Headline: Is DCG at risk of default?
Body: Ok, I’m pretty sure that DCG is not a company that you think about on a daily basis, many probably have not heard of it. This is so common in business. I myself didn’t believe how central it was to nearly everything, until I mapped it out on a blank piece of paper. FTX was at the center, and DCG was just beside it. Now that FTX is gone, DCG will likely make it into the center of my next mapping exercise. Gemini was a company in the cryptocurrency space, and they had a lending arm, Genesis Capital (remember them?) represented a subsidiary that undertook lending activities. To be frank, their fall was only as catastrophic as it was because they were so successful to that point. DCG itself might be facing a similar fate.
Why is DCG facing these issues?
One could cite a bunch of issues including incestuous lending (receiving loans from subsidiaries and then collateralizing these loans with their own cryptocurrency) and rather opaque reporting requirements. But, when one peels away the layers (lawyers too, I suppose) it seems to boil down to a loss of trust from the Public.
This seems very academic and hard to grasp…
The entire monetary system runs on trust (remember, we keep coming to that conclusion??) To keep that trust, the government has regulations and the powers necessary to enforce these regulations. As it regards publicly traded companies, the trust is kept by requiring them to publish financial statements and disclosures, and these are in turn, audited by companies that are supposed to be disinterested 3rd parties. In this way, if the company decides to “disclose” a set of transactions in a misleading way, the auditor will be able to require them to edit the report, to be more clear, and compliant with accounting rules. If the company decides to refuse, the auditors have the option to edit their opinion letter. In this manner, the public can feel that their money invested is fairly safe.
Normally, these companies have an Initial Public Offering (IPO) where their stock is first sold on the market. But, often, these cryptocurrency firms will forgo this IPO, and have an Initial Coin Offering (ICO) instead. Within the accounting field, it is pretty clear that when there is an IPO, there are a set series of disclosures to be made, thus keeping important policies and actions transparent. But, the ICO is a newish beast on this block, and the regulations are still being set. This lack of comprehensive regulation allows for some of the poor management decisions made.
Well, what about “activist investors?”
This is very prescient of you to bring up. In the publicly traded world, if there is an investor who is disenchanted with decisions made, they can do a variety of things that can force the company to change its ways. In a similar vein (though not the same) the Winklevoss twins, who led Gemini, are doing what they can to make the DCG wrongdoings very public. They wrote a public letter to the board, asking them to remove Barry Silbert as CEO. In turn, Gemini Capital creators, Tyler and Cameron Winklevoss were accused of mischaracterizing the entire balance of a $1.1 Billion promissory note as an asset. The back and forth accusations seem to be a continuing thing, as the CEO of DCG responded over Twitter.
Why does this Three Penny Opera matter?
DCG also owns several large companies. They own media group Coindesk, a bitcoin mining outfit, called Foundry, and the Grayscale Bitcoin Trust. All are significant participants within the cryptocurrency environment. The breakup or bankruptcy of DCG could mean the loss of significant money for a lot of people. Real money, mind you. The government is taking this seriously too as the US Attorneys’ Office has opened an investigation into DCG.
The Verdict
So, there you have it. This is another cryptocurrency firm that is facing governmental scrutiny, and will likely wind up in Court. Beyond the government investigation, the Winklevoss brothers also appear to be rather serious.
Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.
— Cameron Winklevoss (@cameron) January 20, 2023
This suggests to me yet another reason to be very careful in investing in cryptocurrency, of any variety.
REFERENCES
Digital Currency Group’s Genesis implosion: What comes next? (cointelegraph.com)
Cameron Winklevoss asks DCG board to remove CEO Barry Silbert, escalating dispute (yahoo.com)
Crypto Trader Auros Global Misses Payment on DeFi Loan as FTX Contagion Spreads (coindesk.com)
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.