DCG’s Barry Silbert Writes Investor Letter After FTX Collapse

Barry Silbert, the founder of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders in an attempt to calm investors’ nerves after the sudden collapse of FTX.

In a note to shareholders 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 the rapid liquidation of FTX two weeks ago, investors have been worried about a crypto contagion affecting all corners of the industry. Lenders stopped lending, withdrawals were harder and unregulated, little-understood tokens plunged in value. The main cryptocurrencies, bitcoins and etheralso continued their year-long descent.

Silbert, an early bitcoin evangelist who founded DCG in 2015, said that despite the crypto winter, the company as a whole is on track to generate $800 million in revenue this year thanks to just $25 million. dollars raised in principal capital since its inception. Forbes estimates Silbert’s net worth at $2 billion.

“We have weathered previous crypto winters,” Silbert wrote, adding that “while this one may seem harsher, collectively, we will emerge stronger.”

Coinbase, Binance, and Crypto.com also did their best to ease customer concerns to avoid an FTX-like run on customer deposits. They each expressed shock at FTX’s apparent deception of investors and customers and stressed that customer assets are secure.

This is knowing that FTX and founder Sam Bankman-Fried betrayed the trust of an industry that was already in the midst of a brutal year of losses. Bankman-Fried said his company’s assets were “good” two days before he desperately sought bailout due to a cash crunch.

Specific to DCG, investor confidence took a hit last week when the Wall Street Journal reported that Genesis 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 has publicly denied.

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

Regarding Genesis lending activities, Silbert said in the letter that the suspension of buybacks and new loan issuance on November 1. 16 was “a liquidity and duration mismatch issue” in the loan portfolio. These issues, he said, had “no impact” on Genesis’ cash and derivatives trading or custody businesses, which “continue to operate as usual.”

He acknowledged that Genesis had hired financial and legal advisers, as the company considered its options.

DCG’s debts amount to just over $2 billion. The company loaned Genesis about $575 million, at “prevailing market interest rates,” which is due in May 2023. It also absorbed $1.1 billion in debt that the fund Bankrupt crypto speculator Three Arrows Capital owed Genesis.

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 Silbert’s full letter below:

Dear shareholders,

There has been a lot of noise over the past week and I want to get in touch directly to clarify where we stand at DCG.

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

In recent days, there have been talks about business-to-business lending between Genesis Global Capital and DCG. For those unaware, in the normal course of business, DCG has borrowed money from Genesis Global Capital in the same vein as hundreds of crypto investment firms. These loans have always been structured on an arm’s length basis and priced at prevailing market interest rates. DCG currently has a liability to Genesis Global Capital of approximately $575 million, which is due in May 2023. These loans were used to fund investment opportunities and to repurchase DCG stock from non-employee shareholders in the secondary transactions previously highlighted in quarterly shareholder updates. And to date, I have never sold a share of my DCG shares.

You may also recall that there is a $1.1 billion promissory note which is due in June 2032. As we shared in our previous letter to shareholders in August 2022, DCG stepped in and assumed certain liabilities of Genesis related to the default of Three Arrows Capital. As reported in August, as these are now liabilities of DCG, DCG is participating in Three Arrows Capital’s liquidation proceedings on the Creditors’ Committee and is pursuing all available remedies to recover the assets for the benefit of creditors. . Other than Genesis Global Capital’s intercompany loans due 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.

Taking a step back, let me be crystal clear: DCG will continue to be one of the industry’s leading builders and we are committed to our long-term mission to accelerate the development of a better system. financial. We have weathered previous crypto winters and while this one may seem harsher, collectively we will emerge stronger. DCG has only raised $25 million in primary capital and we expect to achieve $800 million in revenue this year.

I bought my first bitcoin ten years ago in 2012 and made the decision to commit to this industry for the long term. In 2013, we founded the first BTC trading company – Genesis – and the first BTC fund, which grew into Grayscale, now the largest digital currency asset manager in the world. Foundry operates the world’s largest bitcoin mining pool and builds the decentralized infrastructure of tomorrow. CoinDesk is the premier media, data, and events company in the industry and they have 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 emerging markets. TradeBlock is building a transparent institutional trading platform, and as its newest subsidiary, HQ is building a life and wealth management platform for digital asset entrepreneurs. Each of these subsidiaries are stand-alone businesses that are independently managed and operate as usual. Finally, with a portfolio of over 200 companies and funds, we are often the first check for the best founders in the industry.

We appreciate words of encouragement and support, as well as offers of investment in DCG. We’ll let you know if we decide to do a fundraising round.

Despite the challenging industry conditions, I am more excited than ever about the potential of cryptocurrencies and blockchain technology over the next few decades and DCG is determined to stay at the forefront.

barry

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