Venture capital firm Digital Currency Group (DCG), the parent company of many entities tied to cryptocurrency and blockchain, has filed a complaint against two of its subsidiaries over a promissory note to guard against the 2022 default of Three Arrows Capital (3AC).
In a Thursday filing in the US Bankruptcy Court for the Southern District of New York, DCG alleged that Genesis Global Capital and Genesis Asia Pacific, both under the venture capital firm, owed their parent company overpayments based on recoveries from 3AC.
The complaint said that DCG issued a $1.1 billion promissory note to the Genesis entities, which profited by “hundreds of millions of dollars“ without suffering any loss from the default of 3AC in 2022.
According to DCG, the company issued a 10-year promissory note to Genesis Global Capital in June 2022 as a safeguard against any potential “hole” in Genesis Asia Pacific’s equity that could have been caused by the collapse of 3AC, one of Genesis’ borrowers. DCG alleged that rather than facing significant liquidity problems from 3AC, Genesis “reap[ed] a massive windfall” and was obligated to return payments made on the promissory note.
The recent complaint was just the latest legal entanglement between DCG and Genesis over the collapse of 3AC. In May, Genesis filed lawsuits against its parent company, affiliates and CEO Barry Silbert, alleging fraud, insider enrichment and concealed transfers. The company sought $3.3 billion over DCG allegedly withdrawing funds before Genesis’ bankruptcy.
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The $1.1-billion promissory note mentioned in the filing was issued in response to the collapse of 3AC, with Genesis potentially facing a shortfall in its equity for the second quarter of 2022.
However, DCG noted that “cryptocurrency prices eventually recovered,” allowing Genesis to use 3AC’s collateral — shares of Grayscale’s Bitcoin Trust, which increased in value with the price of the cryptocurrency — to profit from the loans.
“[T]he incremental amounts realized by Genesis after issuance of the Note were, based on the pleadings filed by Genesis in this Court seeking approval of that transaction, far more than sufficient to overcome the prior $1.1 billion collateral shortfall—and, on information and belief, allowed Genesis to profit from [3AC]’s default by recovering nearly $2.8 billion on the original $2.36 billion in [3AC] Loans,” said the filing.
Downfall of FTX caught up in the mix
The crypto market crash of 2022, which many experts suggested had been influenced by the collapse of the Terra ecosystem, resulted in multiple bankruptcies and liquidity issues, with many retail investors losing millions. Amid the market uncertainty, FTX, one of the largest cryptocurrency exchanges at the time, filed for bankruptcy, and some of its executives were indicted for fraud.
“While [Genesis Global Capital’s] direct credit exposure to FTX was not material, the FTX bankruptcy spawned the equivalent of a tsunami in the crypto world, causing broad and lasting effects including [Genesis Global Capital’s] bankruptcy filing on January 19, 2023 due to the ‘run on the bank’ that ensued in November 2022 and caused Genesis to halt withdrawals,” said the filing, adding:
“Even had [3AC] not defaulted in June 2022, [Genesis Global Capital] would not have had sufficient capital to withstand the unexpected and devastating market rout that followed the collapse of FTX in November 2022, which also led crypto lender BlockFi to file for Chapter 11 bankruptcy in the same month.”
After Genesis’ bankruptcy filing, the company completed its restructuring plan in August 2024 and announced and the disbursement of about $4 billion in funds to affected parties. DCG requested the court order Genesis to pay more than $105 million plus interest.
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