DCG’s Barry Silbert writes to investors following the collapse of FTX

Barry Silbert, founder of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders trying to calm investor nerves 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, including trading firm Genesis, Grayscale Investments and mining company Foundry.

Since FTX’s swift suspension two weeks ago, investors have been worried about the cryptocurrency, which has affected every corner of the industry. Lenders stopped lending, withdrawals became more difficult and unregulated, and little-understood tokens lost value. Leading cryptocurrencies, bitcoin and etherand continued their decline throughout the year.

Silbert, an early bitcoin evangelist who founded DCG in 2015, said despite the crypto winter, the overall company is on pace to generate $800 million in revenue this year with only $25 million raised in seed capital since its inception. Forbes estimates Silbert’s fortune at $2 billion.

“We’ve weathered previous crypto winters,” Silbert wrote, adding that “even though this one feels tougher, we’ll come out stronger together.”

Coinbase, Binance, and Crypto.com have similarly gone out of their way to address customer concerns about preventing FTX-style transactions on customer deposits. Each of them stressed that they were shocked by FTX’s blatant deception of investors and clients and that client assets were safe.

It’s all about realizing that FTX and its founder, Sam Bankman-Fried, betrayed the trust of an industry in the midst of a year of relentless losses. Bankman-Fried said his company’s assets were “good” two days before it was desperate for a bailout due to a liquidity crunch.

DCG’s inherent investor confidence took a hit last week when the Wall Street Journal reported that Genesis was trying to raise $1 billion from investors before stalling on some pullbacks. There were reports that Genesis would soon file for bankruptcy, which the company has publicly denied.

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

Regarding Genesis’ loan business, Silbert said in the letter that the suspension of repossessions and new lending on Nov. 16 was a “liquidity and maturity mismatch issue” in the loan book. He said the issues had “no impact” on Genesis’ spot and derivatives trading or custodial business, which “continues to be business as usual”.

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

DCG’s debts are just over $2 billion. The company has loaned Genesis approximately $575 million at “market interest rates” due in May 2023. It also assumed $1.1 billion in debt owed to Genesis by bankrupt Three Arrows Capital.

With Three Arrows in bankruptcy, DCG is “pursuing all possible means to recover assets for the benefit of creditors,” Silbert wrote. DCG’s only other debt is a $350 million loan from “a small group of lenders led by Eldridge.”

Read Silbert’s full letter below:

Dear Shareholders,

There has been a lot of buzz this past week and I want to reach out directly to clarify where we stand at DCG.

Most of you are aware of the situation at Genesis, but to reiterate: Genesis Global Capital, Genesis’ lending business, temporarily suspended payments and new sources of credit last Wednesday, November 16, after market turmoil led to unprecedented withdrawal requests. This is a liquidity and maturity mismatch issue in the Genesis loan book. Importantly, these issues have no impact on Genesis’ business-as-usual spot and derivatives trading or custodial businesses. Genesis management and their board have decided to hire financial and legal advisors, and the firm is exploring all possible options amid the fallout from the FTX explosion.

In recent days, there have been talks between Genesis Global Capital and DCG about intercompany loans. For those who don’t know, in the normal course of business, DCG borrowed from Genesis Global Capital, just like hundreds of other crypto investment firms. These loans have always been structured independently of each other and priced based on prevailing market interest rates. DCG currently has a commitment to Genesis Global Capital of ~$575 million due in May 2023. These loans were used to fund investment opportunities and repurchase DCG shares 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 bill due in June 2032. As we shared in our previous shareholder letter in August 2022, DCG stepped in and assumed certain liabilities from Genesis in the event of Three Arrows Capital’s default. As mentioned in August, since these are now DCG liabilities, DCG is participating in the Three Axis Capital liquidation process at the Committee of Creditors and is pursuing all possible means to recover assets for the benefit of creditors. Other than Genesis Global Capital intercompany loans and a long-term promissory note due in May 2023, DCG’s only debt is a $350 million credit facility from a small group of lenders led by Eldridge.

Stepping back, let me be clear: DCG will continue to be the industry’s leading builder, and we remain committed to our long-term mission of accelerating the development of a better financial system. We’ve been through previous crypto winters, and while this winter may seem harsher, we’ll come out of it stronger together. DCG has raised a total of $25 million in seed capital and we are on track to generate $800 million in revenue this year.

I bought my first bitcoin ten years ago in 2012 and decided to stick with this industry for the long haul. In 2013, we founded the first BTC trading firm, Genesis, and the first BTC fund, which has now become Grayscale, the world’s largest digital currency asset manager. The Foundry operates the world’s largest bitcoin mining pool and is building the decentralized infrastructure of tomorrow. CoinDesk is the industry’s best media, information 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 an industry leader in emerging markets. TradeBlock builds a seamless institutional trading platform and as its newest subsidiary, HQ creates a life and wealth management platform for digital asset entrepreneurs. Each of these subsidiaries are independent entities that are independently managed and continue to operate as usual. Finally, with a portfolio of over 200 companies and funds, we are often the first vet for the industry’s top founders.

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

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

Barry

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