Genesis Global’s Chapter 11 filing on January 20th was little surprise to those closely following the cryptocurrency markets and after its decision to “pause” withdrawals in mid-November. Digital Currency Group, Inc. (“DCG”), the parent of Genesis Global Holdco LLC (“Genesis”) and its largest borrower, is not part of the bankruptcy case and instead may find itself a defendant in an adversary proceeding. The company reported that it is conducting an investigation that will examine the circumstances surrounding approximately $850 million of unsecured loans advanced to DCG and certain of its affiliates, the DCG Note, including the purported setoff of approximately $52 million in November, and dividends paid to DCG, among other things. The outcome of the investigations will be of considerable interest to Genesis’ customers and creditors. The bankruptcy case also does not include Genesis’s OTC derivatives trading or custody businesses.

The company’s “first day” pleadings show a large institutional creditor base, many of which extended loans to Genesis pursuant to “master digital asset loan agreements.” Of nearly $2.6 billion in loans, only a small fraction of which were secured by Genesis’ collateral (approximately $350 million). It also had borrowed from customers of Gemini Trust Company (“Gemini”), with Gemini acting as agent on their behalf (the company states that it is not aware of the identities of the Gemini customers). Genesis had pledged certain interests in Grayscale Bitcoin Trust to secure its loans from Gemini customers. Another tranche of shares were intended to be pledged — originating from DCG — but that pledge was never consummated.  According the pleadings, Gemini foreclosed on the first tranche of pledged shares, an action that may be challenged by Genesis. According to Genesis’ schedules, the Gemini customers have an aggregate general unsecured claim of nearly $766 million.  

Following the playbook of Voyager, concurrently with their petitions, the company filed a proposed plan of reorganization which provides, very generally, (i) that holders of general unsecured claims will receive some combination of (a) cash and other assets, (b) equity interests in a reorganized entity and (c) interests in a trust to be established to pursue claims and causes of action that the company may have, including against DCG and Gemini. In order to maximize recoveries to creditors, Genesis Global says that will conduct a marketing process to sell the company or otherwise raise capital. The company suggests that it can complete a marketing process and confirm a plan of reorganization in four months. While complications are due to arise, recent rulings in Celsius’ bankruptcy case regarding the ownership of assets reflected in customers’ earn (or similar) accounts, may erase certain of the uncertainty and ease the path to confirmation.

Initially, given the large institutional credit base and nature of the lending based claims, the Genesis bankruptcy may have more straight-forward investment opportunities for distressed investors relative to FTX and other crypto-bankruptcies (which had a larger portion of retail investor claims and more uncertain claw-back risks). We will provide updates as circumstances warrant.