Explainer: Crypto lender Genesis plagued by contagion concern after FTX blowup

Representations of virtual cryptocurrencies are placed on U.S. dollar banknotes in this illustration taken November 28, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

Nov 18 (Reuters) - The uncertain future of Genesis Global Capital, one of the biggest crypto lenders, is fueling concern that the recent collapse of crytpo exchange FTX is having a spillover effect on other players in the highly interconnected market.

Genesis, which brokers digital assets for financial institutions like hedge funds and asset managers, had almost $3 billion in total active loans at the end of the third quarter. On Wednesday, its crypto lending arm stopped making new loans and blocked customers from taking out money because of what it called "unprecedented market turmoil" that rippled through the market after FTX filed for bankruptcy last week.

Genesis is owned by Stamford, Connecticut-based venture capital company Digital Currency Group.

The contagion concerns stem from Genesis' prominence in crypto, its links to troubled firms and broader reach into the financial world. Genesis' two biggest borrowers, according to a person familiar with the matter, were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading company closely affiliated with FTX. Both are now in bankruptcy proceedings.

"There has been a target on Genesis's back for days," said Joseph Edwards, an investment partner at Securitize Capital. "It's a signal of worse outcomes" for the crypto market, particularly since Genesis also deals with brokers, family offices and money managers.

Genesis received "abnormal withdrawal requests" from customers that exceeded its liabilities on Wednesday, the company said. Two days earlier, it had sought an emergency loan of $1 billion from investors, the Wall Street Journal reported.

While Genesis declined to comment on the Journal report, a spokesperson said it had "massively reduced" its exposure to Alameda after the collapse of Three Arrows. Genesis also said it had "no material exposure" to FTX's native digital token or those of other crypto exchanges, and had hedged its positions on holdings linked to FTX.

The lender is also embroiled in legal proceedings. Genesis had loaned more than $2.3 billion to Three Arrows, according to a July court filing. Genesis' parent, DCG, filed a claim for $1.2 billion against Three Arrows.

While it does not directly serve individual investors, Genesis is an important lender that backs products offered by crypto companies such as Circle Internet Financial, the principal operator of one of the largest stablecoins, USD Coin, and by Gemini. Those products pay yield to customers who deposit certain cryptocurrencies on the platforms.

Crypto lenders, who acted as the de facto banks of the crypto world, boomed during the pandemic. But unlike traditional banks, they are not required to hold capital cushions. Earlier this year, a shortfall of collateral forced some lenders - and their customers - to shoulder large losses. read more

Investors are concerned that those losses could pile up. Last year, Genesis extended $130.6 billion in crypto loans and traded $116.5 billion in assets, according to its website.

KNOCK-ON EFFECTS

Other companies have distanced themselves from Genesis amid concern that its troubles could reverberate. Crypto.com, an exchange, and Tether, which operates the world's largest stablecoin, on said Wednesday they had no exposure to Genesis.

Paolo Ardoino, Tether's chief technology officer, said FTX's connections to institutions could potentially have a domino effect on other companies, although it remains to be seen how that will play out.

"We don't know what is the size of that cascading effect- could be small, could be big," he said.

Market participants are fixated on the links between Genesis and FTX.

Genesis also made loans to Alameda, a trading outfit closely linked with FTX, and accepted FTT tokens as collateral, according to a source familiar with the matter. The price of that token has fallen 93% in the last month, according to analytics website CoinGecko.

Genesis has not disclosed its total exposure to Alameda.

Crypto experts said some of the industry's biggest names could yet be engulfed in Genesis' troubles. Its parent company, DCG, said the halted withdrawals at Genesis had no impact on its operations or subsidiaries. DCG also owns crypto asset manager Grayscale.

DCG declined to specify if it would take on any of Genesis' liabilities. Spokespeople for the group declined to comment.

Reporting by Hannah Lang in Washington and Elizabeth Howcroft in London Editing by Lananh Nguyen, Anna Driver and Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

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Reports on the intersection of finance and technology, including cryptocurrencies, NFTs, virtual worlds and the money driving "Web3".