Grayscale owner DCB has revealed that it is $2bn (£1.65bn) in debt, causing the value of bitcoin to look increasingly precarious due to the company's digital asset holdings and its ownership of troubled crypto lender Genesis.
The Grayscale Bitcoin Trust is one of the world's largest holders of bitcoin (BTC-USD), with a stash totalling 643,572 BTC, worth $10.6bn. This is approximately 3% of all available bitcoin.
Grayscale could be affected by the recent collapse of crypto exchange FTX as its parent company Digital Currency Group (DCG) also owns Genesis which has been forced to halt customer withdrawals.
The lending platform has $175m in locked funds on bankrupt exchange FTX and investors are waiting to see if DCG will bail out the struggling subsidiary.
In a note to shareholders on Tuesday, DCG founder Barry Silbert attempted to calm investor nerves about the financial health of DCG’s subsidiaries Genesis, Grayscale Investments and mining company Foundry.
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Silbert wrote: “We have weathered previous crypto winters, while this one may feel more severe, collectively we will come out of it stronger.”
Genesis needs a $1bn capital injection, according to Reuters. DCG’s debts amount to just over $2bn and the company loaned Genesis roughly $575m. It also absorbed the $1.1bn debt that the bankrupt crypto hedge fund Three Arrows Capital owed Genesis.
It has been reported that Genesis Global Capital hired investment bank Moelis & Co to explore options, including a potential bankruptcy.
Crypto-commentator TradFiWhale said on Twitter: "DCG's Grayscale business is extremely valuable.
"DCG doesn't want to fire sale this, so, they will likely let Genesis go under.
"Genesis likely filing for bankruptcy, I think creditors will eventually get most of money back, and DCG will survive with a black eye and marred reputation."
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DCG tweeted: "The impact lies with the lending business at Genesis and does not affect Genesis’s trading or custody businesses.
"Importantly, this temporary action has no impact on the business operations of DCG and our other wholly owned subsidiaries."
Genesis could be the final domino to fall in a crisis that has its origin in May's Terra's UST/Luna (LUNA1-USD) crash that took down Three Arrows Capital, Voyager Digital (VYGVQ) and ultimately FTX, after several months.
However, because Genesis is an institutional lender, the impact of its fall could have wider market reverberations.
The crypto lender is estimated to be the prime brokerage of all of the cryptocurrency ecosystem, a place for institutions to access crypto markets.
On Thursday David Hoffman of the Bankless podcast asked: "Is Genesis going to take the entire cryptocurrency down?"
Silbet said: "Despite the difficult industry conditions, I am as excited as ever about the potential for cryptocurrencies and blockchain technology over the coming decades and DCG is determined to remain at the forefront."
On Friday, bitcoin was down 1.7% in the past week to $16,471, while ether (ETH-USD) fell 1.6% to $1,182.
After the collapse of FTX led to a string of linked crypto-lending platforms shutting down customer withdrawals, some proponents have been looking to decentralised exchanges (DEXs) as the solution.
DEXs are a type of cryptocurrency exchange which allow for direct peer-to-peer crypto-transactions from one digital wallet to another, without the need for an intermediary, and with user funds staying in the wallet owned by that user.
However, what initiatives are actually coming out of the decentralised finance space to answer the problem of insolvency on centralised platforms?
A collection of decentralised exchanges, such as Drift Protocol, GMX, and Perpetual Protocol are "building an aggregated dashboard", which they promise will allow greater transparency for institutional and retail users.
This new aggregated dashboard will provide information on proof of deposits, insurance funds and borrowing levels.
The collective told Yahoo Finance UK: "We already have the solution to the challenges brought to light by FTX’s collapse, decentralized finance, and we must work collaboratively to prove its merits.
"Our greatest fear is that this incident will be used to kneecap the development of a technology that was built to prevent this in the first place. Now’s the time to lean into the promise of DeFi."
Organisations that operate decentralised exchanges are reaching out to global regulatory bodies to start a dialogue for the improvement of the transparency and security of the industry.
Drift Protocol, GMX, and Perpetual Protocol told Yahoo Finance UK: "DeFi as a primitive was designed to prevent the loss of customer deposits that have occurred to date. Although the distinction may be confusing for non-crypto native individuals.
"We are here, ready, willing and able to guide any regulator through the clear distinctions that separate DeFi from CeFi.
"We welcome meaningful and productive engagement with regulators to move this space forward."