FTX Collapse: Barry Silbert's Crypto Empire Is In the Crosshairs of Regulators

Digital Currency Group, the head of Barry Silbert's crypto empire, is under DoJ and SEC investigations, according to Bloomberg News.

The bankruptcy of Sam Bankman-Fried's crypto empire continues to cause waves in the crypto space. 

The various firms continue to monitor each other to find out who will be the next collateral victims of this disaster after the lender BlockFi went down.

All eyes have been on lender Genesis, a subsidiary of crypto juggernaut Digital Currency Group, aka DCG. Last November, the brokerage stopped customers from making withdrawals and issuing new loans as a result of the bankruptcy of FTX. The division that has halted the withdrawals is Genesis Global Capital, which works with institutional clients and had $2.8 billion in total active loans as of the end of the third quarter.

The company had funds locked in its FTX trading account. 

Genesis is also closely watched by regulators. According to Bloomberg News, the Department of Justice and the Security and Exchange Commission are conducting separate investigations into the parent company of the lender and the relationship between the two firms.

Relations Between DCG and Genesis

Federal prosecutors are, for example, closely examining the transfers of funds between DCG and Genesis. They also want to determine what was told to investors about the transactions between the two companies. 

This is similar to the interest of the investigators in the incestuous relations between FTX and its sister company Alameda Research, a hedge fund which was also a trading platform for institutional investors. The fall of the Bankman-Fried empire showed that funds from FTX clients had been loaned to Alameda, amounting to approximately $10 billion. However, the two companies were supposed to be independent even if they shared the same founder.

Federal investigators have requested documents from DCG and Genesis. Both investigations are still in the initial stages and no allegations have yet been made against Digital Currency Group or Genesis. 

“While we do not comment on specific legal or regulatory matters, Genesis maintains regular dialogue and cooperates with relevant regulators and authorities when it receives inquiries," a spokesperson told TheStreet in an emailed statement.

DCG didn't immediately respond to a request for comment. The DoJ and the SEC also did not respond. The DoJ investigation is led by the United States Attorney's Office Eastern District of New York.

"DCG has a strong culture of integrity and has always conducted its business lawfully. We have no knowledge of or reason to believe that there is any Eastern District of New York investigation into DCG," the company told Bloomberg.

The information on the investigations of the regulators comes at a very bad time for DCG and its subsidiary. The Wall Street Journal reported a few days ago that Genesis was on the verge of bankruptcy. The company has also decided to take emergency measures, in particular the elimination of 30% of its workforce.

"We continue working with our advisors, in collaboration with DCG and advisors appointed by various client groups, to evaluate options to preserve client assets and move the business forward," a spokesperson told TheStreet on Jan. 5.

A Genesis bankruptcy filing would also affect the Gemini cryptocurrency exchange founded by the billionaire twin brothers Tyler and Cameron Winklevoss. 

Genesis Providing Loans

Genesis is Gemini's partner in a reward program offered by the platform to attract customers. This program is called Gemini Earn. It's a high-yield savings product that promises customers of the cryptocurrency exchange up to an 8% annual return on crypto deposits, depending on which assets are held. Under this program, Genesis serves as Gemini's primary lender.

Genesis owes $900 million to Gemini's Earn users. Gemini was also forced to pause withdrawals related to Gemini Earn following the decision of Genesis, which is owned by crypto juggernaut Digital Currency Group.

For several weeks the two companies have been trying to solve the problem, but apparently things are not moving forward. So said Cameron Winklevoss in an open letter to Barry Silbert, the founder and CEO of DCG.

Silbert told investors, last November, that DCG received a $575 million loan from Genesis that is due in May. He also said there's a $1.1 billion promissory note due in June 2032 tied to the collapse of hedge fund Three Arrows Capital, or 3AC.

He asserted that the loans were "always structured on an arm's length basis and priced at prevailing market interest rates."

Besides DCG and Genesis, Silbert also controls Grayscale Investments, a digital asset management company that runs a Bitcoin Trust. DCG is also the parent company of Foundry Digital, a crypto mining service provider, and Luno, a London-based cryptocurrency exchange. 

Finally, DCG also owns the crypto news site CoinDesk, which had published the article that caused suspicion around FTX.