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FTX Contagion Hits Winklevoss Twins as Crypto Lenders Come Under Fire

(Bloomberg) -- The fallout from the rapid collapse of Sam Bankman-Fried’s FTX is spreading across the crypto world, ensnaring the billionaire Winklevoss twins through a liquidity squeeze at their lending partner, Genesis.

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Genesis is suspending redemptions and new loan originations at its lending business after the unit faced withdrawal requests that exceeded current liquidity. Gemini Trust Co., founded by Cameron and Tyler Winklevoss, subsequently announced its yield product for retail investors will also halt redemptions as Genesis was a key partner in the program.

The crypto world, initially built on the tenet of decentralization but which ballooned into a full-fledged financial ecosystem complete with digital-asset lending, is facing a reckoning in the wake of FTX’s bankruptcy. Regulators are probing whether Bankman-Fried and his associates misused customer funds.

At stake is whether a crisis of confidence topples the lucrative business of borrowing, lending and leveraging crypto and causes an industry-wide retrenchment.

Genesis, a counterparty to many in the sector, has been closely watched as a gauge of the industry’s strength -- or for signs of contagion. Gemini, whose Earn program offers customers the opportunity to put their “crypto to work” in return for yields exceeding 8%, is one of Genesis’s biggest lenders. It had originated $4 billion in crypto loans as of a year ago.

“We are working with the Genesis team to help customers redeem their funds from the Earn program as quickly as possible,” Gemini said on its website. “We will provide more information in the coming days.”

“This does not impact any other Gemini products and services,” the firm added. “All customer funds held on the Gemini exchange are held 1:1 and available for withdrawal at any time.”

BlockFi, Voyager

Crypto lenders BlockFi Inc. and Voyager Digital Ltd. are also under pressure.

BlockFi, which on Monday said it had “significant exposure” to FTX and its related entities, is preparing a potential bankruptcy filing, the Wall Street Journal reported. Voyager, which Bankman-Fried was going to rescue in a $1.4 billion deal, is now twisting in the wind, trying to find a replacement buyer for its assets.

Investors such as crypto hedge fund Galois Capital, which reported “significant” funds stuck on FTX’s platform, are also feeling the impact. Even miners are getting hit as the decline in crypto prices sparked by the collapse of FTX has also put further pressure on profits.

But it’s crypto lenders that are feeling the most acute strain after a year of persistent downward pressure on digital-asset prices and multiple high-profile blowups, including the algorithmic stablecoin TerraUSD and hedge fund Three Arrows Capital.

Celsius Network Ltd., itself a crypto lender, was among the major causality of those collapses earlier this year. It sought bankruptcy protection.

Equity Infusion

Genesis said last week it would get a $140 million equity infusion from its parent company, Barry Silbert’s Digital Currency Group, after disclosing that its derivatives business had $175 million locked in an FTX trading account.

While Genesis is one of oldest and most well-known crypto brokers, over the past few years it built one of the largest digital-asset lenders as well, allowing funds or other market makers to borrow dollars or virtual currencies to leverage their trades.

The lending business already faced trouble when Three Arrows collapsed. It had made a $2.4 billion loan to the now-bankrupt hedge fund, which was run by Su Zhu and Kyle Davies.

The requests to withdraw funds exceeded available liquidity at Genesis Global Capital, its lending arm, according to interim Chief Executive Officer Derar Islim. The New York-based company has hired advisers to explore all possible options, including raising new funding, and will deliver a plan for its lending business next week, Islim said. Alvarez & Marsal and the law firm Cleary Gottlieb are advising Genesis.

The move will affect only the lending business, according to Islim, who said Genesis’s spot and derivatives trading and custody businesses “remain fully operational.”

The lending business has shrunk dramatically, with loan originations falling to $8.4 billion in the third quarter from $44.3 billion in the first three months of the year.

Genesis had been downsizing ahead of its latest squeeze. The company eliminated 20% of its then 260-person workforce in August and appointed Islim as interim CEO, replacing Michael Moro.

Announced departures include Noelle Acheson, who left her post as head of market insights; Matthew Ballensweig, who stepped down as co-head of sales and trading and said he would move into an advisory position; and Michael Patchen, who left after three months as chief risk officer.

Digital Currency Group also controls Grayscale Investments, which offers the Grayscale Bitcoin Trust, or GBTC, the largest investment vehicle in the crypto market. The trust is trading at about a 40% discount to the market price of Bitcoin.

Crypto prices, which have taken a leg lower since FTX’s troubles started earlier this month, extended losses Wednesday, with Bitcoin fallng as much as 2.9%. The world’s largest cryptocurrency has tumbled around 75% from a record high of almost $69,000 reached about a year ago.

--With assistance from Muyao Shen.

(Updates with details of Gemini’s Earn program starting in fifth paragraph.)

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