Crypto

Why The Winklevoss Brothers Are In A $900 Million Crypto Showdown With Barry Silbert

Tyler Winklevoss, CEO and Co-Founder of Gemini Trust Co., left, and Cameron Winklevoss, Chairman and Co-Founder of Gemini Trust Co., speak at the 2021 Bitcoin Conference in Miami, Florida, US , on Friday , June 4, 2021.

Eva Marie Uzcategui | Bloomberg | Getty Images

Both Cameron Winklevoss and Barry Silbert were early supporters of bitcoins who made their fortunes on their investments and built great businesses along the way. For almost two yearsthey enjoyed a mutually beneficial partnership that made a lot of money for their customers.

Now the bitcoin heavyweights are in a deadly war of words which illustrates the depth of the crypto crisis and underscores the risks that were ultimately assumed by ordinary investors who found themselves caught in a massively unregulated market. As it stands, hundreds of millions of dollars in customer cash sits in an unreachable limbo as the two crypto entrepreneurs argue over who is responsible.

Silbert is the founder of Digital Currency Group (DCG), a crypto conglomerate that includes the Grayscale Bitcoin Trust and Exchange platform Genesis. Winklevoss, along with his brother Tyler, co-founded Gemini, a popular crypto exchange which, unlike many of its peers, is matter New York banking regulations.

Winklevoss and Silbert were linked by an offer called Earn, a nearly two-year-old Gemini product that promoted returns of up to 8% on customer deposits. Along with Earn, Gemini loaned its clients’ money to Genesis to be placed on various crypto trading desks and borrowers.

As the digital coin markets soared in 2020 and 2021, this capital produced high returns for Genesis and easily paid Earn users their return, which was very attractive at a time when the benchmark rate of the Federal Reserve was virtually nil. Other riskier (and now defunct) crypto platforms like Celsius and Voyager Digital offered returns of up to 20%.

Barry Silbert, Founder and CEO, Digital Currency Group

David A. Grogan | CNBC

It was a booming business. Genesis had 260 employees and a robust sales office, and Gemini was one of its top lending partners, sending $900 million worth of client crypto to the company. Gemini considered Genesis, which is regulated by New York State and the Securities and Exchange Commission, to be the most trusted name in crypto lending, according to a person with direct knowledge of the matter. Diversification was a challenge as other players had looser risk standards, said the source, who asked not to be named for confidentiality reasons.

Friends turned enemies

In 2022, the crypto market crashed and the Earn model collapsed.

Cryptocurrencies turned south, borrowers stopped paying debt, hedge funds and lenders went bankrupt, and activity came to a screeching halt.

The floodgates opened even wider in November, when FTX descended into bankruptcy and the crypto exchange’s customers were unable to access billions of dollars in deposits. FTX founder Sam Bankman-Fried was soon arrested for fraudaccused of using client funds for trading, lending, venture capital investment and its lavish lifestyle in the Bahamas.

An industry-wide crisis ensued as crypto investors at all levels attempted to withdraw their assets. Five days after FTX’s collapse, Genesis was forced to freeze new loans and suspend redemptions. In a tweet, the company said, “FTX has created unprecedented market turbulence resulting in abnormal withdrawal requests that have exceeded our current liquidity.”

The contagion was so fast that Gemini and Genesis experts hired to guide them through a potential bankruptcy of Genesis.

All withdrawals on Earn have been suspended since November. Gemini’s 340,000 retail customers are angry, and some have banded together to class actions against Genesis and Gemini. Winklevoss puts the blame on Silbert’s shoulders, and he went public with his battle to recover the $900 million in deposits his clients placed with Genesis.

In a letter in Silbert on Jan. 2, Winklevoss said those funds belonged to clients, including a teacher, a police officer, and “a single mother who lent you the money for her son’s education.”

Winklevoss said Gemini tried for six weeks to engage in “good faith” with Silbert only to be met with “bad faith stall tactics.” Gemini’s attorneys had attempted to work with the Genesis team over the Thanksgiving holiday but found their efforts effectively rebuffed, a source said.

Another person who asked not to be named told CNBC that advisers to Genesis, DCG and Gemini’s creditors’ committee met several times during the six-week period mentioned by Winklevoss.

Gemini’s creditors are represented by attorneys from Kirkland & Ellis and Proskauer Rose, and financial advisers from Houlihan Lokey.

Advisors to DCG and Genesis include law firm Cleary Gottlieb Steen & Hamilton and investment bank Moelis and Company.

The most recent meeting between the three groups of lawyers and bankers was on Monday, according to this individual.

Tuesday, Winklevoss followed up with a open letter to the DCG board, asking him to replace Silbert.

One of Winklevoss’ main complaints stems from a loan Silbert made to Genesis after crypto hedge fund Three Arrows Capital (3AC) disappeared last year. Genesis was owed over a billion dollars by 3AC when the company defaulted on its debt. Silbert stepped in and effectively backed his trading company’s exposure with a $1.1 billion intercompany loan to Genesis.

At the time, Genesis sought to reassure Gemini that the DCG unit remained solvent and solid and was backed by its parent company. Silbert justified the decision in a message to investors this week, writing that “Genesis had unparalleled expertise and the best institutional clientele in the world.” Court records show that on July 6, Genesis assured Gemini that liquidity was not an issue, and the two parties agreed to continue working together.

Gemini claims Genesis provided misleading information regarding Silbert’s loan. Rather than serving to bolster Genesis’ operating position, the loan was a “10-year promissory note” and was a “complete gimmick that did nothing to improve Genesis’ immediate liquidity position or make its balance sheet solvent.” “, wrote Winklevoss.

Silbert avoided directly responding to Winklevoss’ latest accusation, although the company came to his defense. In a tweet on Tuesday, DCG called the letter “another desperate and unconstructive publicity stunt”, adding that “we preserve all legal remedies in response to these malicious, false and defamatory attacks”.

“DCG will continue to engage in a productive dialogue with Genesis 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 allegations of financial irregularities by Winklevoss.

For the 41-year-old Winklevoss twins, a public and high-profile spat is nothing new. They are best known for their role in the birth of Facebook, now known as Meta, which was founded by a Harvard classmate Mark Zuckerberg. They sued Zuckerberg, finally settling in 2011 with a $65 million payout in cash and Facebook shares.

The brothers quickly turned to crypto and by 2013 said they control 1% of all bitcoins in circulation. The stake grew from $11 million at the time to over $4.5 billion when bitcoin peaked in 2021.

Silbert, 46, entered the market around the same time. He sold his previous company, SecondMarket, on Nasdaq in 2015, and started DCG that year. But he first invested in bitcoin in 2012.

Silbert and the Winklevoss brothers were bitcoin bulls long before exchanges or trading apps made it easy to buy digital currencies and long before institutional interest in the space. Now that the trade has reversed, they are locked in the fight.

Faced with mounting pressure from creditors and the looming threat of bankruptcy, Genesis recently cut its workforce by 30% in a second round of layoffs. Gemini cut 10% of its workforce in June 2022, with another round layoffs seven weeks later.

Winklevoss says Gemini’s thousands of customers are “looking for answers.” On Tuesday, Gemini told Earn customers it was terminating customer loan agreements with Genesis and ending the program.

Gemini and Genesis insist they are negotiating in good faith. But the harsh reality is that with the bursting of the crypto bubble last year, both companies had no place to hide. Their clients are now scrambling to be healed.

– CNBC’s Kate Rooney contributed to this report.

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