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Grayscale owner's woes could 'severely impact' crypto markets, report claims

DELIVERING ALPHA -- CNBC?s Melissa Lee moderates the Tales from the Crypto panel at the CNBC Institutional Investor Delivering Alpha conference July 18th in NYC. (Seated: Barry Silbert, Founder and Chief Executive Officer, Digital Currency Group). -- (Photo by: Heidi Gutman/CNBC/NBCU Photo Bank/NBCUniversal via Getty Images)
Barry Silbert, founder and CEO of Grayscale owner Digital Currency Group, a centre piece of the crypto jigsaw. Photo: Heidi Gutman/CNBC/NBCU Photo Bank/NBCUniversal via Getty

Investors are watching the movements of the Digital Currency Group with trepidation, with one report warning that if the firm slides into further financial distress it "could severely impact crypto markets".

The US-based Digital Currency Group (DCG) is a centre piece of the crypto jigsaw and is the parent of the Grayscale Bitcoin Trust, which owns 653,633 bitcoins (BTC-USD).

DCG is a venture capital outfit that focuses on the digital currency market with subsidiaries such as CoinDesk, Genesis and Grayscale Investments (GBTC).

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The group's current problems stem from its Genesis subsidiary, which reportedly owes crypto-platform Gemini $900m.

Gemini allocated user funds to Genesis in order to generate yields for its interest-bearing Gemini Earn accounts.

Watch: Web3 sectors to watch in 2023 | The Crypto Mile

On Monday, Gemini co-founder Cameron Winklevoss posted an open letter to DCG founder and CEO Barry Silbert saying: "Every time we ask you for a tangible engagement, you hide behind lawyers, investment bankers, and process.

"After six weeks, your behavior is not only completely unacceptable, it is unconscionable."

Winklevoss claims that DCG owes its Genesis subsidiary $1.675bn, of which around $900m is owed to Gemini Earn and its 340,000 users.

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Crypto-research firm Arcane Research have released a report urging investors to pay attention to the ongoing financial distress related to DCG "as the outcome could severely impact crypto markets".

Arcane Research said: "In short, if DCG enters bankruptcy, the company could be forced to liquidate its assets.

"This could force DCG into selling its sizable positions in GBTC and unknown positions in ETHE and other Grayscale trusts."

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Marcus Sotiriou, crypto analyst at GlobalBlock, spoke to Yahoo Finance to give his views on how the bitcoin could be impacted by the developments with DCG and Gemini.

He said: "If DCG goes under or tries to stay solvent by liquidating its GBTC, it would find a buyer to conduct an orderly transaction as opposed to just dumping it on the market.

"I think bitcoin would suffer out of fear though, hence causing disorderly sell pressure on the open market."

He also speculated on how DCG's current woes could play out in a Linkedin post on Sunday.

He said: "With DCG owing $900m to Gemini, and Grayscale's value far less than this debt, I see two potential outcomes for Grayscale and GBTC holders.

"One being that DCG is forced to sell Grayscale in order to generate cash to pay off creditors.

"In this case, Valkyrie has made a proposal to take over as the new Trust administrator and manage GBTC.

Read more: Crypto industry starts 2023 with fresh wave of job cuts

"This proposal involves reducing fees from 2% to 75 bps and using Reg M, which would close the GBTC discount and therefore save GBTC holders!

"The other being the bear case for GBTC holders where Gemini forces Genesis into bankruptcy.

"This could result in DCG becoming bankrupt, as they likely do not have the cash to pay off Genesis’s callable loans ($1.1bn).

"This means that Grayscale assets owned by DCG ($560 mill worth of GBTC) would be at risk of being sold."

Genesis suspended redemptions and new loans after the collapse of the FTX cryptocurrency exchange in November 2023.

Genesis had handled the backend business for Gemini Earn, which before the current crypto crash was offering as much as 8% interest when users deposited funds.

But trouble surfaced once Genesis faced a rush of withdrawals from its lending arm after FTX’s implosion.

Gemini’s customers have now been unable to redeem more than $900m for nearly two months.

DCG was founded by Barry Silbert in 2015 and quickly grew to be a major player in the crypto space.

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