The fallout from FTX’s collapse continues to cascade through the cryptocurrency market, and there are fears that one of the biggest names in the industry will face financial difficulties.
Speculation is swirling about the health of Digital Currency Group, a sprawling $10 billion ($15 billion) crypto empire that includes brokerage firm Genesis, wealth manager Grayscale and industry news site CoinDesk.
Genesis was one of many firms affected by the collapse of Bahamas-based FTX – one of the largest crypto exchanges in the world – which froze redemptions last week after it was announced that $175 million ($264 million) dollars) were locked in their FTX trading account.
Bloomberg reports that Genesis executives spent the weekend raising fresh money from investors to deal with a liquidity crunch, warning that the company may have to file for bankruptcy if it doesn’t reach at least $1 billion ($1.5 billion) of capital.
Binance reportedly turned down an application to invest in Genesis on Monday.
“We have no plans to file for bankruptcy immediately,” the company said in a previous statement to Bloomberg. “Our goal is to resolve the current situation amicably without having to file for insolvency. Genesis continues to have constructive discussions with creditors.”
This comes after Grayscale, which operates the world’s largest Bitcoin fund, set off alarm bells in the market on Friday after it refused to share proof of reserves with clients, citing “security concerns.”
Crypto firms took stock after the collapse of FTX, which had just $900 million ($1.3 billion) in assets versus around $9 billion ($13.6 billion) in liabilities when it filed for bankruptcy faced with demands for more transparency.
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Several have published proof of reserve checks, including public digital wallet addresses where assets are stored, to reassure customers that their funds are available. Binance, the world’s largest exchange, is planning to do so soon.
But on Friday, Grayscale said it would not release proof-of-reserves for its Grayscale Bitcoin Trust (GBTC). GBTC is effectively a Bitcoin exchange-traded fund (ETF) that allows investors to gain exposure to the cryptocurrency without actually owning it.
In theory, GBTC units should directly correlate to the price of bitcoin. But shares in the fund — which is estimated to hold more than 3 percent of all mined bitcoin — have fallen sharply, trading at a 45 percent discount to actual bitcoin price, reflecting investor concerns about underlying stocks.
The sharp divergence was triggered by his statement on Friday, in which Grayscale assured investors that the underlying bitcoins would be stored under Coinbase’s custody.
“Coinbase frequently performs on-chain validation,” it said. “For security reasons, we do not make such on-chain wallet information and verification information publicly available via a cryptographic proof-of-reserve or other advanced cryptographic accounting method.”
Grayscale acknowledged that “that would be disappointing to some, but panic instigated by others is not sufficient reason to bypass complex safeguards that have protected our investors’ assets for years.”
The company shared a Nov. 18 letter from Coinbase Chief Financial Officer Alesia Haas that included accounting spreadsheets showing the US-listed exchange sold approximately 635,235 bitcoin on behalf of Grayscale, valued at approximately $10 billion ( 15 billion US dollars).
“To be absolutely clear, the Grayscale Bitcoin Trust underlying $BTC is solely owned by $GBTC and $GBTC,” Grayscale said.
“The laws, regulations and documents defining Grayscale’s digital asset products prohibit the lending, loaning or other encumbrance of the digital assets underlying the products.”
Grayscale insisted that “no other entity, including DCG, Genesis or any other Grayscale affiliate, has any control over the digital assets underlying Grayscale products.”
Despite these reassurances, Bloomberg analyst James Seyffart said fear likely fueled GBTC’s faster sell-off relative to Bitcoin.
“There’s a lot of concern, news and rumor about DCG, Grayscale’s parent,” he said. “I think people just want to get away from anything that might come down, even if it’s just a remote possibility.”
Recent market tremors sent bitcoin to around $15,800 on Tuesday, its lowest level since November 2020.
Grayscale’s refusal to share wallet addresses for security reasons has been met with skepticism by experts.
“That makes literally ZERO sense. ZERO,” wrote Julian Hosp of Cake DeFi.
“Grayscale should show their backing address, El Salvador should show their daily bitcoin purchases and existing holdings, Saylor should show their addresses, Tether should do audits – then all FUDs stop – otherwise FUD just keeps going.”
“This reads like pure lawyer talk from people who have no idea how blockchains work,” said Anthony Sassano of The Daily Gwei newsletter. “Posting an address and signing a message proving ownership of that address is not a security issue.”
“This is going to age incredibly badly,” added blockchain developer Hudson Jameson. “There is no reason to make that claim. Cryptographic proof-of-reserves via Merkle trees or other common methods do not raise any security concerns. If I’m wrong, Grayscale should explain what the concerns are.”
Economist Nouriel Roubini wrote: “Cryptos Gansta G Gang of Four: Genesis, Grayscale, Galaxy, Gemini. Now everyone is in big trouble and/or collapsing. From the moon now all madmen fall to earth!”
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