Tyler Winklevoss, Chief Executive Officer and Co-Founder of Gemini Trust Co., left, and Cameron Winklevoss, President and Co-Founder of Gemini Trust Co. speak during the Bitcoin 2021 conference in Miami, Florida, on Friday, June 4, 2021 .
Eva Marie Uzcategui | Bloomberg | Getty Images
Cameron Winklevoss and Barry Silbert were both early believers in Bitcoin, making fortunes from their investments and building large companies along the way. For almost two years, they enjoyed a mutually beneficial partnership that made their clients big bucks.
Now, the Bitcoin heavyweights find themselves in a grueling war of words that illustrates the depth of the crypto crisis and underscores the risks that were ultimately borne by ordinary investors caught in a massively unregulated market. By the looks of it, hundreds of millions of dollars in client funds sit in inaccessible limbo as the two crypto entrepreneurs bicker over who is to blame.
Silbert is the founder of Digital Currency Group (DCG), a crypto conglomerate owned by Grayscale Bitcoin Trust and Trading platform Genesis. Winklevoss co-founded Gemini, a popular company, with his brother Tyler Crypto exchange subject to New York banking regulation, unlike many of its competitors.
Winklevoss and Silbert were linked by an offer called Earn, a nearly two-year-old Gemini product that was being promoted Yields of up to 8% on customer deposits. With Earn, Gemini lent client funds to Genesis to place across various crypto trading desks and borrowers.
As the digital coin markets soared in 2020 and 2021, this asset brought high returns for Genesis and easily earned users their return, which is very attractive at a time when Federal Reserve interest rates were virtually zero was. Other riskier (and now defunct) crypto platforms like Celsius and Voyager Digital offered returns of up to 20%.
Barry Silbert, Founder and CEO, Digital Currency Group
David A Grogan | CNBC
It was booming business. Genesis had 260 employees and a robust sales desk, and Gemini was one of its largest lending partners, sending $900 million in customer crypto to the company. According to one person with direct knowledge of the matter, Gemini considered Genesis, which is regulated by New York State and the Securities and Exchange Commission, to be the most reliable name in crypto lending. Diversification is a challenge as other players have looser risk standards, said the source, who asked not to be named for confidentiality reasons.
Friends became enemies
In 2022, the crypto market collapsed and the Earn model fell apart.
Cryptocurrencies turned south, borrowers defaulted on their debts, hedge funds and lenders went under, and activity ground to a halt.
The floodgates opened even wider in November, when FTX went bankrupt and customers of the crypto exchange could not access billions of dollars in deposits. FTX founder Sam Bankman-Fried was soon arrested on fraud charges and accused of using client funds for trading, lending, venture investing and his lavish lifestyle in the Bahamas.
An industry-wide crisis ensued as crypto investors across the board sought to siphon off their fortunes. Five days after FTX collapsed, Genesis was forced to freeze new loans and suspend repayments. In a tweet, the company said, “FTX has caused unprecedented market turmoil that has resulted in unusual withdrawal requests that have exceeded our current liquidity.”
The contagion was so rapid that both Gemini and Genesis hired experts to guide them through a possible Genesis bankruptcy.
All payouts at Earn have been paused since November. Gemini’s 340,000 retail customers are furious, and some have joined forces in class action lawsuits against Genesis and Gemini. Winklevoss puts the blame on Silbert’s shoulders, and he has gone public with his fight to recover the $900 million in deposits his clients deposited with Genesis.
in one Letter to Silbert on Jan. 2, Winklevoss said those funds belong to clients including a school teacher, a police officer and “a single mother who loaned you her son’s tuition money.”
Winklevoss said Gemini spent six weeks trying to engage in “good faith” Silbert only to encounter “malicious stall tactics.” Gemini attorneys had attempted to work with Genesis’ team during the Thanksgiving holiday but found their efforts effectively rebuffed, a source said.
Another person, who asked not to be named, told CNBC that advisors from Genesis, DCG and Gemini’s creditors’ committee met several times during the six-week period Winklevoss mentioned.
Gemini creditors are represented by attorneys from Kirkland & Ellis and Proskauer Rose and financial advisors from Houlihan Lokey.
Advisors to DCG and Genesis include law firm Cleary Gottlieb Steen & Hamilton and investment bank Moelis and Company.
According to this person, the last meeting between the three lawyers and bankers took place on Monday.
On Tuesday, Winklevoss followed with one open letter to the DCG board with a request to replace Silbert.
One of Winklevoss’ key complaints stems from a loan Silbert made to Genesis following the demise of crypto hedge fund Three Arrows Capital (3AC) last year. Genesis owed 3AC over $1 billion when the company defaulted on its debt. Silbert stepped in, effectively stopping his trading company’s involvement with a $1.1 billion intercompany loan to Genesis.
At the time, Genesis was trying to reassure Gemini that the DCG entity would remain solvent, strong and backed by its parent company. Silbert justified the decision in a note to investors this week, writing that “Genesis has unmatched expertise and the best institutional client base in the world.” Court documents show that on July 6, Genesis assured Gemini that liquidity was not an issue and the two parties agreed to continue working together.
Gemini claims Genesis provided misleading information about Silbert’s loan. Rather than serve to strengthen Genesis’ operational position, the loan was a “10-year promissory note” and a “complete gimmick that did nothing to improve Genesis’ immediate cash position or make its balance sheet solvent.” wrote Winklevoss.
Silbert has avoided directly responding to Winklevoss’ latest allegation, although the company has taken on its defense. In a tweet on Tuesday, DCG called the letter “another desperate and unconstructive publicity stunt,” adding, “We reserve all legal remedies in response to these malicious, fake, and defamatory attacks.”
“DCG will continue to engage in productive dialogue with Genesis and its creditors with the goal of arriving at a solution that works for all parties,” the company said.
A DCG spokesman told CNBC the company denied Winklevoss’ claims of financial impropriety.
A public and high-profile dispute is nothing new for the 41-year-old Winklevoss twins. They are best known for their role in the birth of Facebook, now known as Meta, founded by Harvard classmate Mark Zuckerberg. They sued Zuckerberg and eventually settled in 2011 for $65 million in cash and Facebook stock.
The brothers quickly switched to crypto and said they controlled 1% of all bitcoin in circulation by 2013. Stakes rose from $11 million at the time to over $4.5 billion when Bitcoin peaked in 2021.
Silbert, 46, entered the market around the same time. In 2015 he sold his previous company SecondMarket to Nasdaq and founded DCG earlier this year. But he first invested in Bitcoin in 2012.
Silbert and the Winklevoss brothers were Bitcoin bulls long before exchanges or trading apps made buying digital currencies easy, and well before institutional interest in the space. Now that the trade has reversed, they are deeply involved in the fight.
In the face of increasing pressure from creditors and the threat of bankruptcy, Genesis recently reduced its headcount by 30% in a second round of layoffs. Gemini cut 10% of its workforce in June 2022, followed by another round of layoffs seven weeks later.
Winklevoss says thousands of Gemini customers are “looking for answers.” On Tuesday, Gemini informed Earn customers that it was terminating customer loan agreements with Genesis and ending the program.
Gemini and Genesis insist that they are dealing in good faith. But the harsh reality is that with the crypto bubble bursting last year, both companies had no place to hide. Your customers are now making efforts to get well.
– CNBC’s Kate Rooney contributed to this report.
