecting $140 million in new funds, its liquidity has been almost exhausted. Previously, Genesis announced the suspension of redemption and new loan issuance services due to the inability of Genesis’s loan department to withdraw $175 million in the FTX account.
These messages make encrypted users eager to know: how bad can this be? the point?
Today we finally have the answer: Genesis is indeed on the verge of bankruptcy..... .
But Genesis does not have any immediate plans to file for bankruptcy. So... that's good news, right?
Actually, no. The FTX debacle and ensuing crypto credit crunch created an industry-wide credit crunch that led to a run on Genesis. Genesis' current emergency funding target is an additional $500 million The original fundraising goal of 1 billion was cut in half. Binance is considered a potential funding source, although WSJ is also not sure about Binance Will there actually be a transaction.
So, what is Genesis
Refer to Ram Ahluwalia this Twitter Thread (also summarized in this article).
Compared with traditional brokerage companies, Genesis provides the same services and functions, while targeting institutional clients Customize its products. Prime brokerage firm offerings like Genesis include lending services and over-the-counter trading services.
In traditional financial markets, major brokers such as Goldman Sachs offset their positions through counterparties. Suppose a Goldman Sachs client wants to go long $100 million in U.S. Treasuries: If Goldman fulfills this order without hedging, they will be short $100 million in U.S. Treasuries. If yields start to fall, Goldman will be in the red, but if yields continue to rise, Goldman will profit on the position.
Goldman Sachs will not expose itself to the price fluctuations of the underlying securities, but simultaneously with JP Morgan Chase establishes a long position, offering its client a price (sell price) slightly higher than the price it gets (buy) from JPMorgan.
This allows traders to capture bid/ask spreads when executing client orders , without taking directional risk.
As a pioneer in the encrypted OTC and prime brokerage markets, Genesis does not have access to the powerful inter-dealer marketplace that traditional financial institutions have. Genesis attempts to provide the same services as its traditional counterparts, despite lacking similar risk management solutions.
Genesis Risk Sources
We are aware that Genesis is no longer honoring withdrawal requests. But why?
Genesis is facing issues regarding liquidity and potential solvency.
Liquidity Issues
Like a bank primarily financed by demand deposits, Genesis relies on short-term funding sources, including Circle's Earnings Program and Gemini Earn. In addition (much like a bank), Genesis also has an asset-to-maturity conversion business, which means that Genesis can use these short-term deposits to make long-term loans.
Lending funds over longer terms allows Genesis to capture the balance between its cost of capital and interest income The price difference between them lays the foundation for a potentially profitable business model. However, there is a risk in this strategy that the bank-like entity does not have enough liquidity to meet an unexpected flood of withdrawal requests.
In times of economic uncertainty, lenders often want to recover as much as possible of outstanding credit to support Own cash/liquid asset reserves. Short-term deposit sources, such as the funds previously used to fund Genesis, allowing users to withdraw funds on demand, are one of the first places lenders look for liquidity.
Individuals and institutions with funds on FTX (including Genesis) suddenly lost all funds considered liquid. Additionally, FTX’s mismanagement of user funds has reignited user anger over cryptocurrency lending practices, and industry calls for a re-examination of undercollateralized and off-chain lending practices have intensified.
The FTX crash has stimulated the market’s liquidity demand for funds locked in the trading platform, This has greatly reduced the willingness of crypto users to lend money to the centralized black box, resulting in a reduction in the available funding sources for Genesis.
Unfortunately, (much like the bank) Genesis release The loan period of the company is very long, and there is not enough liquidity to meet the abnormally large number of withdrawal requests after the FTX thunderstorm.
Genesis's liquidity problem may be a "lucky thing" and withdrawals will resume soon The possibility is not small. In this case, if, as mentioned above, if Binance enters to help, or other potential solutions appear, Genesis may resume withdrawals soon after.
BlockBeats Note: On November 22, according to the Wall Street Journal, because of concerns about Genesis Some of Binance's businesses may create conflicts of interest in the future, and Binance has decided not to invest in Genesis.
Solvency issues
Genesis may exist Counterparty risk associated with duration management activities and position hedging.
Duration can be used to measure the sensitivity of asset and liability values to changes in interest rates. Longer duration means that the price sensitivity of assets and liabilities to interest rate fluctuations is higher. Higher interest rates will have a negative impact on valuation, while lower interest rates will have a positive impact. If we use shorter-term funding sources while making longer-term loans, the difference in duration exposes financial entities to the risk of a duration mismatch.
This means that, for Genesis, in the event of a change in interest rates , Genesis' assets will be more affected than its liabilities.
Genesis solvency vs interest rate changes before managing its duration gap There will be a negative correlation. Given the current stagnation of the cryptocurrency credit market and the rise in risk-free interest rates, Genesis, which is not risk-hedged, will struggle in terms of solvency under the impact of tightening monetary policy.
Although Genesis may hedge the risk of rising interest rates, if its duration management Should a key counterparty in the strategy go bankrupt, Genesis would be exposed to directional risk, increasing its own risk of insolvency.
Remember those bitcoins Luna Foundation Guard bought with UST ?
Genesis received $1 billion in UST from this swap. While Genesis will likely hedge their exposure to UST, UST will also face directional risk should the counterparty in the hedge go bankrupt.
Currently, the market value of this $1 billion UST is only $23 million.
Each Crypto Hedge Fund Bankruptcy Increases Genesis’s Interest in Crypto Assets directional risk, which also includes unsold UST.
Counterparty risk poses a far greater threat to Genesis than liquidity issues. The amount of liquidity will only affect the repayment timeliness of Genesis, while the counterparty risk will directly affect the solvency of Genesis.
Affected by the insolvency of the counterparty, the failure of the risk management strategy will have a negative impact on Genesis' Its solvency is negatively affected and results in a reduction in its payments to creditors.
Suspicious Contact
Genesis, Three Arrows Capital, GBTC and DCG, what do they have in common?
Grayscale (a subsidiary of DCG) is the trustee of GBTC. In exchange for its services, Grayscale charges an annual management fee of 2% of all assets under trust management . According to its 2022 Third Quarter Regulatory Statement filed with the SEC, Grayscale’s early Fee income from GBTC to date exceeds $302 million, compared to $433 million in the same period in 2021.
Genesis (also a subsidiary of DCG) is Three Arrows Capital's lead lender. Based on DataFinnovation's July analysis of publicly available SEC and investor filings< /a>, Genesis essentially lends to Three Arrows Capital at its single counterparty limit.
The analysis speculates that Three Arrow Capital will borrow BTC from Genesis in exchange for collateral Return to Genesis to create GBTC (Genesis is the only authorized person who can create GBTC shares), then return GBTC to Genesis, and repeat.
When GBTC trades at a higher price than BTC, Three Arrows Capital is essentially Lay back and use profits to increase your exposure to GBTC and other crypto assets. Assuming the premium continues, Sanjian Capital could theoretically repeat this arbitrage process forever.
By increasing the AUM of Grayscale's BTC trust to increase the fee income,DCG is in I also made a lot of money from this transaction.
Unfortunately, with GBTC selling pressure increasing and demand for the product dwindling, This premium becomes a discount. Coupled with Luna's death spiral (previously a sizable investment position in the Three Arrows portfolio), the end result was that Three Arrows was insolvent.
Genesis is unlikely to fully recover its outstanding loan to Three Arrows Capital, and given the There is a lack of mature counterparties in China, and they may have non-negligible counterparty risks to Three Arrows Capital.
Existing lending relationship and potential Three Arrows Capital (or other insolvent Encrypted funds) counterparty risk has brought continuous liquidity pressure to Genesis and has become a source of risk for its bankruptcy default.
Grayscale FUD
Not only was DCG dealing with issues related to Genesis withdrawals and its solvency, the group was also forced to defend its support for GBTC due to DCG’s refusal to release the wallet addresses holding Grayscale’s trust assets or their full reserve audit certificate.
Following the FTX incident and concerns over trading platforms falsifying audit certificates for reserves, Grayscale's hesitancy to produce their reserve audit certificate is definitely a bad practice!
A third party has tried to verify on the chain about 50 % of GBTC holdings traceable to BTC held by trusts.
However, Coinbase Custody defended Grayscale, confirming that GBTC and other Grayscale products remain fully backed by assets controlled by Coinbase Custody.
Nansen CEO Alex Svanevik Through correlation analysis, Grayscale's ETH product is likely to be fully backed by reserves held by Coinbase Custody, further confirming that GBTC is fully backed.
Coinbase Custody Misrepresenting GBTC holdings is unlikely, as such actions would be fraudulent and could expose Coinbase to legal liability. But in the wake of the FTX debacle and the resulting scandalous allegations, it’s not entirely inconceivable that Coinbase would be defrauded about holding BTC on Grayscale’s behalf.
DCG Event Fermentation
Concerns remain around the solvency of Genesis and the backing of Grayscale (and the general financial health of DCG), and the failure of either of these organizations would be disastrous for the crypto industry.
Genesis Impact Much larger in scope than FTX, which offers (or has offered) prime brokerage services, making it possible for institutions to invest in cryptocurrencies.
If the event ends with Grayscale liquidating its trust, it will put billions of dollars of selling pressure on BTC, ETH and other Grayscale assets, an event that will destroy the crypto market. However, this outcome remains unlikely given the fee income generated by the product and the profitability of the group.
While it is unclear how the Genesis event will pan out, the short-term fate of the broader crypto industry Again depends on the solvency of another black box CeFi entity. Considering that Genesis is the nexus for institutional investment in cryptocurrencies, if it fails, the consequences are really disastrous.
Fasten your seat belts. The road ahead is rough!
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