The fallout from the collapse of FTX continues to cascade through the cryptocurrency market, with fears one of the industry’s biggest names is in financial strife.
Speculation is swirling around the health of Digital Currency Group, a sprawling $US10 billion ($A15 billion) crypto empire which includes brokerage Genesis, asset manager Grayscale and industry news website CoinDesk.
Genesis was one of many firms caught up in the collapse of Bahamas-based FTX – one of the world’s largest crypto exchanges – freezing redemptions last week after revealing it had $US175 million ($A264 million) locked in its FTX trading account.
Bloomberg reports Genesis executives spent the weekend scrambling to raise fresh cash from investors to deal with a liquidity crunch, warning it may need to file for bankruptcy unless it can access at least $US1 billion ($A1.5 billion) in capital.
On Monday, Binance reportedly turned down a request to invest in Genesis.
“We have no plans to file bankruptcy imminently,” the company said in an earlier statement to Bloomberg. “Our goal is to resolve the current situation consensually without the need for any bankruptcy filing. Genesis continues to have constructive conversations with creditors.”
That came after Grayscale, which operates the world’s largest bitcoin fund, set off alarm bells in the market on Friday after refusing to share proof of reserves with customers, citing “security concerns”.
Following the collapse of FTX, which was revealed to have just $US900 million ($A1.3 billion) in assets against around $US9 billion ($A13.6 billion) in liabilities when it filed for bankruptcy, crypto firms have faced calls for greater transparency.
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Several have published proof-of-reserve audits, including public digital wallet addresses where assets are stored, to reassure customers their funds are available. Binance, the world’s largest exchange, says it plans to do so soon.
But on Friday, Grayscale said it would not be publishing proof-of-reserves for its Grayscale Bitcoin Trust (GBTC). GBTC is effectively an exchange-traded-fund (ETF) for bitcoin, allowing investors to gain exposure to the cryptocurrency without actually holding it.
In theory, GBTC units should directly correlate with the price of bitcoin. But shares in the fund – which is estimated to hold more than 3 per cent of all mined bitcoin – have plummeted sharply to trade at a 45 per cent discount to the actual price of bitcoin, reflecting investor fears about its underlying holdings.
The sharp divergence was sparked by its statement on Friday, in which Grayscale assured investors that its underlying bitcoin were stored under the custody of Coinbase.
“Coinbase frequently performs on-chain validation,” it said. “Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic proof-of-reserve, or other advanced cryptographic accounting procedure.”
Grayscale acknowledged that this would “be a disappointment to some, but panic sparked by others is not a good enough reason to circumvent complex security arrangements that have kept our investors’ assets safe for years”.
The company shared a November 18 letter from Coinbase chief financial officer Alesia Haas, which included accounting tables showing the US-listed exchange held around 635,235 bitcoin on behalf of Grayscale, worth about $US10 billion ($A15 billion).
“To be perfectly clear, the $BTC underlying Grayscale Bitcoin Trust are owned by $GBTC and $GBTC alone,” Grayscale said.
“The laws, regulations, and documents that define Grayscale’s digital asset products prohibit the digital assets underlying the products from being lent, borrowed, or otherwise encumbered.”
Grayscale insisted that “no other entity, including DCG, Genesis, nor any other Grayscale affiliate, has any control over the digital assets underlying the Grayscale products”.
Despite these assurances, Bloomberg analyst James Seyffart said fear was likely driving the faster sell-off in GBTC compared with bitcoin.
“There is a lot of concern and news reports and rumours about DCG, the parent of Grayscale,” he said. “I think people just want to get away from anything that could be coming down, even if it’s only a remote possibility.”
The latest market rumblings have sent bitcoin tumbling to around $US15,800 on Tuesday, its lowest level since November 2020.
Grayscale’s refusal to share wallet addresses due to security concerns was met with scepticism by experts.
“This makes literally ZERO sense. ZERO,” wrote Julian Hosp from Cake DeFi.
“Grayscale should show their backing address, El Salvador should show their daily bitcoin purchases and existing holdings, Saylor should show their addresses, Tether should do audits – then all FUD stops – otherwise, the FUD just continues.”
“This reads like pure lawyer speak from people who have no idea how blockchains work,” said Anthony Sassano from The Daily Gwei newsletter. “Posting an address and signing a message proving ownership of that address is not a security concern.”
“This will age incredibly poorly,” added blockchain developer Hudson Jameson. “There is zero reason to make this claim. Cryptographic proof-of-reserves via merkle trees or other common methods do not raise any security concerns. If I’m wrong, Grayscale should explain what the concerns are.”
Economist Nouriel Roubini wrote, “Crypto’s Gansta G Gang of Four: Genesis, Grayscale, Galaxy, Gemini. Now all in huge trouble and/or collapsing. From the moon all the lunatics are now crashing down to Earth!”
frank.chung@news.com.au