Barry Silbert, the founding father of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders in attempting to settle investors’ nerves after the sudden collapse of FTX.
In a note to shareholders on Tuesday, Silbert addressed all of the “noise” in regards to the financial health of DCG’s subsidiaries, which incorporates trading firm Genesis, Grayscale Investments and mining company Foundry.
Since FTX’s rapid winddown two weeks ago, investors have fearful a couple of crypto contagion affecting every corner of the industry. Lenders have stopped lending, withdrawals have been harder and unregulated, little-understood tokens have plunged in value. The leading cryptocurrencies, bitcoin and ether, have also continued their year-long descent.
Silbert, an early bitcoin evangelist who founded DCG in 2015, said that despite the crypto winter, the general company is on pace to generate $800 million in revenue this 12 months on the back of just $25 million raised in primary capital since inception. Forbes estimates Silbert’s net price at $2 billion.
“We have now weathered previous crypto winters,” Silbert wrote, adding that “while this one may feel more severe, collectively we are going to come out of it stronger.”Â
Coinbase, Binance and Crypto.com have similarly done their best to assuage customer concerns to avoid an FTX-type run on customer deposits. They’ve each expressed shock at FTX’s apparent deceit of investors and customers and emphasized that client assets are secure.
That is all with an awareness that FTX and founder Sam Bankman-Fried betrayed the trust of an industry that was already within the midst of a brutal 12 months of losses. Bankman-Fried said his company’s assets were “advantageous” two days before he was desperate for a rescue due to a liquidity crunch.
Specific to DCG, investor confidence took a success within the last week, when the Wall Street Journal reported that Genesis had been trying to lift $1 billion from investors before ultimately halting some withdrawals. There have been reports that Genesis would soon file for bankruptcy, which the corporate publicly refuted.
Fear spread to the Grayscale Bitcoin Trust, known by its ticker GBTC, which lets investors get access to bitcoin through a more traditional security. GBTC is currently trading at a 42% discount to bitcoin, up from a reduction of closer to 30% two months ago.
Regarding Genesis’ lending business, Silbert said within the letter that the suspension of redemptions and recent loan originations on Nov. 16 was “a difficulty of liquidity and duration mismatch” within the loan book. These issues, he said, had “no impact” on Genesis’ spot and derivatives trading or custody businesses, which “proceed to operate as usual.”
He acknowledged that Genesis has hired financial and legal advisors, because the firm considers its options.
DCG’s debts amount to simply over $2 billion. The corporate borrowed roughly $575 million from Genesis. The loans were priced at “prevailing market rates of interest” and are due in May 2023. It also absorbed the $1.1 billion debt that the bankrupt crypto hedge fund Three Arrows Capital owed Genesis.
With Three Arrows in bankruptcy, DCG “is pursuing all available remedies to get well assets for the advantage of creditors,” Silbert wrote. DCG’s only other debt is a $350 million credit facility from “a small group of lenders led by Eldridge.”
Read the total letter from Silbert below:
Dear Shareholders,Â
There was a number of noise over the past week and I need to get in contact on to make clear where we stand at DCG.
Most of you might be aware of the situation at Genesis, but to recap up front: Genesis Global Capital, Genesis’ lending business, temporarily suspended redemptions and recent loan originations last Wednesday, November 16 after market turmoil sparked unprecedented withdrawal requests. That is a difficulty of liquidity and duration mismatch within the Genesis loan book. Importantly, these issues don’t have any impact on Genesis’ spot and derivatives trading or custody businesses, which proceed to operate as usual. Genesis leadership and their board decided to rent financial and legal advisors and the firm is exploring all possible options amidst the fallout from the implosion of FTX.
In recent days, there was chatter about intercompany loans between Genesis Global Capital and DCG. For those unaware, within the extraordinary course of business, DCG has borrowed money from Genesis Global Capital in the identical vein as a whole lot of crypto investment firms. These loans were at all times structured on an arm’s length basis and priced at prevailing market rates of interest. DCG currently has a liability to Genesis Global Capital of ~$575 million, which is due in May 2023. These loans were used to fund investment opportunities and to repurchase DCG stock from non-employee shareholders in secondary transactions previously highlighted in quarterly shareholder updates. And to today, I’ve never sold a share of my DCG stock.
Chances are you’ll also recall there’s a $1.1B promissory note that’s due in June 2032. As we shared in our previous shareholder letter in August 2022, DCG stepped in and assumed certain liabilities from Genesis related to the Three Arrows Capital default. As stated in August, because these are actually DCG liabilities, DCG is participating within the Three Arrows Capital liquidation proceedings on the Creditors’ Committee and is pursuing all available remedies to get well assets for the advantage of creditors. Except for the Genesis Global Capital intercompany loans due in May 2023 and the long-term promissory note, DCG’s only debt is a $350M credit facility from a small group of lenders led by Eldridge.
Taking a step back, let me be crystal clear: DCG will proceed to be a number one builder of the industry and we’re committed to our long-term mission of accelerating the event of a greater economic system. We have now weathered previous crypto winters and while this one may feel more severe, collectively we are going to come out of it stronger. DCG has only raised $25M in primary capital and we’re pacing to do $800M in revenue this 12 months.
I purchased my first bitcoin a decade ago in 2012 and made the choice that I might commit to this industry for the long run. In 2013, we founded the primary BTC trading firm – Genesis – and the primary BTC fund, which evolved into Grayscale, now the world’s largest digital currency asset manager. Foundry runs the biggest bitcoin mining pool on this planet and is constructing tomorrow’s decentralized infrastructure. CoinDesk is the industry’s premier media, data, and events company and so they have done phenomenal work covering this crypto winter. Luno is probably the most popular crypto wallets on this planet and is an industry leader within the emerging markets. TradeBlock is constructing a seamless institutional trading platform and as the most recent subsidiary, HQ is establishing a life and wealth management platform for digital asset entrepreneurs. Each of those subsidiaries are standalone businesses which might be independently managed and are operating as usual. Lastly, with a portfolio of 200+ corporations and funds, we’re often the primary check for the industry’s best founders.Â
We appreciate the words of encouragement and support, together with offers to speculate in DCG. We’ll let you realize if we resolve to do a financing round.
Despite the difficult industry conditions, I’m as excited as ever in regards to the potential for cryptocurrencies and blockchain technology over the approaching a long time and DCG is set to stay on the forefront.Â
Barry
Correction: A previous version of this story mistakenly said that DCG loaned money to Genesis. The loan was from Genesis to DCG.
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