The largest lender in crypto, Genesis Global Capital, engaged in the same kind of high-risk lending practices that have brought down similar firms, a Quartz investigation found.
Genesis abruptly halted operations last week, blaming crypto market declines and a crisis of confidence in the industry. It warned potential investors that it could face bankruptcy if it can’t raise more capital. The lender, which is owned by Digital Currency Group, an influential crypto conglomerate, said it had $2.8 billion worth of outstanding loans at the end of September (pdf).
That could represent just a portion of the potential fallout, given how much trading that Genesis facilitated was reliant on risky debt and crypto valuations that now look implausible. Three people familiar with operations at Genesis during the recent crypto boom-and-bust period told Quartz that the company’s loans were sometimes unsecured or secured with collateral from other clients.
Those are the same practices that have already felled other crypto lenders like Celsius, which filed for Bankruptcy in July, and trading firms like Alameda Capital, the hedge fund attached to FTX that declared bankruptcy this month. Alameda took loans from Genesis using FTX’s now-worthless token as collateral, Reuters reported, though the amount of debt is still unknown.
In all, Quartz’s investigation of Genesis Global Capital found:
- Genesis sometimes offered unsecured loans to its clients, which used the borrowed money as a way to raise capital during the crypto bull market without having to sell their holdings. Because the loans were unsecured, meaning they weren’t backed by the borrower’s assets, Genesis had nothing to collect when risky trades went south in the bear market. It’s not clear how much of Genesis’ lending was unsecured.
- Major risks even emerged in Genesis loans that were secured by collateral, which are assets the lender can take from the borrower if the loan goes belly-up. That’s because Genesis would sometimes lend out its clients’ collateral to other borrowers, instead of keeping the funds locked, a practice known as rehypothecation that is closely regulated in traditional finance after it helped set off the great financial crisis.
Genesis Global Trading, the parent company of Genesis Global Capital, did not respond to requests for comment on its lending practices. Genesis Trading also operates a crypto trading platform that it says is unaffected by the problems at Genesis Capital and wider tumult in the crypto markets.
Genesis launched in 2018 and grew quickly by offering institutional investors low-interest loans to facilitate crypto trading. Borrowers ate up the cheap credit, and Genesis at its peak reported $50 billion worth of outstanding loans.
Crypto lenders, entering a new and unregulated market, have often emphasized the safety of their loans by requiring high levels of collateral. For instance, if a lender gave an investor 100 bitcoin, worth around $1.6 million today, it would require the investor to post more than 100 bitcoin in collateral as protection.
Being “overcollateralized” was supposed to take risk out of the system and allow crypto lenders to operate without the massive compliance teams and rigorous underwriting standards that banks have. In reality, loans offered by Genesis sometimes required less collateral than the value of the loan, or not collateral at all, according to the three people familiar with the business.
Not all of Genesis’ loanbook was unsecured or undercollateralized, according to one former Genesis employee. It couldn’t be determined how much, if any, collateral Genesis held against its outstanding loans. Whether or not a borrower received could receive an unsecured loan from Genesis depended on the borrower’s reputation, the size of the loan, and the asset the loan was denominated in, the former employee said.
Genesis often permitted highly leveraged trading, which means betting with money that is largely borrowed. In its frequently asked questions (pdf), Genesis is cryptic about what kind of loan-to-value ratios (LTVs) it was willing to accept. LTV measures how much of a purchase or investment is made with borrowed funds. Loans with high LTVs are considered riskier.
“LTV is determined on the basis of our business and risk assessment process,” Genesis wrote in its FAQ. “Collateral for borrowers is managed on a client by client basis and such terms are negotiated with regards to each loan.”
Genesis increased its risk further by using what collateral it did collect to fund loans to other clients, according to the three people familiar with its operations. It would then take the collateral received from the new loans and lend that out, too.
The practice renders even “secured” loans effectively unsecured because, in order to cover the loss from one loan, the lender would have to claw back collateral from a different borrower. Extreme drops in the crypto markets, like those that followed Federal Reserve tightening monetary policy or a major exchange like FTX collapsing, have led to margin calls on loans that can’t be paid. The cascading effects prompted Genesis to halt operations last week.
Celsius, the crypto lender that failed earlier this year, attempted to hedge the risk it was taking on the lending side of its business by investing in derivatives that would allow it to survive during brutal selloffs in the crypto market. While it remains unclear whether Genesis did this with its derivatives arm, it would have been industry practice, the former employee said.
Quartz is investigating trading and lending practices in the crypto industry. If you know more about Genesis Global Capital or similar firms, you can get in touch with the reporter of this story, Nate DiCamillo, at firstname.lastname@example.org.