Financial uncertainty: what awaits Gemini and DCG investors

A confusing story between several large cryptocurrency companies is gaining new momentum amid the intervention of the US Securities and Exchange Commission (SEC).

Just two and a half months ago, the cryptocurrency community was faced with the collapse of the FTX exchange and a significant drop in the quotes of bitcoin and leading altcoins.. At the same time, Genesis announced that it urgently needed $1 billion in new investment.. It was not possible to find such an amount in an extremely limited time period, and details regarding the state of affairs in Genesis began to seep into the information space. This was largely facilitated by Cameron Winklevoss, co-founder of the Gemini exchange, who made a number of high-profile statements. Interestingly, the Gemini platform itself is still trying to return about $ 900 million that are “stuck” on Genesis accounts in order to make payments to customers under the Earn program.. Let's dwell on all this intricacies in a little more detail.

Earn program

In 2020, Gemini and Genesis agreed on terms for mutually beneficial cooperation. So, the exchange offered its clients in the US to give away their crypto assets at interest that Genesis would pay.. From February 2021, the program, called Earn, began to work in full force.

In essence, Gemini acted as a kind of intermediary between Genesis and private investors, probably receiving a percentage for this, although, of course, we do not know the details of the agreement.. However, there are cases when the exchange withheld up to 4.29% of the amounts that Genesis returned to pay out to private traders.

For a while, things went well, at least until November 2022.

Winklevoss' statements

The fact that the Winklevoss brothers succeeded in many business endeavors is known to most from the sensational film The Social Network, dedicated to the famous entrepreneur Mark Zuckerberg.. But at the moment, the brothers, and, in particular, Cameron, are co-founders of the Gemini exchange.. And recently, the SEC has become interested in their enterprise.. But why?

By and large, there are practically no questions for the Winklevoss. SEC is interested in Genesis and Gemini companies, and the situation in which investors fell. The bottom line is that the FTX crash hit Genesis financials.. They immediately announced that the possibility of withdrawing money from clients' accounts was blocked, and that it would not be possible to conduct business as before.. At the same time, the Gemini-Earn project stalled, in which Genesis was their partner.. The exchange said that customer funds are being frozen.

A little later it turned out that about $ 900 million from Gemini customers were at Genesis. Attentive users quickly drew attention to the following pattern: at the same time, Genesis needed $1 billion, while Gemini should have had about $900 million there.. The numbers are very comparable.

In early 2023, the story took off with renewed vigor when Cameron Winklevoss publicly took issue with DCG CEO Barry Silbert.. In his opinion, Zilbert lied, claiming that Genesis is a solvent and reliable company.. 'Lie Campaign' Started When Hedge Fund Three Arrows Capital Failed. As a result, Winklevoss calls for Zilbert to leave the post of DCG.

So Genesis and Gemini have a common Earn project.. There are funds of many clients that must be returned with interest.. But payouts are frozen due to Genesis problems caused by the collapse of FTX. Winklevoss blames DCG CEO for current situation. Well, the SEC is starting proceedings with Genesis and Gemini. And here the question arises: what does DCG and Silbert have to do with it, if things are being done with Genesis?

DCG Structure

Digital Currency Group (DCG) is a huge conglomerate that is involved in many areas, from mining and asset management to loans and media news.. There are many different companies in its structure: Genesis, Grayscale, Luno exchange, CoinDesk news publication and many others.

Now it's obvious why Winklevoss focused on the DCG CEO.. Gemini is a division of DCG, which in turn tries to solve her problems.

Unfortunately, all problems remain unresolved to this day, and things are only getting worse in part.. In addition, such hype has a certain impact on the cryptocurrency market.

Solutions to the problem

The biggest question in this whole story is what will happen to the Grayscale Bitcoin Trust (GBTC), and how it will subsequently affect the price of bitcoin.. GBTC has recently become quite popular among users, as it provided regulated access to bitcoins.. In addition, it was convenient for conducting all kinds of speculative arbitrage transactions during periods of high volatility.. Representatives of DCG conglomerate companies believe that the situation could be partially resolved by launching a new product on the market – an ETF pegged to the price of bitcoin.. However, the SEC has yet to allow this to be done.

It's interesting to look at DCG's balance sheet and see how many shares of the Grayscale fund are there.. They account for 9.67% of the total supply. In this situation, DCG needs to either find cash or file for bankruptcy, potentially selling off those shares.. A sell-off in illiquid assets will only add pressure to an already low GBTC discount. DCG has about 67 million shares, and the average daily market turnover of the trust is only 4 million. More interestingly, according to the law, DCG can sell no more than 1% of its outstanding shares during one quarter.. In other words, the company will sell its GBTC shares within 2.5 years.

Another possible solution to the problem, which is discussed in the DCG conglomerate, is the sale of GBTC and other Grayscale funds to a third party.. Such an offer has already been received from Valkyrie at the end of December 2022.. It includes several key points. First, shareholders will be given the opportunity to buy shares in net assets. Second, payments will be reduced from 200 basis points to 75 basis points.. Thirdly, payments to investors will be provided both in fiat money and in bitcoin.

GBTC is still generating revenue for DCG and Grayscale. So, among all trust-related sources, Grayscale has raised more than $300 million from management fees alone.. Therefore, the liquidation of the fund is not the best solution for the organization.. Even if it fails to launch an ETF on bitcoin, then the market can quickly find buyers ready to take control of such a source of income in their own hands.

And yet the probability of liquidation of GBTC does not tend to zero. In the event of Grayscale's insolvency or bankruptcy, a so-called “voluntary liquidation” may be carried out only if 50% of the voting shares do not pass to a new sponsor. Potentially, DCG may close the trust, as this will allow you to receive money, but it is likely that the procedure will be accompanied by the sale of bitcoins on the market.. No one wants to see a sale of approximately 3.3% of the total current supply (632,000 BTC), which will lead to a decrease in Bitcoin quotes. In a scenario where the liquidation of the trust is accompanied by the return of dollars to shareholders, it can be assumed that most of the assets sold will come from off-exchange transactions with interested investors. However, this seems unlikely at the moment.

This material and the information in it does not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.