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The crypto contagion is spreading fast

To ensure Genesis wasn’t crippled by the loss, its parent company, Digital Currency Group (DCG), bailed it out. But in the aftermath, Genesis reduced 20 percent of its workforce to cut costs, and Michael Moro, its longtime CEO, resigned.

Genesis once again found themselves on the wrong side of a meltdown earlier this month; When FTX filed for bankruptcy on Nov. 11, the company lost $175 million stored on the exchange. Again, DCG intervened and provided a $140 million cash injection.

But despite multiple DCG bailouts, Genesis hasn’t escaped the FTX fallout. Samson Mow, a prominent crypto expert and former chief strategy officer at crypto infrastructure firm Blockstream, says the brokerage firm is struggling to fund a surge in customers looking to redeem their crypto. This led to suspension of withdrawals, which threatens to worsen the prevailing crisis of confidence and increases the likelihood of a run on other lenders (e.g. BlockFi or Voyager Digital) – and so the contagion spreads.

But Mow says it’s important to understand that this is a liquidity issue, not a solvency issue. In other words, Genesis has enough assets to pay its debts, they just don’t have cash available. Because of this, bankruptcy seems “unlikely,” says Mow.

DCG also tried to downplay the situation on Twitter, saying that the decision to suspend redemptions and stop issuing new credit was a “temporary measure” and that the issue was strictly limited to Genesis’ credit department, i.e. the trading and custody units will continue to operate as usual.

Nonetheless, the situation is serious enough for Genesis to seek additional funding, with crypto exchange Binance and private equity firm Apollo Global Management being tapped as potential investors.

Attempts to secure funding have reportedly been unsuccessful so far, in part due to concerns about the financial relationship between Genesis and other DCG-owned companies. Of the $2.8 billion in outstanding loans on Genesis’ balance sheet, about 30 percent goes to either DCG or its subsidiaries, but intercompany loans are currently viewed with particular suspicion for their central role in the FTX collapse.

Barry Silbert, CEO of DCG, told investors intercompany loans of this type are not uncommon. “We’ve weathered previous crypto winters, and while this one may feel harsher, together we will emerge stronger.”

But for all his conviction, Silbert’s rallying cry hasn’t stopped speculation. Recently burned by false assurances from FTX founder Sam Bankman-Fried — who tweeted “FTX is fine” on Nov. 7, just days before the company collapsed — crypto investors are also bracing for bankruptcy at Genesis .

One of the consequences of a possible collapse is already playing out. After halting payouts, crypto exchange Gemini, whose yield farming product is powered by Genesis, announced that its earn customers would no longer have access to their funds.

On Nov. 22, the exchange said it was working to “find a fix,” but until then, $700 million worth of customer funds would remain locked up. If Genesis were to go bankrupt, some of those funds may never be returned, just like FTX – and it’s possible that clients of other Genesis-affiliated exchanges could suffer the same fate.

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