Gemini Earn customers are likely to receive 100% of their assets, even though the digital currency group has $1.7 billion in genesis.
A creditor committee representing crypto exchange Gemini and other creditors has proposed a plan to liquidate crypto lender Genesis Global Capital’s assets in November 2022 after Genesis halted withdrawals following a lack of FTX liquidity.
Earn locked funds with Gemini Illiquid Loan
Despite having substantial assets, Genesis faces the challenge of raising enough liquidity to meet short-term obligations to its creditors. Gemini believes that the lender will become liquid if it can ramp up liquidity through capital or debt or restructure some of its debt obligations. Gemini partnered with Genesis in 2021 to offer customers up to 7.5% returns on crypto deposits.
Origin could also increase liquidity through a debt-restructuring program that would force Origin Digital Currency Group to make early payments of $1.7 billion in liabilities.
DCG reportedly owes approximately $1.7 billion to originators through a promissory note ($1.1 billion) and an intercompany loan ($575 million). The repayment deadlines for the liabilities are June 2032 and May 2023. These dates provide unallocated debt to help originators quickly restore liquidity.
Should investigators determine that Origin has a balance sheet insolvency, which is more or less a state of bankruptcy, then Gemini’s Earn customers could lose money.
On the other hand, if the origination is illiquid, the clients are likely to receive 100% of their funds. On December 3, 2022, the Financial Times reported that DCG and Genesis owed Gemini customers about $900 million.
The committee of creditors is awaiting the response of its plan by December 23, 2022.
Will Genesis go the way of FTX?
The recent collapse of crypto exchange FTX and its sister firm Alameda has exposed how intercompany debt can turn sour, leading to a liquidity crisis for the lender and eventual bankruptcy.
FTX later loaned customer funds to help keep Alameda afloat after heavily borrowing to bail out ailing crypto firms during the spring and summer of 2022. FTX’s own FTT token collateralized the loans.
In early November 2022, customers rushed to withdraw FTT from the exchange following a tweet by Binance CEO Changpeng Zhao, causing a liquidity crisis in FTX. As the price of FTT fell, FTX’s debt to Alameda rapidly decreased, widening the gap between FTX’s assets and liabilities, eventually leading to FTX’s bankruptcy.
In other words, FTX’s illiquidity and bankruptcy were tightly linked.
While the details of DCG’s promissory note have not been made public, the mere use of such a debt instrument raises questions.
Unlike a loan agreement made with a bank, which allows the bank to foreclose the borrower’s property if the borrower cannot repay the loan, a promissory note includes the loan’s interest rate, the loan’s maturity date, and the principal amount. it occurs. Specifically absent the agreement what recourse does the lender have if the borrower fails to repay the money.
The lack of recourse creates a risk for the lender, which may not have the resources to survive a default.
Genesis acknowledged that bankruptcy could result if it fails to raise capital. And the $1.1 billion DCG promissory note could catalyze its collapse.
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