Judge Halts DCG’s Ownership Change in Genesis Bankruptcy Case

In a significant development within the cryptocurrency sector, a judge has ruled that Digital Currency Group (DCG) cannot alter its ownership stake in Genesis as long as the latter remains in bankruptcy. This decision is critical in the ongoing financial struggles of these prominent players in the digital asset market.

Genesis’ Bankruptcy and Disputes with Gemini

The recent court ruling ensures that Genesis, a key institutional-focused cryptocurrency lender, remains under the protection of DCG’s tax consolidated group. This arrangement offers Genesis certain tax benefits, particularly concerning its Net Operating Loss (NOL) carryforwards. NOL carryforwards are a tax advantage, allowing companies to offset future profits with previous losses. For Genesis, this is particularly pertinent, as the company has accumulated over $700 million in NOLs, largely due to unrecovered loans from the collapse of Three Arrows Capital.

This protection remains effective until Genesis emerges from Chapter 11 bankruptcy or transitions into a Chapter 7 case involving liquidating the company. Genesis had filed a motion arguing for maintaining DCG’s ownership above 80% to safeguard the potential value of these tax benefits. The ruling thus plays a vital role in preserving Genesis’ financial position and enhancing its potential for successful reorganization.

The backdrop to this legal development involves Genesis’ bankruptcy filing in January, a direct consequence of the fallout from the FTX collapse. This event forced Genesis to halt customer withdrawals, leading to significant financial turmoil. Since then, the company has been embroiled in multiple disputes, most notably with Gemini over their joint Earn program. This program, which offered yield on customer deposits, was suspended amidst Genesis’ financial difficulties, affecting approximately 230,000 customers.

Gemini has been actively seeking to recover around $1.1 billion on behalf of these customers. Legal actions include a complaint about acquiring 62 million Grayscale Bitcoin Trust shares (GBTC) shares. In response, Genesis filed a lawsuit attempting to reclaim $689 million from Gemini. These legal battles highlight the complex web of financial and legal challenges that have emerged after Genesis’ bankruptcy.

Wider Legal Challenges Involving DCG and Gemini

The complications extend beyond the Genesis-Gemini disputes. All three entities and DCG CEO Barry Silbert are implicated in a lawsuit filed by New York Attorney General Letitia James. The lawsuit accuses them of orchestrating a “fraudulent scheme” through the Earn product. According to the complaint, the involved parties engaged in a prolonged campaign of misinformation and concealment, leading to significant financial losses.

The complaint alleges that Genesis Entities, Michael Moro, DCG, and Barry Silbert disguised $1.1 billion in losses, revealing a complex network of financial transactions and decisions that have significant implications for the broader cryptocurrency market. This legal action underscores the cryptocurrency industry’s increased scrutiny and regulatory challenges, particularly after high-profile collapses and financial disputes.

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