Genesis

The crypto broker Genesis has been struggling in the bear market, and have been forced to reevaluate their current team and strategy going forward. This comes after the news that lots of crypto companies are downsizing their workforce after becoming deluded in hubris during the lofty heights of the bull market.

What went wrong at Genesis?

As with many of these collapses, the initial problems start with Three Arrows Capital, the first domino that led to a series of other high-profile collapses.

Not only was Three Arrows Capital the largest crypto hedge fund in existence, but it was also one of the most successful, having risen parabolically over the previous few years.

3AC co-founders Su Zhu and Kyle Davies were large proponents of the super cycle theory, and were huge believers in crypto.

Nevertheless, their optimism and enthusiasm appeared to get the better of them, as the company began to take on more and more risk over time.

Not only did 3AC take out leverage to add to their risky positions, but a lot of their debt was unsecured, and there were even reports that they were “managing the treasuries” of companies they’d invest in – treasuries which have since been completely depleted, thus worsening the fall out.

Suing 3AC for $1.2bn

The Digital Currency Group, which is the parent company of both Genesis and CoinDesk, submitted a court filing to bankruptcy trustee Teneo, in which they assumed liability for the entirety of the $1.2bn that Genesis lost by lending to 3AC.

According to the filing, Genesis sought the return of $1.14bn in assets from 3AC, as well as AVAX and NEAR that had been pledged for an additional total of $91.3m.

It seems that initially the demands were for loans to be called in amounting to a total of $2.36bn, but fortunately some of these were collateralised. Those positions, which include substantial GBTC holdings, have since been liquidated – this can’t have been something that either party was particularly pleased about given the massive discount on GBTC compared to NAV.

According to CoinDesk, who are of course owned by the same company that owns Genesis, the losses amount to “hundreds of millions”  thanks to their exposure to 3AC.

Genesis lays off 20% of employees

Genesis have announced a new leadership team, after the previous one ked the company into financial disaster.

They have also been forced to downsize the scale of their operations at the company as a result of the debacle, and this has resulted in 20% of employees (50 employees) being laid off.

CEO Michael Moro stepping down

Michael Moro joined the company in 2015 and the following year took over as the CEO. He will be stepping down to be replaced by the interim CEO, Derar Islim.

Derar Islim joined the company in 2020, during which time he has been working on developing some of the core functions of the company, as well as their business strategy.

As of yesterday, Moro stepped down, but will continue to advice and work with the new leadership throughout the transition process.

They should have known better

The ability to make such huge losses is extraordinary, and the team at Genesis really ought to have known better.  The lack of due diligence and competence in all those parties who naively trusted 3AC is astonishing, and they ought to have known better.

It appears that there was a complete lack of due diligence at the firm when they agreed to lend so much money to 3AC, and that they were ill-prepared in the event of a market downturn, liquidation event or 3AC insolvency.

Not only this, but the very space that they were investing in, DeFi, has a huge focus on the ability to make loans in a transparent, auditable, and collateralised way: there was no need whatsoever to take on all the extra risk and complexity of lending to a firm like 3AC, and such actions could only possibly be justified with rigorous risk-management procedures in place.

Did 3AC deceive their creditors?

Of course, the true fault of this disaster lies with 3AC, who were the ones directly responsible for taking on extreme leverage and extreme risk with others’ funds, thanks to their strongly-held belief in a supercycle.

Not only this, but there are now allegations swirling that the company may even have directly lied to their creditors in order to ease their concerns – if creditors were attempting to conduct due diligence but were intentionally blocked from doing so, then that is a criminal matter for which 3AC ought to be held accountable.

Genesis is now trying to rebuild what they have lost with a different team, and with a different risk profile – needless to say they most likely won’t be taking such reckless decisions in the future.

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