Tyler Winklevoss, CEO and co-founder of Gemini Trust Co., left, and Cameron Winklevoss, president and co-founder of Gemini Trust Co., speak during the Bitcoin 2021 conference in Miami, Florida, US, on Friday, June. 4, 2021.
Eva Marie Uzcategui | Bloomberg | Getty Images
Cameron Winklevoss and Barry Silbert were both early believers Bitcoin who made money from their investments and built great businesses along the way. for about two yearsThey enjoyed a mutually beneficial partnership that made their clients a lot of money.
Now, the bitcoin heavyweights are in a fierce war of words This shows the depth of the crypto crisis and underscores the risks that were ultimately taken by ordinary investors who were trapped in a largely unregulated market. As it stands, hundreds of millions of dollars of customer cash are sitting in a limbo as two crypto entrepreneurs battle over who is responsible.
Silbert is the founder of the Digital Currency Group (DCG), a crypto conglomerate that includes Grayscale Bitcoin Trust and others. trading platform Produce, Winklevoss, along with his brother Tyler, co-founded the popular Gemini Crypto exchange that is unlike many of its peers subject New York for Banking Regulation.
Winklevoss and Silbert were linked through an offering called Earn, a nearly two-year-old Gemini product that promoted Up to 8% return on customer deposits. With Earn, Gemini lent client money to Genesis for placement at various crypto trading desks and lenders.
As the digital coin market soared in 2020 and 2021, that capital produced higher returns for originators and easier payments to users, which was very attractive at a time when the Federal Reserve’s benchmark rate was near zero. Other risky (and now defunct) crypto platforms such as Celsius and Voyager Digital were offering higher yields of up to 20%.
Barry Silbert, founder and CEO of Digital Currency Group
David A. Grogan | cnbc
It was a flourishing business. Genesis had 260 employees and a strong sales desk, and Gemini was one of its largest lending partners, sending $900 million worth of customer crypto to the firm. According to a person with direct knowledge of the matter, Gemini considers Genesis, which is regulated by the State of New York and the Securities and Exchange Commission, to be the most trusted name in crypto lending. Diversification was a challenge, as other players had lower risk appetite, said the source, who asked not to be named for the sake of confidentiality.
In 2022, the crypto market crashed and the Earn model fell apart.
Cryptocurrencies turned south, borrowers stopped paying back their loans, hedge funds and lenders went under, and activity ground to a halt.
The floodgates opened even wider in November, when ftx headed for bankruptcy and crypto exchanges were unable to access billions of dollars in customer deposits. FTX founder Sam Bankman-Fried was soon arrested for cheatingaccused of using client funds for trading, lending, venture investment and The lavish lifestyle in the Bahamas.
An industry-wide crisis as crypto investors across the board tried to withdraw their assets. Five days after FTX crashed, Genesis was forced to freeze new lending and suspend redemption, “FTX has caused unprecedented market turbulence, resulting in unusual withdrawal requests that exceed our current liquidity,” the company said in a tweet.
All withdrawals on Earn have been frozen since November. Gemini’s 340,000 retail customers are angry, and some have banded together class actions Against Genesis and Gemini. The Winklevoss puts the blame squarely on Silbert’s shoulders, and he has gone public with his fight to retrieve the $900 million deposits his customers placed with Origin.
one in letter On January 2, to Silbert, Winklevoss said the funds belonged to clients including a school teacher, a police officer and “a single mother who lent you money for her son’s education.”
Winklevoss said that Gemini had been trying for six weeks to engage with Silbert in a “good faith” manner, only to be met with “bad faith stall tactics”. A source said that Gemini lawyers had attempted to work with Genesis’ team through the Thanksgiving holiday, but found their efforts effectively thwarted.
Another person, who asked not to be named, told CNBC that counsel to Genesis, DCG, and Gemini’s creditor committee met several times during the six-week period referenced by the Winklevoss.
The Gemini creditors are represented by both Kirkland & Ellis and Prosquire Rose of counsel and Houlihan Locke of financial advisor.
Advisors to DCG and Genesis include law firm Cleary Gottlieb Stein & Hamilton and investment bank Moelis & Company.
The most recent meeting between the three sets of lawyers and bankers was on Monday, according to the person.
on Tuesday, the winklevoss open letter to the board of DCG, asking that it replace Silbert.
One of the Winklevoss’ central complaints stems from a loan made by Silbert to Origin following the demise of crypto hedge fund Three Arrows Capital (3AC) last year. was the origin owes over a billion dollars By 3AC when the firm defaulted on its loan. Silbert intervened and effectively hedged his trading firm’s exposure with a $1.1 billion intercompany loan to Genesis.
At the time, Genesis tried to reassure Gemini that the DCG unit remained solvent and strong and was supported by its parent company. Silbert justified the decision in a message to investors this week, writing that “Genesis had unmatched expertise and the best institutional client base in the world.” Court filings show that on July 6, Genesis assured Gemini that liquidity was not a concern, and the two parties agreed to work together.
Gemini claims that Genesis provided misleading information about Silbert’s debt. Instead of strengthening Genesis’s operating position, the Winklevoss wrote, the loan was a “10-year promissory note” and “a complete gimmick that did nothing to improve Genesis’s immediate liquidity position or make its balance sheet solvent.” did not do.”
Silbert has avoided directly responding to Winklevoss’ latest allegation, though the company has defended him. In a tweet on Tuesday, the DCG called the letter “another desperate and unconstitutional publicity stunt”, adding, “We are preserving all legal remedies in response to these malicious, fake and defamatory attacks.”
“DCG will continue to engage in productive negotiations with Origin and its creditors with the goal of arriving at a solution that works for all parties,” the company said.
A DCG spokesperson told CNBC that the company denies Winklevoss’ allegations of financial impropriety.
Public and high-profile controversy is nothing new for the 41-year-old Winklevoss twins. He is best known for his role in the birth of Facebook, now known as meta, founded by a Harvard classmate mark zuckerberg, They sued Zuckerberg, eventually settling in 2011. $65 million payout In cash and Facebook stock.
The brothers quickly turned to cryptography and until 2013 Said they control 1% of all bitcoins in circulation. The stake grew from $11 million at the time to more than $4.5 billion when bitcoin peaked in 2021.
Silbert and the Winklevoss brothers were bitcoin bulls before any exchange or trading app made it easy to buy digital currencies and well ahead of institutional interest in the space. Now that the trade has reversed, they are in deep conflict.
Facing mounting pressure from creditors and the growing threat of bankruptcy, Genesis recently cut its workforce by 30%. second round of layoffs, Gemini to cut 10% of its workforce in June 2022 with second round Seven weeks after layoff.
Winklevoss says thousands of Gemini customers are “looking for answers.” On Tuesday, Gemini told Earn clients it was terminating the client loan agreement with Genesis and ending the program.
Gemini and Genesis insist that they are talking in good faith. But the harsh reality is that, with the bursting of the crypto bubble last year, both companies were left with nowhere to hide. Their clients are now scrambling to make ends meet.
— CNBC’s Kate Rooney contributed to this report.