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Nov 18 (Reuters) – The uncertain future of Genesis Global Capital, one of the biggest crypto lenders, is fueling concern that the recent FTX crypto exchange collapse has a ripple effect on other players in the highly interconnected market.

Genesis, which trades digital assets for financial institutions such as hedge funds and asset managers, had nearly $3 billion in total active loans at the end of the third quarter. On Wednesday, his crypto lending arm stopped making new loans and prevented customers from withdrawing money due to what he called “unprecedented market turmoil” that rippled through the market after FTX filed for bankruptcy last week.

Genesis is owned by venture capital firm Digital Currency Group, based in Stamford, Connecticut.

Contagion concerns stem from Genesis’ prominence in crypto, its ties to struggling companies, and its broader reach in the financial world. According to a person familiar with the matter, Genesis’ two main borrowers were Three Arrows Capital, a Singapore-based crypto hedge fund, and Alameda Research, a trading company closely tied to FTX. Both are currently in bankruptcy proceedings.

“There’s been a target on Genesis’s back for days,” said Joseph Edwards, an investment partner at Securitize Capital. “This is a sign of worse outcomes” for the crypto market, especially since Genesis also deals with brokers, family offices and fund managers.

Genesis received “abnormal withdrawal requests” from customers on Wednesday that exceeded its commitments, the company said. Two days earlier, he had applied for a $1 billion emergency loan from investors, The Wall Street Journal reported.

While Genesis declined to comment on the Journal’s report, a spokesperson said it “massively reduced” its exposure to Alameda after Three Arrows collapsed. Genesis also said it has “no material exposure” to FTX’s native digital token or those of other crypto exchanges, and has hedged its positions in FTX-related holdings.

The lender is also involved in legal proceedings. Genesis had loaned more than $2.3 billion to Three Arrows, according to a July court filing. Genesis parent DCG has filed a $1.2 billion claim against Three Arrows.

Although it does not directly serve individual investors, Genesis is a major lender that backs products offered by crypto companies such as Circle Internet Financial, the main operator of one of the largest stablecoins, USD Coin, and by Gemini. These products earn a return to customers who deposit certain cryptocurrencies on the platforms.

Crypto lenders, which have acted as the de facto banks of the crypto world, have exploded during the pandemic. But unlike traditional banks, they are not required to hold capital buffers. Earlier this year, a lack of collateral forced some lenders – and their customers – to take heavy losses. Read more

Investors fear that these losses will pile up. Last year, Genesis issued $130.6 billion in crypto loans and traded $116.5 billion in assets, according to its website.

TRAINING EFFECTS

Other companies have distanced themselves from Genesis, fearing its problems will reverberate. Crypto.com, an exchange, and Tether, which operates the world’s largest stablecoin, said Wednesday they have no exposure to Genesis.

Paolo Ardoino, Tether’s chief technology officer, said FTX’s ties to institutions could potentially have a domino effect on other companies, though it remains to be seen how that plays out.

“We don’t know how big this cascading effect is – it could be small, it could be big,” he said.

Market players are obsessed with the links between Genesis and FTX.

Genesis has also provided loans to Alameda, a trading company with close ties to FTX, and accepted FTT tokens as collateral, according to a source familiar with the matter. The price of this token has fallen 93% over the past month, according to analytics website CoinGecko.

Genesis did not disclose its total exposure to Alameda.

Crypto experts have said that some of the biggest names in the industry could still be engulfed in Genesis issues. Its parent company, DCG, said the halted withdrawals at Genesis had no impact on its operations or subsidiaries. DCG also owns crypto-asset manager Grayscale.

DCG declined to comment on whether it would take on any of Genesis’ responsibilities. Spokespersons for the group declined to comment.

Reporting by Hannah Lang in Washington and Elizabeth Howcroft in London Editing by Lananh Nguyen, Anna Driver and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Reports on the intersection of finance and technology, including cryptocurrencies, NFTs, virtual worlds and money that generates “Web3”.



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