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Business

DCG’s Barry Silbert writes letter to investors after FTX collapse




Barry Silbert, the founder of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders in trying to unnerve investors following the sudden collapse of FTX.

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 swift liquidation two weeks ago, investors have worried about a 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 etherhas also continued its year-long descent.

Silbert, an early bitcoin evangelist who founded DCG in 201[ads1]5, said that despite the crypto winter, the overall company is on track to generate $800 million in revenue this year on the back of just $25 million raised in seed capital since its inception. Forbes estimates Silbert’s net worth at $2 billion.

“We’ve weathered past crypto winters,” Silbert wrote, adding that “while this one may feel more severe, we will collectively come out of it stronger.”

Coinbase, Binance and Crypto.com have similarly done their best to allay customer concerns to avoid an FTX-type run on customer deposits. They have each expressed shock at FTX’s apparent deception of investors and clients and stressed that client assets are safe.

It’s all with an awareness that FTX and founder Sam Bankman-Fried betrayed confidence in an industry that was already in the midst of a brutal year of losses. Bankman-Fried said the company’s assets were “fine” two days before he was desperate for a bailout due to a liquidity crisis.

Specifically for DCG, investor confidence took a hit last week, when the Wall Street Journal reported that Genesis had tried 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 denied.

Fears spread to Grayscale Bitcoin Trust, known by its ticker GBTC, which allows investors to access bitcoin through a more traditional security. GBTC is currently trading at a 42% discount to bitcoin, up from a discount of close to 30% two months ago.

As for Genesis’ lending business, Silbert said in the letter that the Nov. 16 suspension of redemptions and new loans was “a liquidity and duration mismatch issue” in the loan book. Those problems, he said, had “no impact” on Genesis’ spot and derivatives trading or custody business, which “continues to operate as usual.”

He acknowledged that Genesis has hired financial and legal advisers as the firm considers its options.

DCG’s debt amounts to just over 2 billion dollars. The company loaned Genesis approximately $575 million, priced at “prevailing market rates,” due in May 2023. It also absorbed the $1.1 billion debt owed to Genesis by bankrupt crypto hedge fund Three Arrows Capital.

With Three Arrows in bankruptcy, “DCG is pursuing all available remedies to recover assets for the benefit 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 full letter from Silbert below:

Dear shareholders,

There has been a lot of noise in the last week and I would like to make direct contact to clarify where we stand at DCG.

Most of you are aware of the situation at Genesis, but to summarize in advance: Genesis Global Capital, Genesis’ lending operations, temporarily suspended redemptions and new loan assignments last Wednesday, November 16, after the market turmoil triggered unprecedented withdrawal requests. This is a question of liquidity and duration mismatch in the Genesis loan book. Importantly, these issues have no impact on Genesis’ spot and derivatives trading or custody business, which continues to operate as usual. Genesis management and its board decided to hire financial and legal advisors, and the firm is exploring all possible options amid the fallout from the implosion of FTX.

In recent days, there has been chatter about intra-group loans between Genesis Global Capital and DCG. For the uninitiated, in the ordinary course of business, DCG has borrowed money from Genesis Global Capital in the same way as hundreds of crypto investment companies. These loans were always structured at arm’s length and priced at current market interest rates. DCG currently has a commitment to Genesis Global Capital of ~$575 million, which matures in May 2023. These borrowings were used to finance investment opportunities and to repurchase DCG shares from non-employee shareholders in secondary transactions previously highlighted in quarterly shareholder updates. And to this day I have never sold a share of my DCG stock.

You may also recall that there is a $1.1 billion promissory note due in June 2032. As we shared in our previous shareholder letter in August 2022, DCG stepped in and assumed certain obligations of Genesis related to Three Arrows Capital’s default. As mentioned in August, because these are now DCG liabilities, DCG is participating in the Three Arrows Capital liquidation process in the creditors’ committee and is pursuing all available remedies to recover assets for the benefit of creditors. Aside from Genesis Global Capital’s intercompany loan due 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 be crystal clear by taking a step back: DCG will continue to be an industry leader, and we are committed to our long-term mission to accelerate the development of a better financial system. We’ve weathered past crypto winters, and while this one may feel more severe, we’ll collectively come out of it stronger. DCG has only raised $25 million in seed capital and we’re on track to do $800 million this year.

I bought my first bitcoin a decade ago in 2012 and made the decision that I wanted to commit to this industry for the long term. In 2013, we founded the first BTC trading firm – Genesis – and the first BTC fund, which evolved into Grayscale, now the world’s largest digital currency manager. Foundry operates the largest bitcoin mining pool in the world and is building tomorrow’s decentralized infrastructure. CoinDesk is the industry’s premier media, data and events company, and they’ve done a phenomenal job covering this crypto winter. Luno is one of the most popular crypto wallets in the world and is an industry leader in the emerging markets. TradeBlock is building a seamless institutional trading platform, and as its newest subsidiary, HQ is establishing a life and wealth management platform for digital asset entrepreneurs. Each of these subsidiaries are independent businesses that are managed independently and operate as usual. Finally, with a portfolio of over 200 companies and funds, we are often the first check for the industry’s best founders.

We appreciate your words of encouragement and support, along with offers to invest in DCG. We will let you know if we decide to take a financing round.

Despite the difficult industry conditions, I am as excited as ever about the potential for cryptocurrencies and blockchain technology in the coming decades, and DCG is determined to remain at the forefront.

Barry

SEE: Grayscale indicates lawsuit against SEC over denial of bitcoin ETF



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