DCG’s Barry Silbert writes letter to investors after FTX collapse


Barry Silbert, the founder of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders in trying to calm investor nerves following the sudden collapse of FTX.

In a note to shareholders on Tuesday, Silbert addressed all the “noise” surrounding the financial health of DCG’s subsidiaries, which include trading firm Genesis, Grayscale Investments and mining company Foundry.

After FTX’s swift shutdown two weeks ago, investors are worried about a crypto contagion affecting every corner of the industry. Lenders stopped lending, withdrawals were more difficult and unregulated, little-understood tokens plummeted in value. The leading cryptocurrencies, bitcoin and etheralso continued their year-long descent.

Silbert, an early bitcoin evangelist who founded DCG in 2015, said that despite the crypto winter, overall the company is on pace to generate $800 million in revenue this year on the back of just $25 million raised in seed capital since inception. Forbes estimates Silbert’s net worth at $2 billion.

“We’ve weathered previous crypto winters,” Silbert wrote, adding that “while this one may feel tougher, we will collectively come out of it stronger.”

Coinbase, Binance, and Crypto.com have similarly gone out of their way to assuage customer concerns to avoid accumulating FTX-type customer deposits. Each expressed shock at the apparent fraud on FTX’s investors and clients and emphasized that client assets are safe.

This is all with the knowledge 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 “fine” two days before he was in desperate need of a bailout due to a liquidity crisis.

Specifically for DCG, investor confidence took a hit in the past week when the Wall Street Journal reported that Genesis was trying to raise $1 billion from investors before eventually halting some withdrawals. There have been reports that Genesis will soon file for bankruptcy, which the company has publicly denied.

Fear spread to Grayscale Bitcoin Trust, known for its ticker GBTC, which allows investors to access Bitcoin through more traditional security. GBTC is currently trading at a 42% discount to Bitcoin, down from a discount of nearly 30% two months ago.

Regarding Genesis’ loan business, Silbert said in the letter that the suspension of repurchases and new lending on Nov. 16 was a “liquidity issue and duration mismatch” in the loan portfolio. Those issues, he said, had “no impact” on Genesis’ spot and derivatives trading or custody businesses, which “continue to operate as usual.”

He acknowledged that Genesis has hired financial and legal advisers as the firm considers its options.

DCG’s debts total just over $2 billion. The company loaned Genesis approximately $575 million, valued at “prevailing market interest rates,” due in May 2023. It also assumed $1.1 billion in debt owed by failed crypto hedge fund Three Arrows Capital of Genesis.

With Three Arrows in bankruptcy, DCG is “pursuing all available means to recover assets for the benefit of creditors,” Silbert wrote. DCG’s only other debt is a $350 million loan from “a small group of lenders led by Eldridge.”

Read the full letter from Silbert below:

Dear Shareholders,

There has been a lot of noise this past week and I want to reach out directly to clarify where we stand at DCG.

Most of you are familiar with the Genesis situation, but to recap up front: Genesis Global Capital, Genesis’ credit business, temporarily suspended repurchases and new lending last Wednesday, November 16, after market turmoil triggered unprecedented withdrawal requests. This is a liquidity and duration mismatch problem in Genesis’ loan book. Importantly, these issues do not impact Genesis’ spot and derivatives trading or custody businesses, which continue to operate as usual. Genesis management and their 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 inter-company loans between Genesis Global Capital and DCG. For those who don’t know, in the ordinary course of business, DCG has borrowed money from Genesis Global Capital in the same way as hundreds of crypto investment companies. These loans have always been structured on fair market terms and priced at prevailing market interest rates. DCG currently has ~$575 million of indebtedness to Genesis Global Capital due in May 2023. These borrowings were used to finance investment opportunities and to repurchase DCG shares from non-shareholders. employees, in secondary transactions previously highlighted in quarterly shareholder updates. To this day, I have never sold a share of my DCG shares.

You may also recall that there is a $1.1 billion promissory note due in June 2032. As we shared in our previous shareholder letter in August 2022, DCG stepped in and assumed certain obligations of Genesis related to Three Arrows Capital’s default. As stated in August, as these are already liabilities of DCG, DCG is participating in the liquidation proceedings of Three Arrows Capital in the Committee of Creditors and using all available funds to recover assets for the benefit of creditors. Aside from Genesis Global Capital’s intercompany loans maturing in May 2023 and the long-term promissory note, DCG’s only debt is a $350 million loan from a small group of lenders led by Eldridge.

Taking a step back, let me be crystal clear: DCG will continue to be a leading industry builder, and we are committed to our long-term mission to accelerate the development of a better financial system. We’ve weathered previous crypto winters, and while this one may feel tougher, we’ll collectively come out of it stronger. DCG has only raised $25 million in seed capital and we’re aiming to do $800 million in revenue this year.

I bought my first bitcoin a decade ago in 2012 and decided to commit to this industry for the long term. In 2013, we founded the first BTC trading firm – Genesis – and the first BTC fund, which evolved into Grayscale, now the world’s largest digital currency asset manager. Foundry operates the world’s largest Bitcoin mining pool and is building tomorrow’s decentralized infrastructure. CoinDesk is the leading 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 an industry leader in emerging markets. TradeBlock is building a seamless institutional trading platform and as its newest subsidiary HQ is creating a life and wealth management platform for digital asset entrepreneurs. Each of these subsidiaries is a stand-alone business that is independently managed and business 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 along with suggestions for investing in DCG. We will let you know if we decide to do a funding round.

Despite the difficult conditions in the industry, I am as excited as ever about the potential of cryptocurrencies and blockchain technology in the coming decades, and DCG is determined to stay at the forefront.

Barry

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