Crypto Contagion Is Spreading, Fast

Digital Currency Group bails out Genesis to make sure it isn't hamstrung by the loss Genesis cut 20 percent of its workforce and Michael Moro resigned as CEO.

Genesis lost $175 million when FTX filed for Chapter 11 on November 11. The cash injection was provided by DCG.

Genesis has not been able to escape the FTX mess. The brokerage is struggling to fund a surge in the number of customers asking to redeem theircryptocurrencies according to a prominent pundit and ex-chief strategy officer at Blockstream. The suspension of withdrawals leads to the worsening of the crisis of confidence and increases the likelihood of a rush on other banks.

It is important to understand that this is not a solvency problem. Genesis doesn't have enough money to pay its debts in cash. Mow thinks that a bankruptcy seems unlikely.

DCG said that the decision to suspend redemptions and stop issuing fresh loans was a temporary action and that the trading and custody units would continue to operate as usual.

The situation is serious enough for Genesis to seek additional funding.

Reports suggest that the attempt to secure funding has been unsuccessful because of the financial relationship between Genesis and other DCG-owned entities. Thirty percent of the Genesis balance sheet is made to either DCG or its subsidiaries, but inter- company loans are being treated with suspicion because of their role in the FTX collapse.

Barry Silbert, CEO of DCG, told investors that inter- company loans are not unusual. While this one may be more severe, we will come out of it stronger.

Silbert's rally cry has not stopped speculation. Just days before the collapse of FTX, Sam Bankman-Fried, the firm's founder, reassured the public that FTX was fine.

The consequences of a collapse are already being played out. After withdrawals were stopped, the exchange said it would no longer allow customers to access their funds.

$700 million of customer funds were locked up until the exchange found a solution. It is possible that customers of other Genesis-linked exchanges will suffer the same fate if Genesis goes bankrupt.