Digital Currency Group at Risk of $630 Million Default
Digital Currency Group’s imminent $630 million default could speed up the black swan event that former Coinbase CTO Balaji Srinivasan predicted.
DCG could be the latest victim of a snowballing banking crisis Srinivasan predicts will upend the U.S. banking system.
Former Coinbase CTO Predicts Fed-Inspired Black Swan Event
Recently, former Coinbase CTO Balaji Srinivasan bet $1 million that Bitcoin would reach $1 million by June 16, 2023. This increase would take the crypto market cap to $20 trillion. The technology entrepreneur has tempered that initial prediction.
However, he predicts that the Federal Reserve is still “printing trillions” of dollars to bail out failed banks. He says this undisciplined money printing could lead to a black swan event.
“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.”
Black swan events are exceptionally rare, unpredictable events with severe consequences. Finance professor Nassim Taleb popularized the concept in his 2007 book.
Taleb argues that these events cannot be predicted because they fall outside the scope of probabilistic tools depending on large populations and sample sizes.
Traditional banks Signature and Silicon Valley Bank struggled to raise short-term liquidity after depositors withdrew funds en masse from accounts not covered by deposit insurance. First Republic is the latest victim, with the government in talks to rescue the bank.
Will DCG be the Next Domino to Fall?
Crypto conglomerate DCG risks defaulting on its obligations if it cannot pay or restructure the $630 million it owes to Genesis between May 9 and May 11. Genesis filed for bankruptcy in January after pausing withdrawals and loan originations last November.
DCG borrowed almost $500 million from Genesis in 2022 when its annual cash flow was $1 billion. However, the Wall Street Journal said the decline in crypto prices has likely significantly devalued the firm’s assets. It also shut down its wealth-management business in early January to “cut costs.”
To shore up its cash flow, DCG needs to sell additional Genesis assets and refinance a promissory note it gave the lender for Three Arrows Capital’s bankruptcy claims.
It offered Genesis creditors special DCG stock in exchange for the $1.1 billion note, due in 2032. It also wants to extend the deadline for the $630 million loan. The debt restructuring is expected to take months.
External investors expressed little interest in the $3 billion sources told the Financial Times Genesis owes creditors. Crypto exchange Gemini is one of the remaining creditors engaged in mediation with DCG to restore funds Genesis owes to Gemini Earn customers.
DCG’s companies include crypto lender Genesis, asset manager Grayscale Investments, and news outlet CoinDesk. Grayscale is fighting the SEC over the agency’s refusal to greenlight the asset manager’s planned spot Bitcoin ETF.
