Next SBF: DCG CEO Barry Silbert

Authors: Vijay Boyapati, Bitcoin Researcher; Translation: Golden Finance xiaozou

FTX and SBF have recently come to an end.

Is there anything worse than SBF fraud in 2022? Yes!

That's the fraud of Digital Currency Group (DCG), one of the oldest companies in the crypto space, and its CEO Barry Silbert, so let's take a closer look.

To fully understand the fraud and its consequences, we have to go back to 2013, when Barry Silbert started Grayscale, launching the first fund that allowed investors to buy Bitcoin from a brokerage account.

For several years, GBTC was the only way for equity market capital to gain exposure to Bitcoin, and due to its trust structure (there is no ETF-like redemption mechanism), GBTC traded at a higher price than its NAV (net asset value) in the early days. This basically means that the market value of the fund is higher than its underlying asset (Bitcoin). Stock investors don't have much choice, and they're willing to pay a premium for GBTC just to gain exposure to Bitcoin.

GBTC shares are created by providing Bitcoin to Grayscale, and then after 6 months you receive the equivalent of GBTC shares. Since GBTC is trading at a higher price than its net asset value (at one point above 40%), highly profitable carry trades are possible. You can short X BTC and hand X BTC to Grayscale for arbitrage. After 6 months, you can sell GBTC (which is trading above X BTC price) to cover your short position. This act of earning a premium is known as GBTC premium arbitrage trading.

Some market participants, recognizing how profitable such trading is and seemingly risk-free (as GBTC is always trading at a higher price than NAV), began to pour in. Two of the participants are the hedge fund 3AC and the lending platform BlockFi (both bankrupt).

3AC not only earns a GBTC premium, but also trades with leverage. Not only did he use his own funds, but he also borrowed a large amount of bitcoin in order to get more returns. But from whom did they borrow the money? ...... Let's start with Genesis.

Genesis is one of the portfolios of companies owned by DCG (DCG is the parent company created by Barry Silbert with the aim of emulating Berkshire Hathaway's corporate structure and applying it to the crypto market). Like Grayscle, Genesis is also a jewel in the crown of DCG. Genesis is the largest and most important (and basically the only) prime brokerage service provider in the crypto market. It has both a trading/derivatives division (GGT) and a lending division (GGC), but to outsiders it is a company because their office space and even employees are shared.

Genesis makes a profit by offering bitcoin interest rates to bitcoin holders of all sizes, taking bitcoins from them and lending them at a higher interest rate. Who did Genesis lend Bitcoin to? 3AC, BlockFi, and Alameda, among others.

It should be noted here that DCG directly controls GGT (Silbert was Chairman of the Board of Directors of GGT from 2013 to July 2022) and controls GGC through GGT. The GGC did not have a board of directors until June 2022, when two-thirds of the board appointed were from the DCG.

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There is a strong incentive to encourage Genesis to provide Bitcoin loans for GBTC arbitrage trading, as these bitcoins will flow into Grayscale (another jewel in DCG's crown) and then stay there (as there is no ETF redemption mechanism). Once these bitcoins are trapped, Grayscale charges a 2% annual "fund management" fee (essentially doing nothing). Currently, GBTC owns more than 620,000 BTC, which means that Grayscale collects more than 12,000 BTC in management fees per year.

Grayscale's profits flow into its parent company, DCG. Perhaps by now you're aware that there are some important conflicts of interest between DCG, Grayscale, and Genesis. In fact, Grayscale even knew that Genesis was injecting funds into GBTC through loans.

In the image below, you can see Michael Sonnenshein (CEO of Grayscale) signing a loan from Genesis to 3AC. Barry Silbert argues that the idea that these family businesses operate "arm's length" is ludicrous on the surface.

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Over time, new ways to gain exposure to Bitcoin have emerged in the stock market (Microstrategy's stocks, futures ETFs, foreign spot ETFs). New competition, coupled with the large number of GBTC shares generated by carry trades, is starting to hit the GBTC premium.

On February 23, 2021, the premium for GBTC became negative for the first time (i.e., it became a discounted price). Since then, there has been no positive one, with a discount of as much as 49% – meaning that the fund is worth only half of its underlying assets. The arbitrage trade is dead.

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With the end of the GBTC premium arbitrage trade, 3AC has lost its most reliable and profitable way to make money. Then it turned to another very risky trade: the TerraUSD carry trade. At the same time, Genesis continues to lend to them. On May 7, 2022, the Terra Luna ecosystem began to collapse, and the Luna and UST tokens basically fell to zero in a few days. The collapse of LUNA &UST was the last straw that broke 3AC's total bankruptcy due to the use of leverage.

3AC's bankruptcy has created a huge funding hole for the companies that have lent to it, the largest of which is Genesis, which has provided 3AC with a $2.3 billion loan. These risks are manageable with proper risk management and the use of collateral. But Genesis' risk management is terrible. In mid-June 2022, 3AC defaulted on a Bitcoin loan lent to it by Genesis. Genesis was left with a $1.2 billion gap on its balance sheet after liquidating a small amount of collateral, and it also went bankrupt.

! [Ba5MMWd5r3GvhKaqTvgzZaObfZZSwr6jL0G6uAns.png] (https://img-cdn.gateio.im/webp-social/moments-40baef27dd-bae454c46e-dd1a6f-cd5cc0.webp "7130509")

At this point, if the lender who provided Genesis with bitcoin attempts to withdraw the bitcoin, Genesis will not be able to meet its obligations. The right thing to do at this point would be Genesis CEO Michael Moro declaring bankruptcy. But instead of doing so, Michael Moro worked out a plan with Barry Silber, the CEO of the parent company, to cover up the losses on Genesis' balance sheet. In doing so, they were able to alleviate the concerns of Genesis lenders, thereby minimizing withdrawals.

To close the funding gap (the bankruptcy claim was almost worthless due to the outright bankruptcy of 3AC), DCG gave Genesis $1.1 billion in "promissory notes". Moro assured the market that Genesis had "thoughtfully mitigated its losses".

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In fact, a promissory note is a façade. Instead of injecting real capital to fill the gap on Genesis' balance sheet, Barry Silbert offered a piece of paper with interest rates below market levels that could not be redeemed for 10 years. It is clear that Silbert knew that the promissory note would not solve Genesis' bankruptcy because in Genesis' later bankruptcy he valued the promissory note at a fraction of the value of the $1.1 billion that Genesis claimed. The gap on the balance sheet remains significant.

After committing this financial fraud, Genesis executives began working to convince customers that it was solvent. Genesis falsely claimed that the promissory note received was a liquid asset (equivalent to cash). This raises the question of why DCG should step in. If they could have bankrupted Genesis, why risk committing fraud? The answer: DCG is one of Genesis' largest borrowers and uses its portfolio companies as its own piggy bank.

In fact, just after the 3AC crash, Genesis' balance sheet showed a gap on June 18, when DCG took a huge loan of 18,697 BTC from bankrupt Genesis. DCG is also trading GBTC arbitrage, but is now stuck with piles of underwater GBTC.

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If DCG bankrupts Genesis, it will go into bankruptcy proceedings and will be forced to repay the huge loans it has received from its subsidiaries. Barry Silber and DCG chose to continue the pretend. Genesis' insolvency was finally exposed in November 2022, when FTX collapsed and customers across the industry pulled out their bitcoins. Genesis was unable to meet the client's withdrawal request and froze the withdrawal on November 16, 2022. At the time, DCG/Genesis falsely claimed that it was the collapse of FTX and the ensuing market turmoil that caused the "temporary" freezing of customer funds. The fact is that since June of that year, Genesis has been insolvent.

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Even after freezing withdrawals, Genesis claimed that it was not insolvent and only faced a "duration mismatch" problem. That said, it actually has enough funds to meet withdrawal requirements, just not on hand. This is seriously misleading. On January 19, 2023, Genesis was forced to declare bankruptcy, and creditors slowly learned about its fraud. Creditors painfully realised that Genesis' insolvency was never actually resolved by DCG.

On October 19, 2023, the New York State Attorney General filed a civil lawsuit against Genesis, DCG, and Barry Silbert and Michael Moro. The complaint is detailed and substantive, alleging that it has defrauded thousands of investors and constitutes serious fraud.

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While NYAG's lawsuit against Silbert et al. is a civil lawsuit, there is a good chance that the case will be filed as a criminal case in the Southern or Eastern District of New York. Many ordinary investors have lost their life savings, and DCG/Genesis was at the center of the market crash in 2022.

Genesis' crash bears many striking similarities to the FTX fraud: deceptive balance sheets; false public statements made to appease investors; a small group of insiders committing financial fraud; The blind and credulous financial media is too lazy to ask tough questions.

This event is as big as the collapse of FTX, but it has received little public attention. The end of the story is likely to be just as dramatic, with Barry Silbert and Michael Moro likely to meet SBF in prison.

As U.S. Attorneys noted in the FTX trial, "Any false or fraudulent statement made for the purpose of obtaining or holding lawful assets constitutes a felony." ”

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For those who are watching closely, the warning signs are there. Moro was forced to leave his job or change jobs shortly after committing the promissory note fraud. Lawrence H. Summers also resigned as an advisor to DCG, perhaps sensing something from within.

As the fraud is uncovered and litigated by New York State Attorney General Letitia James, it is likely that other coalition agencies (the small circle that knows what happened to DCG/Genesis) will become co-witnesses, just as SBF was denounced by insiders.

The New York State Attorney General already has a cooperating witness who served as a director at Genesis during the promissory note fraud. Unfortunately, the financial media (Bloomberg/Reuters/CNBC) has been incredibly negligent in both the Genesis case and the FTX case before it. It's embarrassing to be brillified by boilerplate answers to important questions (e.g., SBF's claim that FTX and Alameda have no conflicts of interest).

Non-corporate journalists like Coffeezilla and Laura Shin have been asking tough questions and engaging in rational skepticism when confronted with answers that make no sense or are intuitively incomprehensible.

When DCG says "this case has no value", it is seriously leaning towards corporate puns. The case is substantive, detailed, and supported by an informed direct witness. The DCG has not meaningfully rebutted any of the charges made by the New York State Attorney General.

So who will stand up and ask those tough questions? Thousands of investors have lost their savings, many have gone bankrupt, yet Barry Silbert continues to sit on his throne. I would like to quote a passage from the U.S. attorney who prosecuted SBF:

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When I became a U.S. federal prosecutor, I promised that we would spare no effort to root out corruption in the financial markets. That's what it's like to leave no stone unturned. The case is progressing at lightning speed*—*This is not a coincidence, but an option. This case is also a warning to every crook who thinks they can get away with it, who thinks their crimes are too complex for us to arrest them, that they are too powerful for us to prosecute them, or that they are smart enough to get away with if caught. These people should think twice. Otherwise, I promise we have enough handcuffs to cuff them, and none of them will be left behind.