U.S. State-Level Securities Regulators Probing Genesis Global Capital

Alabama Securities Commission Director Joseph Borg indicated that Alabama is participating in a multi-state effort to probe Genesis Global Capital’s links to other crypto firms. The states are investigating whether Genesis and potentially associated companies enticed investors to trade crypto-related securities without proper registration.

Earlier this week, Genesis Global Capital hired a firm named Moelis & Company to explore options that included bankruptcy. It revealed $175 million in deposits on the now-defunct FTX that it cannot access. Genesis is currently negotiating with creditors and courting potential investors in a bid to stay afloat.

It froze bitcoin withdrawals and new loan originations in the wake of financial issues caused by FTX’s bankruptcy.  Genesis Global Capital had $2.8 billion in active loans as of Q3 2022, most of them to institutional clients.

Genesis Global Capital’s sister company, Grayscale Investments, denied having any direct exposure to Genesis. In a Twitter thread, it said it did not act as a counterparty or service provider for any of Genesis’ products.

Shares of Grayscale’s Bitcoin Trust have been trading at a discount compared to its assets under management. ARK Invest regards it as a buy opportunity and, in fact, has been scooping up Grayscale Bitcoin Trust (GBTC) shares for its funds. It remains to be seen whether ARK Invest made the right call, considering that Grayscale and Genesis share a parent company.

Regulators Stepping Up Scrutiny of Troubled Crypto Exchanges

In the wake of FTX’s rapid collapse, international regulators are taking a closer look at its activities and may broaden the scrutiny to include more crypto companies that they suspect of underhanded behavior.

Two days ago, FTX hired former regulators to help it sort out the mess and communicate with the United States’ SEC and CFTC. A lawyer representing FTX in the bankruptcy case it filed in Delaware revealed that FTX hired Steven Peikin and James McDonald, who previously oversaw enforcement for the SEC and CFTC, respectively. It also hired Nicole Friedlander, who oversaw the complex frauds and cybercrime unit for the Southern District of New York division of the U.S. Attorney’s Office.

FTX says this team will investigate potential white-collar crimes committed under Sam Bankman-Fried, who recently stepped down as FTX’s CEO in the wake of the bankruptcy.

The United States’ SEC and Department of Justice opened investigations into FTX US’s activities. Potential issues include fraud and violations of securities regulations.

Some U.S. politicians also made noise about the fallout from FTX’s collapse. Four senators on the Senate Banking Committee signed a letter to the Federal Reserve System, FDIC, and Office of the Comptroller of the Currency demanding that they scrutinize SoFi Technologies. The senators also sent a similar letter to SoFi CEO Anthony Noto.

SoFi is a rare entity because its operations include subsidiaries that provide banking services and a digital asset exchange. Its own literature includes warnings against some digital assets like Dogecoin, which it called a pump-and-dump scheme that has “no special use case or features.”

The letters’ signatories pointed to that as evidence that SoFi knowingly offers highly risky investment options. The senators questioned whether it was violating investor protection regulations by doing so – which, if you wanted to read more into it, could also imply that they think retail investors are stupid in an environment where Ledgers are flying off the shelves.

Crypto Investment Companies More Closely Tied than Previously Believed

When one large crypto company like Genesis Global Capital has financial issues, it can easily have a domino effect that hurts other companies and their clients. Genesis is Gemini Earn’s lending partner, meaning that Gemini Earn can no longer process withdrawals. However, Gemini seemed confident that the situation will be resolved.

“We are disappointed that the Earn program [service agreement] will not be met, but we are encouraged by Genesis’ and its parent company Digital Currency Group’s commitment to doing everything in their power to fulfill their obligations to customers under the Earn program,” Gemini said in a statement about the withdrawal issues.

2022 has generally demonstrated the “domino effect” that can happen when a major crypto company goes under. The FTX bankruptcy and May 2022’s meltdown of the Terra/LUNA ecosystem shone a light on how interconnected crypto organizations can be.

FTX melted down fast when Binance’s Changpeng Zhao announced that Binance was going to sell the FTT tokens that it had received when it sold its stake in FTX and still held. At the time, the tokens were worth $580 million but collapsed in value despite FTX founder Sam Bankman Fried’s offer to buy them for $22 apiece. At first, it looked like Binance was going to end up buying FTX, but Changpeng Zhao walked away from that because he (quite reasonably) didn’t like what he saw in FTX’s books.

BlockFi had a deal with FTX for a revolving line of credit worth $400 million. The deal included granting FTX an option for potential acquisition that would have been based on hitting milestones. With the collapse of FTX, that revolving line of credit is no longer available and BlockFi filed for bankruptcy.

FTX had a deal to acquire Voyager Digital. Now Voyager Digital is looking for another buyer. Voyager Digital also had $3 million on FTX’s platform.

Celsius Network reported having $12 million in outstanding loans to FTX’s associated company, Alameda Research. It previously had $3.6 billion in exposure to FTX Group in November 2020 but says it drastically reduced that exposure since then.

Companies that had millions of dollars’ worth of exposure to FTX include Coinbase, Pantera Capital, CoinShares, and Crypto.com.

Earlier this year, Celsius Network also had a large exposure to the Terra and LUNA ecosystem through improperly loaning clients’ digital assets to the Anchor Protocol. When Terra depegged in May 2022, the entire ecosystem collapsed. Celsius Network couldn’t withdraw the funds. This forced Celsius Network into bankruptcy proceedings.

Voyager Digital and Three Arrows Capital filed for bankruptcy in the wake of Terra’s collapse as well. FTX’s Sam Bankman-Fried likely smelled blood in the water and started circling.

He considered a bid for Celsius Network’s assets and won the initial bidding for Voyager Digital. At the time, he was touting a $1 billion fund for bailouts and acquisitions – one that seemingly no longer exists. In the wake of the FTX collapse, Binance is picking up the ball by raising money for a $2 billion bailout fund.

Any previous perception that companies like Coinbase and Crypto.com and DeFi applications like Celsius Network existed in their own silos was likely false. One big company going under still has ripple effects across the entire crypto industry and can get the attention of regulators.