Winklevoss Faithful has a $700 million problem with Genesis discontinued

Winklevoss Faithful has a $700 million problem with Genesis discontinued

The billionaire Winklevoss twins, owners of the Gemini cryptocurrency exchange, have long portrayed themselves as the adults in the room.

The billionaire Winklevoss twins, owners of the Gemini cryptocurrency exchange, have long portrayed themselves as the adults in the room. Those that ordinary investors can trust.

None of that spares a large slice of Gemini’s customers from the fallout from the FTX meltdown, which threatens to demolish a large swath of the industry.

The problem stems from a product called Gemini Earn – which allows investors to earn up to 8% interest by lending their cryptocurrencies, including Bitcoin, Ether, or dollar-pegged stablecoins. It’s a type of product, widely used across all cryptocurrencies, that looks and feels a lot like a high-yield savings account, but with much less guarantees if things go wrong.

And in Earn’s case, the Gemini website listed just one approved borrower that passed the vetting process: Genesis Global.

On Wednesday, in response to Genesis suspending recalls amid the spreading FTX infection, Gemini also halted recalls of its Earn product. That left in limbo a program that, according to a person familiar with the matter, has $700 million in client funds tied to it. The person asked not to be named because the information is not public.

“People are holding their breath right now, waiting or seeing if there’s another shoe they’re going to drop and what those shoes are,” Gregory D’Inselli, founding partner of Scenius Capital Management, said in an interview. People are still in shock. Many people are badly injured now.”

Gemini, which was founded by brothers Cameron and Tyler in 2014, says on its website that it is “working with the Genesis team to help customers get their Earn money back as quickly as possible.”

The company added that “all client funds held on the Gemini Exchange are held at a 1:1 ratio and available for withdrawal at any time.” Gemini declined to comment following a press release on Wednesday.

It remains to be seen if customers of Gemini Earn, who are both important lenders to Genesis, get their money back. And a lot depends on Genesis itself, which has hired consultants to explore all possible options, including raising new funding. Genesis, one of the oldest and most popular crypto brokers, has itself been a huge player in cryptocurrency lending. The company’s active loans totaled $2.8 billion in the third quarter, according to its earnings report.

Whatever the case, the situation underscores a crisis of confidence – undercut by collapsing asset prices, FTX’s implosion and now Genesis problems – that could herald a larger reckoning across the industry. It’s a blow to the ambitions of regulation-friendly companies like Gemini, whose fortunes are largely tied to mainstream cryptocurrency adoption, and shows that few players are shielded from the risks lurking in a world where rampant speculation with few barriers remains the norm.

It also starkly sheds light on the role of yielding products, which are often marketed and touted as less risky bank-like alternatives, as a source of much of the speculative froth found in cryptocurrencies.

“It will affect the credibility of the entire space,” said Max Gokhman, chief investment officer at AlphaTrAI, an asset manager. “Because at the end of the day, especially for retail investors or natives who don’t understand that if I trade with a counterparty that isn’t regulated in the US, I can’t go to the SEC or the CFTC or anyone else and say, ‘Hey, I got ripped off. .

Gemini’s claims of being insulated from the immediate repercussions of epics like the Genesis story certainly have a more solid foundation than other leveraged industry players. While the company marketed the Earn software on its website along with yield calculators and audit assurances, the company itself was merely a conduit for loans made by its customers to outside borrowers. Other company operations, including the spot exchange, are operating as normal.

When all was well, Genesis made money in part by lending assets it had borrowed from clients like Gemini Earn, often at very high rates. Customers earned a cut of the interest, Gemini got a slice and Broker and Genesis kept the rest.

Gemini says on its website that borrowers are “scrutinized by our risk management framework that reviews our collateral management process for our partners.” Gemini reviews partners’ cash flows, balance sheets, and financial statements “on a periodic basis.”

However, signs of trouble started showing up for the Genesis earlier this year. Genesis’ lending business was already in trouble when crypto hedge fund Three Arrows collapsed. She made a $2.4 billion loan to the now bankrupt fund, which is run by Su Zhu and Kyle Davies.

Last month, Genesis reported that lending fell 80% in the third quarter from the previous three-month period and that most of the remaining businesses also saw significant declines. Then, Genesis said last week that it would acquire $140 million in shares of its parent company, Barry Silbert’s Digital Currency Group, after it was revealed that the derivatives business had $175 million locked in an FTX trading account.

On Wednesday, Genesis suspended redemptions and the issuance of new loans after encountering withdrawal requests that exceeded current liquidity. In other words, people wanted their money back from Genesis and Genesis could not meet these demands.

For Gemini’s Earn customers, they’re pretty much on their own. Despite reassurances that Gemini is “working with the Genesis team to help customers get their Earn money back as quickly as possible,” the terms of the agreement make it clear who bears all risk.

“Your available digital assets will leave our custody, and you accept the risk of loss associated with the loan transaction, up to a total loss.”

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