Barely two days after Digital Currency Group (DCG) claimed it had settled all debts owed to cryptocurrency lender Genesis, a group of Genesis creditors approached a New York court claiming DCG didn’t fulfill the loan’s repayment terms.
Recall that embattled venture capital firm DCG recently announced paying around $700 million to Genesis to settle all the loans DCG owed to the creditors. The $700 million repayment was part of the agreements in a settlement that saw Genesis drop all existing lawsuits against DCG.
Since Genesis owed over $3.5 billion to a diverse set of creditors, the $700 million could’ve brought significant relief to the embattled company if it could liquefy the funds to settle creditors.
It isn’t the first time Genesis would be partially accepting loan repayment from DCG. During the 2022 FTX collapse, DCG repaid part of its Bitcoin loans to Genesis with GBTC, with the latter raising a similar alarm about the unfeasibility of liquefying the purported repayment.
Why is Genesis Raising the Alarm?
Approaching the Southern District of New York Bankruptcy Court, the creditors informed the court that the loan in question was in USD and BTC disbursements, and the Partial Repayment Agreement doesn’t permit them to repay the funds in assets, not USD or BTC.
Rather than repay their loan obligations in USD or BTC, DCG made the repayment in Grayscale Ethereum Classic Trust (ETCG) and Grayscale Ethereum Trust (ETHE), allegedly contravening the provisions of the Partial Repayment Agreement.
Describing the assets as “illiquid instruments,” the Genesis creditors explained how both assets are selling at massive discounts, making it impossible for the crediting firm to realize the apparent value of both crypto assets.
In the filing, Genesis explained how it plans to monetize the ‘illiquid instruments,’ purchase BTC, and have DCG cover the entire conversion cost after accounting.
How did DCG Incur the debt?
Court complaints filed by Genesis against DCG last year claimed the latter received loans over $500 million from the lending group in 2022, which was due for repayment by May 2023. According to the court documents, DCG received the loan in four tranches throughout 2022, and Genesis has managed to default on repayment for each of the four loans.
DCG and Genesis are among a group of fintech companies that suffered the devastating backdrop of the 2022 FTX collapse, as Genesis had filed for a Chapter 11 Bankruptcy in January 2023.
The Rabbit Hole Gets Deeper
Taking a $500 million loan from a practically bankrupt company raises eyebrows, and it’s no surprise that there’s more to it than meets the eye. It all started in 2022 when Genesis became insolvent after experiencing difficulties recovering loans from some high-ticket lenders.
Practically bankrupt, Genesis was on the verge of declaring bankruptcy when it got a bailout from an offer from the DCG CEO—except it wasn’t in cash. The bailout was in the form of a so-called ‘promissory note’ that’s only redeemable after a decade, and interestingly, Genesis’s CEO marketed it as a ‘current asset’ to stakeholders.
With the backing of a massive ‘current asset’ in Genesis, DCG started withdrawing capital from Genesis, taking a whopping 18,697.7 BTC at a 3.85% annual interest rate. Eventually, it became the loan in contention.
The FTX collapse happened, and Genesis desperately needed capital to settle creditors. The situation has worsened since DCG’s purported bailout.
DCG did effect a part repayment of the loan, but it was also in ETHE and ETCG, which prompted an alarm from Genesis, who made no legal attempt to challenge the payment at that time.
DCG will likely not concede to Genesis’s claims, and the row might be up to the New York Bankruptcy Court to decide.
Two of Genesis’s primary claims are true: DCG withdrew the loan in Bitcoin, and ETHE and ETCG are currently relatively illiquid. Since they’ve accepted partial repayment from DCG in ETHE and ETCG in the past, it remains uncertain if the New York Court will rule in the plaintiff’s favor.