Update (Aug. 15 at 11:40 pm UTC): This article has been revised to incorporate a statement from Genesis’ legal representative.
The venture capital firm Digital Currency Group (DCG), the parent entity of numerous organizations associated with cryptocurrency and blockchain, has lodged a complaint against two of its subsidiaries regarding a promissory note aimed at mitigating the 2022 default of Three Arrows Capital (3AC).
In a filing on Thursday in the US Bankruptcy Court for the Southern District of New York, DCG claimed that Genesis Global Capital and Genesis Asia Pacific, both part of the venture capital group, owed their parent company excess payments based on recoveries from 3AC.
The complaint indicated that DCG provided a $1.1 billion promissory note to the Genesis entities, which earned “hundreds of millions of dollars” without incurring any losses from 3AC’s default in 2022.
According to DCG, the firm issued a 10-year promissory note to Genesis Global Capital in June 2022 as a precaution against any potential “gap” in Genesis Asia Pacific’s equity that could have arisen from the failure of 3AC, one of Genesis’ borrowers. DCG asserted that instead of encountering significant liquidity challenges from 3AC, Genesis “reap[ed] a massive windfall” and was required to return payments made on the promissory note.
The recent complaint marked yet another legal confrontation between DCG and Genesis regarding the fallout from 3AC’s demise. In May, Genesis initiated lawsuits against its parent entity, affiliates, and CEO Barry Silbert, asserting claims of fraud, insider enrichment, and undisclosed transfers. The firm sought $3.3 billion from DCG, alleging that the latter withdrew funds prior to Genesis’ bankruptcy.
“DCG’s unfounded, erratic and convenient reversal to withhold 3AC distributions is baseless,” remarked Luke Barefoot, a partner at the law firm Cleary Gottlieb and counsel to Genesis, in a statement to Cointelegraph. “It plainly contradicts the written agreements, DCG’s claims to the bankruptcy court, and the fact that DCG has already distributed $100M+.”
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The $1.1-billion promissory note referenced in the filing was issued in response to the fall of 3AC, with Genesis potentially facing a deficit in its equity for the second quarter of 2022.
However, DCG noted that “cryptocurrency prices ultimately recovered,” enabling Genesis to utilize 3AC’s collateral — shares of Grayscale’s Bitcoin Trust, which appreciated in value alongside the cryptocurrency — to profit from the loans.
“[T]he additional amounts accrued by Genesis following the issuance of the Note were, based on the pleadings filed by Genesis in this Court seeking endorsement of that transaction, far more than sufficient to address the preceding $1.1 billion collateral deficit—and, on information and belief, permitted Genesis to profit from [3AC]’s default by reclaiming nearly $2.8 billion on the original $2.36 billion in [3AC] Loans,” stated the filing.
FTX’s Collapse Intertwined
The cryptocurrency market downturn of 2022, which many analysts suggested was influenced by the disintegration of the Terra ecosystem, resulted in several bankruptcies and liquidity crises, with many retail investors losing substantial amounts. In the midst of the market turmoil, FTX, one of the largest cryptocurrency exchanges at the time, filed for bankruptcy, and several of its executives faced charges for fraud.
“While [Genesis Global Capital’s] direct credit exposure to FTX was not significant, the FTX bankruptcy triggered a wave equivalent to a tsunami in the crypto realm, producing widespread and enduring consequences, including [Genesis Global Capital’s] bankruptcy filing on January 19, 2023 due to the ‘run on the bank’ that followed in November 2022 and forced Genesis to suspend withdrawals,” stated the filing, adding:
“Even had [3AC] not defaulted in June 2022, [Genesis Global Capital] would not have had sufficient capital to endure the unexpected and severe market downturn that ensued after the collapse of FTX in November 2022, which also prompted crypto lender BlockFi to file for Chapter 11 bankruptcy in the same month.”
Following Genesis’ bankruptcy filing, the company completed its restructuring strategy in August 2024 and announced the disbursement of approximately $4 billion in funds to affected parties. DCG requested the court to order Genesis to repay over $105 million plus interest.
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