Barry Silbert, the founder of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders trying to calm investors’ nerves in the wake of FTX’s sudden collapse.
In a note to shareholders on Tuesday, Silbert addressed all the “noise” about the financial health of DCG’s subsidiaries, which include trading company Genesis, Grayscale Investments and mining company Foundry.
Since FTX’s rapid liquidation two weeks ago, investors have worried about crypto contagion affecting every corner of the industry. Lenders have stopped lending, withdrawals have been more difficult and unregulated, little-understood tokens have plummeted in value. The leading cryptocurrencies, Bitcoin and etherhave also continued their year-long descent.
Silbert, an early Bitcoin evangelist who founded DCG in 2015, said that despite the crypto winter this year, the entire company is on track to hit $800 million in revenue based on just $25 million in primary capital raised since inception. Forbes estimates Silbert’s net worth at $2 billion.
“We have weathered previous crypto winters,” Silbert wrote, adding, “while this one may feel harsher, we will emerge stronger together.”
Coinbase, Binance, and Crypto.com have similarly done their best to address customer concerns to avoid a run on FTX-type customer deposits. They have both expressed shock at FTX’s apparent deception of investors and clients, stressing that clients’ assets are safe.
And all in the knowledge that FTX and founder Sam Bankman-Fried have betrayed the trust of an industry already in the midst of a brutal year of losses. Bankman-Fried said his company’s assets were “fine” two days before he was desperate for a bailout over a liquidity crisis.
For DCG in particular, investor confidence was hit hard last week when the Wall Street Journal reported that Genesis had attempted to raise $1 billion from investors before eventually halting some withdrawals. There were reports that Genesis would soon file for bankruptcy, which the company publicly refuted.
The fear spread to the Grayscale Bitcoin Trust, known by its ticker Conditions, giving investors access to Bitcoin through a more traditional security. GBTC is currently trading at a 42% discount to Bitcoin, up from a discount of just under 30% two months ago.
Regarding Genesis’ lending business, Silbert said in the letter that the Nov. 16 suspension of repayments and loan reinstatements was “a liquidity and maturity mismatch issue” in the loan book. These issues, he said, would have “no impact” on Genesis’ spot and derivatives trading or custody business, which “are continuing as normal.”
He acknowledged that Genesis has hired financial and legal advisors as the company evaluates its options.
DCG’s debt is just over $2 billion. The company has loaned Genesis approximately $575 million at “market interest rates” due in May 2023. It has also assumed the $1.1 billion in debt owed by bankrupt crypto hedge fund Three Arrows to Capital Genesis.
Since Three Arrows has filed for bankruptcy, DCG is pursuing “all available legal remedies to recover assets on behalf 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 Silbert’s full letter below:
There has been a lot of noise over the past week and I would like to get in touch with you directly to clarify where we stand at DCG.
Most of you are aware of the situation at Genesis, but to recap Genesis Global Capital, Genesis’ lending business, suspended repayments and new lending last Wednesday the 16th. This is a liquidity and Duration mismatch in the Genesis loan book. Importantly, these issues will not impact Genesis’ spot and derivatives trading or custody business, which will continue to operate as normal. Genesis leadership and its board of directors have decided to hire financial and legal advisors and the company is evaluating all possible options amid the aftermath of FTX’s implosion.
In the last few days Genesis Global Capital and DCG have been talking about intercompany loans. For those unaware, DCG has borrowed money from Genesis Global Capital in the same manner as hundreds of crypto investment firms in the ordinary course of business. These loans have always been structured at arm’s length terms and priced at arm’s length interest rates. DCG currently has ~$575 million in debt to Genesis Global Capital maturing 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 date I have never sold any of my DCG shares.
You may also recall that there is a $1.1 billion promissory note due June 2032. As we communicated in our previous letter to shareholders in August 2022, DCG has stepped in and assumed certain of Genesis’ liabilities related to the failure of Three Arrows Capital. Now that the debt is DCG, as indicated in August, DCG is participating in Three Arrows Capital’s liquidation proceedings on the creditors’ committee and is pursuing all available legal remedies to recover assets on behalf of creditors. Aside from Genesis Global Capital’s intercompany loans maturing in May 2023 and the long-term promissory note, DCG’s only debt is a $350 million credit facility from a small group of lenders led by Eldridge.
Let me step back and say it very clearly: DCG will continue to be a leading builder in the industry and we are committed to our long-term mission to accelerate the development of a better financial system. We have weathered previous crypto winters, and while this one may feel harsher, we will emerge stronger together. DCG has only raised $25 million in primary capital and we plan to hit $800 million in revenue this year.
I bought my first bitcoin a decade ago in 2012 and made the decision to make a long-term commitment to this industry. In 2013, we founded the first BTC trading company – Genesis – and the first BTC fund, which grew into Grayscale, now the world’s largest digital currency wealth manager. Foundry operates the largest bitcoin mining pool in the world and is building the decentralized infrastructure of tomorrow. CoinDesk is the industry’s leading media, data and events company and has done a phenomenal job this crypto winter. Luno is one of the most popular crypto wallets in the world and an industry leader in emerging markets. TradeBlock is building a seamless institutional trading platform and as its newest subsidiary, HQ is setting up a life and wealth management platform for digital asset entrepreneurs. Each of these subsidiaries is a separate company, independently managed and operating as usual. After all, with a portfolio of over 200 companies and funds, we are often the first point of contact for the best founders in the industry.
We appreciate the words of encouragement and support and the offers to invest in DCG. We will inform you if we decide on a financing round.
Despite the difficult industry conditions, I remain excited about the potential of cryptocurrencies and blockchain technology in the decades to come, and DCG is determined to stay at the forefront.
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