Crypto broker Genesis stops loan redemptions after collapse of FTX

Exchange filed for bankruptcy protection after traders pulled out $6 billion

Following the stunning collapse of cryptocurrency exchange FTX, crypto lender Genesis Global Capital suspended redemptions. AFP

Crypto lender Genesis Global Capital suspended redemptions on Wednesday, blaming the failure of cryptocurrency exchange FTX.

It came as court papers showed founder FTX Sam Bankman-Fried faces legal action, as the exchange's sudden collapse ripples across the industry.

FTX filed for bankruptcy protection in the US on Friday in the highest-profile crypto failure to date, after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal.

Liquidators in the Bahamas said late on Tuesday that they were challenging the validity of US bankruptcy proceedings, adding further uncertainty for crypto investors.

A spokesman for Genesis Global Trading, the parent of Genesis Global Capital, which also offers crypto trading and custody services, said on Wednesday they had “taken the difficult decision to temporarily suspend redemptions and new loan originations in the lending business”.

The spokesman said Genesis was working to “shore up the necessary liquidity to meet our lending client obligations”, and that Genesis's trading and custody businesses were unaffected.

Genesis's parent Digital Currency Group, an investor which also owns crypto asset manager Grayscale, said on Twitter that the decision to suspend redemptions “was made in response to the extreme market dislocation and loss of industry confidence caused by the FTX implosion”.

The suspension “has no impact on the business operations of DCG and our other wholly owned subsidiaries”, Digital Currency Group said.

Grayscale Bitcoin Trust, the world's largest bitcoin fund, fell almost 7 per cent on Wednesday. Bitcoin fell 2.6 per cent to $16,400. It has fallen by about 20 per cent so far this month.

Joseph Edwards, investment partner at Securitize Capital said: “This shouldn't be seen as a step up, but rather as a step outwards, given that Genesis have a number of significant regulated counterparties — there will be discomfort being felt among OTC desks in Europe and North America in particular.”

US cryptocurrency exchange Gemini said in a blog that Genesis “will not be able to meet customer redemptions” within the agreed five business days for users of Gemini's “Earn” product, where Gemini users can receive interest on balances they deposit on the platform by allowing Gemini to lend them elsewhere.

Several other crypto firms, including Crypto.com and stablecoin Tether said on Wednesday they had no exposure to Genesis. A spokesman for the New York Department of Financial Services said it was monitoring the situation.

Genesis is not alone in facing fallout from FTX's collapse.

Crypto lender BlockFi, which previously acknowledged it had significant exposure to FTX, plans to lay off workers while preparing to file for bankruptcy, The Wall Street Journal reported,

Meanwhile, US court filings showed Mr Bankman-Fried is facing legal action in the US from investors alleging the company's yield-bearing crypto accounts violated Florida law.

The proposed class action lawsuit filed late on Tuesday in Miami alleges that FTX yield-bearing accounts were unregistered securities that were unlawfully sold in the US.

Sam Bankman-Fried, founder and chief executive of FTX, is facing legal action in Florida. Bloomberg

The lawsuit also seeks damages from a number of celebrities who allegedly helped to promote FTX, including NFL quarterback Tom Brady and tennis star Naomi Osaka.

Representatives for Mr Bankman-Fried, Mr Brady and Ms Osaka did not immediately respond to requests for comment on Wednesday.

Bloomberg on Tuesday also reported that US and Bahamian authorities were discussing the possibility of flying Mr Bankman-Fried to the US for questioning.

But Clayton Fernander, the commissioner of police in the Bahamas, said in Nassau on Wednesday on the sidelines of a police conclave that police had not interviewed or met with Mr Bankman-Fried and that Mr Fernander had not been in communication with US authorities in relation to the matter.

The exchange's Bahamas-based liquidators filed a Chapter 15 petition in a US bankruptcy court in New York late on Tuesday questioning the validity of the US bankruptcy proceedings.

The liquidators, appointed by a Bahamas judge on November 10, said that because their filing came before FTX's bankruptcy filing in the US, they were the only ones authorised to begin bankruptcy proceedings for FTX and its affiliates.

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The US bankruptcy proceedings involve multiple FTX group companies with more than 100,000 creditors, a number that could surpass 1 million.

Bahamas Office of the Prime Minister said on Wednesday the Bahamas did not have sole oversight of FTX's worldwide operation, and so far it had not identified any deficiencies in its regulatory framework.

Elsewhere, crypto exchange Binance, in a response to a hearing on the crypto industry by a British parliamentary committee on Monday, said it had not contributed to FTX's collapse.

As FTX's problems emerged last week Binance initially said it would sell its holding's of FTX's own token FTT, then signed a non-binding letter of intent to buy FTX’s non-US assets before abandoning the deal.

The US House Financial Services Committee said on Wednesday it planned to hold a hearing in December to investigate the collapse.

Updated: November 17, 2022, 1:37 PM