Though 2022 has ended, its continuum of chaos soldiers on.
We’ve begun the year with crypto exchange founder and billionaire Cameron Winklevoss penning an open letter to Digital Currency Group’s Barry Silbert, demanding to know what happened to the $900 million of Gemini Earn customers’ money that they now can’t withdraw.
To refresh your memory from last November, Gemini Earn promised depositors yields of as much as 8% by “earning interest” on your money to the exchange. By which I mean “give them your money and, for some reason, get a ridiculously high return back.” If this deal seems too good to be true, it’s because it is. The money flowed from Gemini to Genesis, who presumably loaned it to other parties that may not be paying them back.
All of this began back in November, when Genesis had to halt withdrawals due to their exposure to FTX, not long after saying that they had no exposure to FTX at all. Genesis owes over $1.8 billion to various creditors (including the $900 million owed to Gemini Earn customers), and said creditors are desperate to avoid a bankruptcy proceeding that, like FTX, will likely take years to fully resolve.
And Gemini was meant to be one of the good ones. Gemini is a US-based exchange, one built on “trust, safety and compliance,” regulated by the New York State Department of Financial Services, one that would never be reckless with customer funds.
Except they absolutely weren’t, because a pair of rich guys wanted to make more money.
Gemini offered outsized and deeply unrealistic returns just for leaving your cryptocurrency in their “Earn” program. Gemini marketed this service as an “interest-earning program,” while adding a brief note at the bottom that Earn “allows customers to lend their digital assets to disclosed institutional borrowers,” and that “loans are not insured by Gemini or any governmental program or institution.” So, to be clear, this was never an interest-generating account. And this is an important distinction because Gemini is (or was) adopting the language and marketing frameworks of traditional banking while providing a very different service.
An archive of the Gemini Earn website from April 2021 adds that Gemini’s partners are “vetted through [their] risk management framework,” and that said funds would be loaned to Genesis. Their last archived marketing page (November 14 2022), which has since been replaced with a series of updates on their efforts to recover customer funds, promises that Gemini “reviews [their] partners’ collateralization management process” as part of their “risk management framework,” which also includes a periodic review of “partners’ cash flow, balance sheet and financial statements to ensure the appropriate risk ratios and health.”
In plain English, this means that Gemini allegedly conducted the necessary due diligence to know, say, that $900 million was missing, and somehow was either hoodwinked or misled in some other way.
Cameron Winklevoss’ letter claims that Earn users are “tired, scared and many are now in dire straits,” despite the fact that Gemini misled its users into believing that they were lending out their money (which they also obfuscated by calling it “earned interest”) to a company “vetted through a risk management framework”.
Genesis tried (and failed) to raise a $1 billion “emergency loan” in November. They owe $900 million to Gemini, $300 million to crypto exchange Bitvavo, and the total amount owed may be in the region of $1.8 billion. They are “owed” $1.2 billion from 3 Arrows Capital (remember them?) which they will never see again (liquidators have recovered tens of millions of the $3.5 billion that 3 Arrows Capital owes to creditors). They’re also, confusingly, owed $575 million from Digital Currency Group (though Cameron Winklevoss claims it’s more like $1.675 billion), the company that owns them. Even if that loan from their parent company materializes, they still have to plug a very big hole with money that does not exist.
Yet Cameron Winklevoss has said that Silbert of Digital Currency Group is "using bad faith stall tactics.” Even now, crypto’s “brightest” and richest still cling to lie after lie, failing to acknowledge the extremely obvious point: the money is gone.
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No Way Out
While Silbert is no doubt trying to drag this out as long as possible, Cameron Winklevoss is still misleading customers (and the general public) as to how this will go. Let me put it like this: if the money isn’t there, how will Genesis expect to get it?
A loan? From whom? And why would anyone lend money to a company to help them pay back other loans that they weren’t able to pay because they were quite literally bad at loaning people money?
The answer is “we don’t care, we want to keep the big scam going,” because once Gemini admits why this happened, they will have to admit that — despite claiming to be a big, successful, respectable and American exchange — they still took the same big, stupid risks that every “fraudulent” exchange suffered for.
This is not a casual fling with a risky asset class. It is a near-billion-dollar swindle of, to quote Cameron Winklevoss: “…a single mom who lent her son’s education money to you…a father who lent his son’s bar mitzvah money to you…A husband and wife who lent their life savings to you…a school teacher who lent his children’s college funds to you.”
The “you” here is, in context, Barry Silbert, who is also a corrupt and greedy piece of shit just like the Winklevosses. Cameron Winklevoss slammed Silbert for “greedy share buybacks” and “illiquid venture investments” - things that are awful, especially if you are not paying your debts - but acts as if his company had no hand in these massive consumer losses. Except by the very nature of these accusations, it is apparent that Cameron Winklevoss knew, on some level, exactly how “beyond comingled” the assets of Genesis and Digital Currency Group may be. Though it’s not obvious how long he knew, I would be shocked if he had literally just realized all of this incredibly sensitive and distressing information.
Perhaps it’s because he continued to trust the obviously corrupt charlatans running Digital Currency Group because he believed he, just like every other stupid asshole, was immune to the effects of reality. When Digital Currency Group first revealed that they were mixed up with the Three Arrows Capital contagion (loaning them at one point $2.36 billion dollars), that was the time to end Gemini Earn - when it became obvious that your customer money was in the hands of someone either deeply corrupt or incredibly stupid.
It was already fairly stupid to run Earn to begin with. The promised 8% returns on deposits suggests that Gemini must have been making a great deal more than that to make it profitable. But to keep running it knowing exactly how bad Genesis was? That, to quote Cameron Winklevoss, is “not only completely unacceptable, it is unconscionable.”
It’s incredibly important to focus the blame on the real villains of these stories, and that’s why Cameron Winklevoss is so desperate to shift the spotlight away from Gemini. Silbert and his cronies have clearly got some kind of weird swindle going on - more of which we’ll see in the inevitable lawsuits - but just like Sam Bankman-Fried and every other crypto collapse, the fundamental truth is that it never looks good under the hood. Unless Gemini wants to pay $900 million of customer deposits from its own coffers, they are likely going to have to sue Genesis Digital (and Digital Currency Group) to get money that very well may not exist.
And if it does, where will Digital Currency Group - which owns the Grayscale Bitcoin Trust (a stock where owning one stock is meant to be equivalent to owning [Edit] 0.001 Bitcoin, and that currently trades at a massive discount relative to the price of Bitcoin) - get the money? Will they have to liquidate some of their Bitcoin, crashing an already fragile market? Will they get another loan from another part of their own company? At what point does one stop reorganizing chairs before the iceberg hits?
A thread by Elation Finance suggests that the worst is yet to come, saying that Genesis has no liquidity and is simply trying to raise money to plug the gaps in their customers’ balances. If this is the case, I would argue that absolutely nobody is getting their money back ever. FTX has, at the very least, direct creditors.
In the event that Gemini cannot recoup the $900 million, customers will likely have to sue them to get it back, which assumes both A) that they prevail and B) that Gemini actually has that kind of cash to pay them. You cannot squeeze blood from a stone.
Sidebar: What Does This All Actually Mean For Crypto?
The cryptocurrency industry may talk about how decentralization is the future, but this industry is painfully centralized. As I wrote about last year, Digital Currency Group is, like Three Arrows Capital and FTX, another weakpoint in an already brittle industry. In the event that Digital Currency Group - as Cameron Winklevoss suggested in his letter - is “beyond comingled” with Genesis, then that means that Digital Currency Group can (and very likely will!) want to sell off holdings in the Grayscale’s various trusts. Grayscale owns a great deal of crypto - 3 million Ethereum and 654,600 Bitcoin - and any attempt to sell enough to cover these debts will crater the market.
I want to write something here about “things going back to normal,” but I cannot shake this feeling that things are going to get much, much worse. There are few reasons to trust that Digital Currency Group is run ethically.
The real question - the one that is the entire hinge of any “best case scenario” - is how much money Digital Currency Group and Genesis actually has left. I severely doubt that they have anywhere near how much Gemini Earn customers have.
In the event that they are totally insolvent, this will lead to several potracted lawsuits, along with possibly the largest cryptocurrency crash we’ve seen yet if Grayscale is forced to liquidate. I just can’t see any situation where customers are made whole - I’d love to be wrong.
The crypto industry has been trying to distance itself from Sam Bankman-Fried by claiming that FTX was a “crime not crypto” situation. This was (and remains) a lie to cover up for people like Barry Silbert and Cameron Winklevoss, who exploited customers in a similar but less-craven way. Users using users that were using innocent customers’ deposits to enrich themselves until the good times ended.
There were many points at which Gemini could have chosen to do make things right. Countless inflection points should have raised concerns and ended Gemini Earn, but they didn’t.
At this point, you’re going to begin to hear the word “liquidity” again. It’s a term that means “money available to be spent” and suggests that the company has otherwise operated in a respectable fashion. Genesis referred to “fixing liquidity.” Bankman-Fried talked about “raising liquidity” to fix FTX. DCG may be facing a “liquidity crisis.”
These are euphemisms for “running out of money.” If a company spends all their money and hasn’t got any left, they are “out of money,” not “facing a liquidity crisis.” A company that not only spends their money but users’ money is not “facing a liquidity crisis.” They are at best acting recklessly and at worst committing financial crimes. None of these companies faced “a liquidity crisis” because things got tough and business stopped coming in. Every single one of them lost money because they got greedy and didn’t really give that much of a shit about the law or the safety of their customers’ funds.
As with every single one of these stories, the real victims are Gemini’s customers. I encourage you to read my piece on Celsius (another crypto “lender” that was more of a ponzi scheme) and the specific quotes from their bankruptcy proceedings.
Pay attention to the agonizing human cost of those who are conned by cryptocurrency entrepreneurs. Remember that while it’s fun to imagine each and every person who touched a cryptocurrency product is a comical libertarian husk, the reality is that many more people put their money in these services out of desperation or misplaced hope. They are the victims of a scam - and the scammers must be held accountable.