DCG’s Barry Silbert writes letter to investors after FTX collapse

Barry Silbert, the founder of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders trying to calm investor nerves following the sudden collapse of FTX.

In a note to shareholders on Tuesday, Silbert addressed all the “fuss” about the financial health of DCG’s subsidiaries, including trading firm Genesis, Grayscale Investments and mining company Foundry.

Since FTX’s rapid winding down two weeks ago, investors have been concerned about a crypto contagion hitting every corner of the industry. Lenders have stopped lending, withdrawals are more difficult and unregulated, little-understood tokens have fallen in value. The leading cryptocurrencies, bitcoin and etherhave also continued their year-long descent.

Silbert, an early bitcoin evangelist who founded DCG in 2015, said that despite the crypto winter, the company is on track to generate $800 million in revenue this year from just $25 million in primary capital since inception. Forbes estimates Silbert’s net worth at $2 billion.

“We have made it through previous crypto winters,” Silbert wrote, adding that “while this one may feel tougher, collectively we will come out stronger.”

Coinbase, Binance and Crypto.com have similarly done their best to address customer concerns to avoid an FTX-like run on customer deposits. All of them have expressed shock at FTX’s apparent deception of investors and clients, stressing that clients’ assets are safe.

That’s all with the realization that FTX and founder Sam Bankman-Fried have betrayed the trust of an industry that was already in the middle of a relentless year of losses. Bankman-Fried said his company’s assets were “fine” two days before he was desperate for bailout from a liquidity crunch.

For DCG specifically, investor confidence took a hit this past week, when the Wall Street Journal reported that Genesis had attempted to raise $1 billion from investors before eventually halting some withdrawals. There were reports that Genesis would soon file for bankruptcy, which the company publicly refuted.

Fear spread to the Grayscale Bitcoin Trust, known for its ticker GBTC, which allows investors to access bitcoin through a more traditional security. GBTC is currently trading at a 42% discount to bitcoin, up from a nearly 30% discount two months ago.

Regarding Genesis’ lending business, Silbert said in the letter that the suspension of principals and new borrowing on Nov. 16 was “a matter of liquidity and maturity mismatch” in the loan book. These issues, he said, had “no impact” on Genesis’ spot and derivatives trading or custody operations, which “continue to operate as usual.”

He acknowledged that Genesis has hired financial and legal advisors as the company considers its options.

DCG’s debts are just over $2 billion. The company loaned Genesis approximately $575 million, priced at “prevailing market interest rates,” due in May 2023. It also absorbed the $1.1 billion debt owed to Genesis by bankrupt crypto hedge fund Three Arrows Capital.

With Three Arrows in bankruptcy, DCG is “pursuing all available resources to recover assets for the benefit of creditors,” Silbert wrote. DCG’s only other debt is a $350 million credit facility from “a small group of lenders led by Eldridge”.

Read Silbert’s full letter below:

Dear Shareholders,

There has been a lot of noise this past week and I want to reach out directly to clarify where we stand at DCG.

Most of you are aware of the situation at Genesis, but to recap beforehand, Genesis Global Capital, Genesis’s lending business, temporarily suspended redemptions and new loans last Wednesday, November 16 after market turmoil led to unprecedented withdrawal requests. This is a matter of liquidity and maturity mismatch in the Genesis loan book. Importantly, these issues do not affect Genesis’ spot and derivatives trading or custody operations, which continue to operate as normal. Genesis leadership and their board decided to hire financial and legal advisors and the company is exploring all possible options amid the fallout from the FTX implosion.

In recent days, there have been rumors of intercompany loans between Genesis Global Capital and DCG. For those who don’t know, in the normal course of business DCG has borrowed money from Genesis Global Capital in the same vein as hundreds of crypto investment firms. These loans were always commercially structured and priced at market interest rates. DCG is currently in debt to Genesis Global Capital of ~$575 million, due May 2023. These loans were used to fund investment opportunities and repurchase DCG stock from non-employees in secondary transactions previously reported in quarterly shareholder updates . And to this day I have never sold any part of my DCG stock.

You may also recall that there is a $1.1 billion promissory note due in June 2032. As we shared in our previous shareholder letter in August 2022, DCG stepped in and assumed certain liabilities of Genesis related to Three Arrows Capital’s default. As reported in August, as these are now DCG liabilities, DCG is participating in the Three Arrows Capital liquidation proceedings in the Creditors’ Committee and is using all available resources to recover assets for the benefit of creditors. Other than Genesis Global Capital’s intercompany loans due May 2023 and the long-term promissory note, DCG’s only debt is a $350 million credit facility from a small group of lenders led by Eldridge.

Taking a step back, I can be crystal clear: DCG will continue to be a leading builder of the industry and we are committed to our long-term mission to accelerate the development of a better financial system. We’ve made it through previous crypto winters and while this one may feel harsher, collectively we will emerge stronger. DCG has raised just $25 million in primary capital and we are on track to generate $800 million in revenue this year.

I bought my first bitcoin ten years ago in 2012 and made the decision that I would commit to this industry for the long term. In 2013, we founded the first BTC trading company – Genesis – and the first BTC fund, which evolved into Grayscale, now the world’s largest digital currency asset manager. Foundry runs the largest bitcoin mining pool in the world and is building the decentralized infrastructure of tomorrow. CoinDesk is the premier media, data, and events company in the industry, and they’ve done a phenomenal job during this crypto winter. Luno is one of the most popular crypto wallets in the world and is a market leader in emerging markets. TradeBlock is building a seamless institutional trading platform and as the latest subsidiary, HQ is establishing a life and wealth management platform for digital asset entrepreneurs. Each of these subsidiaries are stand-alone companies that are independently managed and operate normally. Finally, with a portfolio of over 200 companies and funds, we are often the first to vet the best founders in the industry.

We appreciate the words of encouragement and support along with offers to invest in DCG. We will let you know if we decide to do a financing round.

Despite the challenging industry conditions, I am as excited as ever about the potential for cryptocurrencies and blockchain technology in the coming decades and DCG is determined to stay ahead of the game.

Barry

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