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What should wealth management users do if Genesis is thunderstormed?

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"We should hope that DCG can raise funds quickly, buffer its damage and reduce the crisis chain of infection"

Original author: Ram Ahluwalia, CEO of Lumida Wealth Management

Original compilation: Leo, BlockBeats

On November 16, Genesis announced that its lending arm was suspending withdrawals and disbursements. Later in the day, the encrypted trading platform Gemini issued a document saying that its wealth management product Earn was affected by the suspension of withdrawals and distributions by Genesis and suspended withdrawal services. Subsequently, on November 23, Bloomberg published an article stating that Genesis, an encrypted lending agency, had US$2.8 billion in outstanding loans on its balance sheet, of which about 30% of the loans were issued to affiliated companies, including its parent company DCG (Digital Currency Group) , and the company has been trying to raise $1 billion in cash before, and if it fails to raise funds, the worst plan may be to file for bankruptcy.

Recently, Lumida Wealth Management CEO Ram Ahluwalia wrote an article about genesis "< a href="https://www.theblockbeats.info/news/32668?search=1" target="_blank">What does Genesis do on the verge of bankruptcy?" to help everyone better Learn how Genesis does business.

In general, as a lending institution, Genesis’ liquidity will seriously affect other customers (like Gemini Earn), so how will Genesis or DCG's next step affect its customers? In this regard, Ram Ahluwalia once again wrote an article on "Analyzing what might happen next to Genesis, DCG, and Gemini", and BlockBeats compiled and compiled it as follows:

What about Gemini Earn's clients?

I think there is a credible path to recovery if Gemini Earn's customers want Make a choice: accept short-term instant liquidity in exchange for small amounts; or wait long-term until full recovery.

Note: This article does not represent any legal or financial advice, double check your loan agreement. DYOR (do your own research). I'm just sharing an opinion and seeking outside advice, also, don't just trust people on the internet.

The analysis assumes a scenario where Genesis goes through Chapter 11 bankruptcy, with three factors in Functional:

- Willingness and Ability of DCG to Raise Equity

- Priority of Gemini Claims level (not yet clear)

- price action for GBTC (and BTC)

Some good news

DCG The letter to shareholders revealed that Genesis had a loan (promissory note) of US$1.1 billion to its parent company DCG, and there was no risk of bad debts with 3AC. This series of actions (by transferring 3AC assets to DCG) restored the repayment of Genesis Lending ability.

However, Genesis Lending currently has maturity issues (the loan matures in June 2032), Ideally, Genesis Lending would sell $1.1 billion in loans on the open market, but there's no corporate loan market for DCG's debt, and the current value of the loan is well below $1.1 billion.

I didn't see the terms of the promissory note loan, assuming the $1.1 billion is payable in 10 years , no P&I (principal and interest) payment during the period. At a 12% discount, the promissory note is worth $350 million; at a 15% discount, the promissory note is now worth $272 million.

Currently, two loans from Genesis Lending to DCG involve assets of approximately US$1.7 billion, As long as DCG continues to operate, it can meet its obligations and make loan payments. If DCG has flexibility in valuation, it should be able to raise capital: the right thing to do for DCG is to raise equity - remove tail risk and pay Gemini Earn clients who expose DCG to state agencies and Class Action Risk.

If DCG raises more than $500 million in equity, its ability to meet bond payment obligations will A substantial increase, but the risks include: DCG did not raise a lot of funds; GBTC or BTC prices plummeted; further loan write-downs.

To be clear, the price of BTC is directly related to Grayscale's ability to generate revenue: BTC remains at Above $10,000, Grayscale can generate enough fees (specific reference) , these are Risk factors, Genesis is negotiating with its creditors and DCG, leverage of Genesis Lending includes: principal forgiveness; new payment plan; offering "bail-in" (eg, conversion of debt into equity).

Assuming no bailout, Genesis Lending should be in Chapter 11 bankruptcy (other affiliates e.g. the OTC Desk is operating as usual). Genesis Lending does not want a group of retail investors to own a portion of the business. Plus, depositors just want their principal back.

But since Genesis Lending is currently solvent, there is a path to full recovery, But savers may face a difficult choice:

- Deadline to exit: get some money now, get the rest in a few years

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-Accept principal reduction now for "instant" liquidity (in months)

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Key points: We don't know the status of Genesis's liquid assets (stables, ETH, etc.); we also don't know if Gemini Earn customers have guarantees (e.g., do they have priority claims rights?); Circle Yield loans are secured.

However, Gemini Earn's T&Cs (General Terms and Conditions) state: "Through our Projects may receive loans that are unsecured. As a lender, you should understand the credit risk you face with borrowers.” Additionally, Gemini stated that they are not responsible for loan performance or any representations made by Genesis.

How does claim priority work?

Secure creditors get either their collateral or cash equivalent to the value of the collateral . If the collateral is worth less than the claim, the claim is split into a secured claim for the collateral portion and an unsecured claim for the remainder, with the secured claim being paid in full and the unsecured claim receiving any payment to the unsecured creditor corresponding proportion. Even unsecured claims have a path to recovery if DCG raises equity and continues to operate.

After you file for bankruptcy, you should see the shape of the market buying these claims, hedge funds Model out the expected recovery and time frame. They will bid on your claims below what they believe to be intrinsically valued and provide liquidity.

In the case of MF Global, with the recovery of additional assets, the client gained 50% - 93 % of revenue. But again, recovery only depends on Genesis Lending's asset quality and liquidity, and the prioritization of claims.

Best possible scenario

DCG raises new equity and injects equity into Genesis Lending, Genesis Lending resumes as a going concern and clients withdraw funds. (Fed policy change and BTC skyrocketing)

But one of the key variables is the regulator, NYDFS, CFPB, FTC and SEC can all meddle in their status quo, Gemini and DCG are under intense pressure to keep retail investors intact, Gemini T&Cs do have a "class action waiver", but they should be represented.

Regulators may argue that there is insufficient disclosure by retail investors (e.g., They don't fully understand the risk factors like PPM, balsht, etc), and if there are non-accredited investors, the pressure to keep retail investors intact increases significantly.

Finally, I want to clarify that I have not seen any evidence that Gemini or Genesis Lending or Any deception or fraud by DCG, and other business units functioning well, are legitimate, regulated actors acting in their commercial interests.

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We should hope that DCG can raise funds quickly to buffer its damage and reduce the crisis chain of infection.