Cameron Winklevoss, CEO of the US-based cryptocurrency exchange Gemini, has called for the resignation of CEO Barry Silbert of Digital Currency Group (DCG) in another open letter, and has accused DCG of fraud. Silbert has denied any wrongdoing in response.
DCG's subsidiaries include Grayscale, the company behind the Grayscale Bitcoin Trust (GBTC), the formerly leading crypto lender Genesis, as well as crypto news publication CoinDesk. Since the FTX scandal, Genesis has particularly been struggling with liquidity, putting the DCG conglomerate in a difficult position.
Digital Currency Group Accused of Fraud
In an open letter to the DCG board, the Winklevoss twins claim that Silbert and Genesis Global Capital (a subsidiary of Digital Currency Group) have committed fraud against over 340,000 participants of the Gemini Earn program. This accusation follows a public appeal by the Gemini founders on Twitter. In it, Cameron Winklevoss stated that Genesis is indebted to Gemini with 900 million dollars and accused Silbert of using lawyers, investment bankers, and bureaucratic procedures to evade responsibility.
According to Winklevoss, Genesis lent over 2.3 billion dollars to Three Arrows Capital (3AC), ultimately resulting in a loss of 1.2 billion dollars for the crypto conglomerate when the hedge fund collapsed in June 2022. The twins claimed that Silbert, DCG and Genesis staged a "carefully crafted campaign of lies" starting in July 2022, claiming that DCG had injected the lost funds back into Genesis through a 10-year bond. In reality, no capital had been funneled to support Genesis's operations, but rather the Digital Currency Group had concealed the issue through accounting fraud.
Three Arrows Capital as a Proxy for DCG
Furthermore, Winklevoss elaborates extensively on where he believes the fraudulent origin of the Genesis liquidity crisis lies. He states that as an independent company, it would be hard to imagine that Genesis would lend so much money to Three Arrows Capital (3AC) given the low quality of the securities provided by 3AC. Winklevoss argues that it was all part of a larger plan by parent company Digital Currency Group (DCG). Through a process of recursive trading, Genesis granted loans to the crypto hedge fund against securities in the form of Grayscale Bitcoin Trust (GBTC) shares. 3AC then reinvested these loans into the GBTC and pledged them again as collateral for larger loans.
"However, it is becoming increasingly clear that the interactions with 3AC were not well-intentioned, secured loans. In reality, 3AC simply acted as a facilitator for Genesis and allowed it to engage in trades of Bitcoin for GBTC shares using the Grayscale Trust. In these transactions, Genesis bet on the shares being worth more in the future than the Bitcoin." - Cameron Winklevoss, Co-Founder of Gemini
With a consistent GBTC premium until 2021, this "zero-sum trade" had been running well. However, the tide turned and Genesis fell on the losing side. But, according to Winklevoss, this is the key point: Genesis was never actually participating in the profits. The premium always went into the pockets of Three Arrows. Therefore, what had been a zero-sum game for Genesis turned into a negative-sum game. The only logical explanation for the granting of the loans would be the continuous infusion of Bitcoin into Grayscale's Trust (GBTC). This would continuously generate money for the DCG conglomerate through management fees - the ends justify the means.
The conglomerate denies the allegations
In an open letter from the CEO, Barry Silbert, some answers to the fraud allegations against DCG can be found. Since the foundation of the construct, all subsidiary companies have been operating as independent entities with their own management teams, financial and risk management protocols, as well as legal and compliance oversight. According to Silbert, the Digital Currency Group has never controlled any business, loans, or bonds for Genesis. Additionally, the conglomerate owes Genesis approximately $525 million through two loans, due May 2022. These loans were always structured under market-typical conditions and granted at market-typical interest rates.
Furthermore, the company claims that it has no knowledge of any official investigation against DCG, and has no reason to assume that there is one. This contrasts with a recent Bloomberg report. The journal's unidentified sources claim that the Eastern District of New York and the US Securities and Exchange Commission are currently examining flows of money between DCG and its subsidiary Genesis. If the dispute with the Winklevoss twins ends up in court, which seems likely given the harsh fraud allegations, these investigations against DCG may soon come to light.
