Cryptos Hotel California traps the Winklevoss twins

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You can get into crypto anytime, but can you ever leave? A fierce $900 million Bitcoin feud between billionaire twins Winklevoss and Barry Silbert suggests the main legacy of virtual currency bubbles is dislike of the California hotel, with guests desperately hoping for fresh cash to pay the tab or a change of direction that will allow them to check. At the heart of the dispute is a crypto lending business that exploded dramatically last year after bringing together Cameron and Tyler Winklevossand Silbert. As relatively early adopters of Bitcoin, tycoons undoubtedly recognized a big challenge in crypto: how to make money from a stack of virtual tokens with no intrinsic value.

The result was a cottage industry of rigs, including the Winkleviis Gemini Earn. Gemini took the crypto from depositors and loaned it to crypto brokerage firm SilbertsGenesis, which in turn outsourced it to investors, including Three Arrows Capital (3AC), in search of returns. In the frothy days of everything going up, everyone inquired: eye-popping 7% interest rates, the promise of instant withdrawals and the names involved meant few people really read the fine print. But when the markets tumbled, the new structure became yet another golden cage: Everyone wanted to leave but no one could pay the bill. When 3AC went bankrupt in July, Silberts Digital Currency Group had to cover some of Genesis’ debts with a $1.1 billion promissory note, while the fall of FTX in November caused platform withdrawals to freeze. shapes everywhere, including Gemini and Genesis. Over 340,000 Gemini Earn customers are trapped in limbo and owe Genesis $900 million.

Normally, in the absence of a white knight or a magic bundle of outside money, one would reasonably expect the cascade of defaults to trigger bankruptcy proceedings or a meeting to reach a settlement, what the Winklevoss twins had hoped to do with Silbert by January 8. But, this being crypto, one hotel annex always seems to lead to another rather than an exit. Silbert may be biding his time or reshuffling his assets because there’s a goose in his empire: Grayscale Bitcoin Trust, the world’s largest digital currency fund. And this fund has its own California-like structure: It charges a 2% annual management fee based on the net asset value of its holdings, bringing in $615.4 million in 2021 alone.

Holders have little choice but to sell their shares in the open market during the crypto winter, there is no redemption mechanism to access the funds underlying Bitcoin holdings. And that may be why the Winklevoss twins are resorting to public charges of insider trading and accounting fraud against Silbert and asking him to step down. In addition to painting Gemini as a victim of Genesis rather than an enabler, Cameron Winklevos’ latest letter pressures Silbert to shed some light on his opaque empire with regulators spinning in circles and hedge funds churning. are waving. The $1.1 billion promissory note in particular is described as a gimmick and inadequate funding. The result is that DCG may find itself reluctantly forced to relinquish control of its most valuable Grayscale entity or trigger Genesis bankruptcy, which for Gemini could unlock funds to reimburse customers. (DCG on Tuesday called Winklevoss’s letter malicious, false and defamatory and said she would engage in a productive dialogue with Genesis.)

This mess has many possible outcomes, none of which are objectively great for retail customers caught up in the crypto ride. Even if somehow a direct link is made between Grayscales cash flow and the claims of disgruntled Geminis depositors, it will be hedge funds looking for an angle on the confidence of Silberts or the legal advisers handling the claims are likely to be the best off. In the meantime, the twins are right to try to shed some light on DCG, where US authorities are already looking into internal transfers. We have seen from FTX the dangers of opaque and sprawling entities that are not held to a high standard by counterparties or regulators. DCG has a portfolio of over 200 companies and funds, and more transparency is needed, especially when it comes to Grayscale Bitcoin Trust, given how expensive and poor it has been. The price of trusts fell 76% last year and is trading at a 39% discount to its net asset value. Jonathan Biers’ book on crypto lending, Reckless, makes it clear that the latest burst of this bubble has all the hallmarks of a generalized financial crisis: greed, poor risk management, conflicts of interest, insufficient regulation and unsound business strategies. durable. , while the Winklevoss twins in search of new income saw them embrace the laser-eyed hype to the hilt. Does the individual have the impression that the doge is money? So it is, Gemini COO Noah Perlman said in 2021, referring to the dog-related cryptocurrency its founders established as a joke.

Whatever happens, the Hotel California crypto issue is likely to remain. You cannot use Bitcoin to pay your bills or live off your earnings without cashing out. Lending activity will likely survive, but in a much smaller size, as crypto fans try to attract more buyers to support the price. Which means regulators need to be vigilant. No one has come out yet.

More from Bloomberg Opinion:

Beware the Dangers of Too Much Crypto Regulation: Tyler Cowen

Navigating 2023 with Seven Maps and a Cat: Ashworth and Gilbert

Beware of crypto-billionaires who brag about audits: Lionel Laurent

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion

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