Authored by Turner Wright via CoinTelegraph.com,
Recursive trades between Grayscale trust and the Three Arrows Capital hedge fund allegedly inflated assets and fees, according to open letter from the Gemini president...
Cameron Winklevoss, co-founder of the cryptocurrency exchange Gemini, has penned an open letter to the board of Digital Currency Group, or DCG, saying CEO Barry Silbert was “unfit” to run the company.
In a Jan 10. letter, Winklevoss claimed Silbert and Genesis Global Capital — a subsidiary of DCG — had defrauded more than 340,000 users who were a part of Gemini’s Earn program.
Earn Update: An Open Letter to the Board of @DCGco pic.twitter.com/eakuFjDZR2
— Cameron Winklevoss (@cameron) January 10, 2023
The letter followed a Jan. 2 appeal on Twitter to Silbert directly, in which the Gemini co-founder said Genesis owed Gemini $900 million, accusing the CEO of hiding “behind lawyers, investment bankers, and process.”
According to Winklevoss, Genesis lent more than $2.3 billion to Three Arrows Capital, a move which ultimately left the crypto firm with a loss of $1.2 billion once the hedge fund failed in June 2022.
In the letter Cameron Winklevoss explains, in detail, his accusations about Silbert's actions using recursive trades between Grayscale Trust and Three Arrows Capital to inflate assets and fees...
How did we get here? Greed.
As a standalone business, it’s inconceivable that Genesis would have lent so much money to 3AC given the low quality of the collateral that 3AC posted. Genesis made these loans because it was one piece of a much larger scheme designed to enrich the greater DCG enterprise. More specifically, Genesis was willing to recklessly lend to 3AC because 3AC was using the money for the kamikaze Grayscale net asset value (NAV) trade - a recursive trade that ballooned the AUM of the Grayscale Bitcoin Trust (ticker: GBTC) and, as a consequence, the fees earned by its sponsor, Grayscale Investments, LLC (Grayscale), a wholly owned subsidiary of DCG.
Genesis booked these interactions with 3AC as bona fide, collateralized loans. It is becoming clear, however, that this was not the case at all. In reality, 3AC was acting as a mere conduit for Genesis, allowing it to enter into what were effectively swap transactions of bitcoin for GBTC shares with the Grayscale Trust. In this transaction, Genesis was betting that shares would be worth more than bitcoin in the future. The 3AC “loan" was the bitcoin leg of the swap and the 3AC “collateral” was the GBTC leg of the swap. 3AC was a mule shuttling the assets between the parties, and as a result Genesis ended up owning massive risk.
Up until 2021, Genesis won this zero-sum trade because the GBTC shares were worth more than bitcoin. Starting in 2021, however, Genesis lost this trade because the shares were worth less than bitcoin. Normally, all things being equal, the gains and losses would cancel each other out. There is no free lunch. In other words, Genesis would participate in both the wins and losses. Astonishingly, however, it appears that Genesis never participated in the wins because it apparently always ceded them - the GBTC share premium - to 3AC. This meant that Genesis only participated in the losses, turning what would otherwise have been a zero-sum trade into a negative-sum trade. Crazy town.
Disturbingly, not only did Genesis not close out 3AC’s position when the NAV trade inverted (something any rational, independently operated business would have done), it continued to lend to 3AC on attractive terms and accept GBTC as collateral. For Grayscale, this had the desired effect of keeping GBTC shares from being sold into the market, which would have depressed the share price and further widened the discount to NAV. But for Genesis, this had the undesired effect of keeping its risk position open and allowing it to grow.
Why would Genesis enter into a toxic risk position where the best it could do was not lose money? Things only begin to make sense when you realize that the bitcoin this swap was stuffing into the Grayscale Trust like a Thanksgiving turkey is stuck there forever. It can never be redeemed (or at least until Grayscale, in its sole discretion, decides to implement a redemption program allowing GBTC shares to be converted back into bitcoin). As a result, Barry was comfortable with Genesis loading up more and more on this toxic trade because it was a gambit to feed the Grayscale Trust — Barry’s financial Hotel California that would print money for the DCG universe in perpetuity. The end would justify the means.
Original Accounting Fraud.
Instead of booking these swaps as the risky derivatives that they were, Genesis hid them by mischaracterizing the first and last legs of these swaps transactions as collateralized loans on its balance sheet. This made the Genesis balance sheet appear healthier than it actually was, fraudulently inducing lenders to continue making loans.
In June 2022, the music stopped. 3AC collapsed, laying bare the poisonous fruits of this radioactive trade.
Instead of stepping up to solve this self-created problem, and despite having earned more than a billion dollars in fees — all at the expense of Genesis lenders — Barry refused to take responsibility. Instead, he resorted to committing fraud to protect his ill-gotten gains.
He claimed Silbert, DCG, and Genesis orchestrated "a carefully crafted campaign of lies" starting in July 2022 in an effort to show DCG had injected the funds into Genesis.
"There is no path forward as long as Barry Silbert remains CEO of DCG," said Winklevoss.
"He has proven himself unfit to run DCG and unwilling and unable to find a resolution with creditors that is both fair and reasonable. As a result, Gemini, acting on behalf of 340,000 Earn users, requests that the Board remove Barry Silbert as CEO.”
