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The FTX saga is keeping the crypto industry on its toes. If it has proven anything, it’s that the highly unregulated market is dominated by opacity, no matter how much companies tout blockchain’s transparency. This revelation is injecting fear into the digital asset world and shaking faith in the companies left standing. Digital Currency Group (DCG) is one of the industry’s biggest forces. Not surprisingly, the company is attracting a lot of unease and questions. The U.S. Securities and Exchange Commission’s (SEC’s) new probe into DCG and its relationship with the Genesis crypto brokerage is not assuaging these fears.
On Friday, Bloomberg first reported that DCG was facing an investigation by both the SEC and the U.S. Attorney’s Office for the Eastern District of New York. The yet-to-be-formally-announced probe by both offices will investigate DCG’s relationships with its subsidiaries. Particularly, the investigation focuses on the crypto brokerage company Genesis.
Because the probes from both agencies are not yet formally public, investors don’t have much in the way of information. What we do know from insiders is that the pair are specifically investigating money transfers between DCG and Genesis. DCG’s CEO, Barry Silbert, disclosed that the company owed Genesis $575 million late last year. Silbert also revealed that DCG loaned Genesis a $1.1 billion promissory note, taking on debt Genesis owed to bankrupt crypto lender Three Arrows Capital.
It is yet unclear what about these transactions is of interest. It is also unclear whether either body is preparing charges against DCG for this activity. A spokesperson for DCG tells Bloomberg it is unaware of any investigation, adding that the company “has a strong culture of integrity and has always conducted its business lawfully.”
FTX Collapse Shifts Regulator Focus to Battered Genesis Crypto Exchange Parent
This investigation is perhaps the last thing DCG or the Genesis crypto brokerage want to deal with amid the crypto bear market. However, it does not come as any big surprise that government agencies are honing in on the pair of companies.
FTX’s fallout has brought great scrutiny upon all centralized crypto exchanges. The company was able to hide illicit activity and detrimental balance sheets for months. So, even companies that may be financially sound are facing questions. Genesis is not one of these companies, making it even easier to scrutinize.
The company is currently $900 million in debt to Gemini Earn users. Genesis was the primary liquidity provider for the product. When users began to exit the service during market volatility, it wasn’t able to scrounge up enough liquidity to meet this demand. This would cause a withdrawal freeze, sending waves of worry across the market that Genesis was secretly in a similar predicament as the disgraced FTX.
DCG’s other major subsidiary, investment firm Grayscale, is also in deep trouble as its portfolio tanks. With DCG already in over $1.6 billion worth of debt to Genesis, there’s no bailing out Grayscale. Some analysts have said that DCG may even be pushed to dismantle Grayscale’s biggest crypto trust to save the company.
There’s no doubt investigators are looking into this tangled conundrum. On the surface, it looks eerily similar to FTX’s problems. Executives tied up funds in partner companies and couldn’t handle a liquidity crunch. When the crunch came, the entire FTX ecosystem would plunge into debt. With no word yet from the SEC nor the Attorney General’s office, there are no criminal accusations against DCG. If the company is truthful, this investigation could even do well to ease the minds of investors assuming the worst. In the meantime, DCG is winding down its HQ wealth management unit to free up some liquidity.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.