Digital Currency Group At Risk Of Domino Effect As Banking Crisis Snowball

Updated: 02 May 2023

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Digital Currency Group risks a $630 million default if it fails to reimburse Genesis between May 9 and 11.
The company cites a stark drop in crypto prices overtime that has devalued his assets,
Former Coinbase CTO Balaji says it’s reckless for the Fed to print trillions of dollars to help rescue collapsed banks.

Digital Currency Group (DCG), a cryptocurrency conglomerate, risks defaulting on its obligations if it fails to pay or restructure a $630 million owed to Genesis between May 9 and May 11. The news comes after a January filing of Chapter 11 protection by Genesis Capital, a bankruptcy filing that saw the firm pause withdrawals and loan origination.

DCG To Refinance Genesis Or Face The Consequences

It happened that DCG borrowed around $500 million from Genesis in 2022 when its annual cash flow was around $1 billion. According to the Wall Street Journal, however, the firm’s assets have been devalued by a stark margin amid the declining cryptocurrency prices. The downtick in crypto price also saw the company wind down its wealth management business earlier in January in a strategic attempt to reduce expenses.

DCG must now sell more Genesis assets to shore up its cash flow and hopefully refinance a promissory note given to Genesis, the lender of Three Arrows Capital (3AC) bankruptcy claims. As part of the restructuring, DCG offered Genesis creditors special company stock against a $1.1 billion note due in 2032. The company is also looking to stretch the $630 million loan deadline. It is worth mentioning that the debt restructuring will take months before settlement.

Former Coinbase CTO Predicts Fed-Inspired’ Black Swan’ Event

Former Coinbase CTO Balaji Srinivasan wagers $1 million that Bitcoin (BTC) would hit $1 million by June 16 this year, an increase that would ship the cryptocurrency market capitalization to $20 trillion. Nevertheless, in a recent statement, the tech entrepreneur appended the bet.

I don’t know how many months – years –we have. Just to quantify it, I think we have a 10% chance of a very serious issue in months, 70% in years, 19% in decades, and 1% it takes a century or so on.

According to Balaji, the Federal Reserve is still “printing trillions” of dollars to help rescue collapsed banks. Balaji believes such a lack of discipline in printing money could cause a black swan event. Finance professor Nassim Taleb adds weight to Balaji’s statement, pointing out that it is impossible to predict these events as they fall outside the scope of probabilistic tools based on large populations and sample sizes.

Considering Traditional banks like Signature and Silicon Valley Bank (SVB) had a hard time raising short-term liquidity when depositors withdrew funds in their numbers from accounts not covered by deposit insurance, and given the recent case involving First Republic, it becks the question of whether DCG will be the next domino to fall.