Cryptofinance: Barry Silbert, crypto boss on the defensive

Welcome to the FT Cryptofinance newsletter. This week, we’re taking a look at Barry Silbert, the man at the heart of Digital Currency Group.

It’s been two weeks since FTX — one of the crypto industry’s marquee brands — fell into bankruptcy in spectacular fashion and I compared it to the collapse of Lehman Brothers.

As the impact rippled through the market, the biggest players have been trying to steady the ship. Fighting hardest this week has been Digital Currency Group and founder and chief executive Barry Silbert.

Silbert has been trying to reassure shareholders about the viability of his conglomerate as fears swirl that one part of it, crypto broker Genesis, will be the next big name to fall.

Simply put, Genesis is a player. Last year it traded $116bn worth of crypto, originated $131bn worth of loans. Yet on November 16 it announced it was halting withdrawals at its lending unit. This week it said it was not imminently on the brink of bankruptcy.

Silbert’s name may be unfamiliar to some readers. Like many executives, he’s on Twitter but doesn’t use it frequently to broadcast his thoughts. He doesn’t do countless TV or conference appearances.

So he — and by extension DCG — doesn’t have the same public profile as personalities like Sam Bankman-Fried, Binance’s Changpeng Zhao or MicroStrategy’s Michael Saylor. Even so, Silbert has an important chapter in crypto’s story that explains the market’s focus.

DCG is the parent group of a portfolio that includes digital asset management firm Grayscale, crypto news site CoinDesk, mining company Foundry, wallet provider Luno and Genesis.

That DCG’s Genesis is the latest company to wobble after an industry shock that was started by an article on FTX by DGC’s CoinDesk is symptomatic of its reach.

“Getting one’s head around the fact that the same guy owns Grayscale, CoinDesk, Genesis and DCG is . . . I’m not sure what it is. The industry is so interconnected,” one industry observer told me.

In industry terms, Silbert is a veteran. He was an investment banker in New York before founding SecondMarket, a marketplace for private companies to buy and sell their shares before it was bought by Nasdaq.

Silbert was an “early” bitcoin believer, the kind that jumped on the crypto train in the middle of the 2010s even as the nascent industry was reeling from scandals such as Mt. Gox and Silk Road. More particularly he believed bitcoin to be the biggest opportunity of his career.

Grayscale has been critical to that ambition. It runs Grayscale Bitcoin Trust (GBTC), an investment vehicle that gives investors a tradeable product that tracks the coin.

“Accredited investors” like hedge funds can buy the shares with bitcoin at the net asset value of the trust, then sell at market price after a lock-up period has expired, usually six months later.

In 2020 the market price was on average an 18 per cent premium to the NAV, making it one of the market’s most lucrative trades. It was so popular it helped to fuel a $5bn lift in new client funds in GBTC that year. Defunct crypto hedge fund Three Arrows was one of the biggest GBTC holders.

But the emergence of several spot bitcoin ETFs in Canada sapped demand and the trust’s premium flipped to a discount almost overnight.

However, GBTC shares cannot be redeemed for bitcoin or hard currency — meaning the only way for any investors to exit the trade is by selling the shares to other investors. The discount still stands and has reached 40 per cent, making it very unpopular. The biggest holder of GBTC now is . . . DCG.

The market is still unpicking how complicated this arrangement has become. My colleagues Kadhim Shubber, Nikou Asgari and Joshua Oliver this week revealed DCG borrowed $575mn in cash and bitcoin from Genesis, and some of the funds have been used to fund purchases of units of GBTC, as well as buying back DGC shares.

Silbert told investors that the Genesis loan book was facing an issue of liquidity and duration mismatch and it did not affect the platform’s trading and custody businesses. But the links are another indication of how delicately balanced Silbert’s crypto empire is.

For an industry uncovering the extent of the links between crypto exchange FTX and proprietary trader Alameda Research, it’s another reason to be concerned.

As DA Davidson senior research analyst Chris Brendler told me on a phone call this week: “This does feel quite a bit like the 2008 financial crisis . . . and those were, for the most part, public companies with all kinds of oversight yet we had no idea how far that contagion spread.”

What’s your take on crypto’s Barry Silbert? Email me at scott.chipolina@ft.com.

The FT’s Crypto and Digital Assets Summit: Winter Edition will discuss what’s to come after the “crypto winter” and what to expect in 2023. As an FT premium subscriber, you can use promo code PREMIUM2022 to watch digitally for free or use FT25 to get 25% off your in-person pass. Register here: cryptowinter.live.ft.com/

Weekly highlights

• On Monday two Estonian citizens were arrested and charged in connection with a $575mn crypto fraud and money laundering scheme. The arrests indicate — amid a growing line of similar cases — that law enforcement is wising up to illicit crypto activity.

• Late Tuesday evening I moderated a panel discussion on crypto’s impact on the Ukraine crisis. Industry members and Ukraine’s deputy minister for digital transformation, Alex Bornyakov, told me repeatedly that crypto can serve as an economic lifeline when traditional payment rails fail. Bornyakov also predicted Russian use of crypto as a means of sanctions evasion would be a “huge deal” in the future.

• As you may recall, I was in The Bahamas last week chasing stories on FTX. I found that government, regulators and law enforcement are putting their collective head in the sand in a desperate bid to protect the island’s “reputation” on digital assets. Read my story here.

• Things are heating up in Hodlnaut land. The crypto platform caught out by the summer’s market collapse halted withdrawals earlier this year and was eventually placed under interim judicial management. Singaporean police this week said it was investigating the platform and its directors “for possible cheating and fraud offences”.

Soundbite of the week: Binance is ‘not a Chinese company’

Binance co-founder and chief executive Changpeng Zhao — colloquially known in the industry as “CZ” — said this week Binance was not a Chinese company.

“Binance is not a Chinese company, we are not related to China at all, I have to repeat this many times’ just because I look Chinese.”

Sadly though, it was another missed opportunity for him to tell the world where Binance is actually based. Since FTX’s catastrophic collapse, CZ promised “full transparency” in a tweet. We have asked Binance — for the nth time — where it is based. We’ll let you know when we get an answer.

Data mining: Gemini’s falling trading volume

Gemini is an example of the contagion fears. The exchange, run by twins Tyler and Cameron Winklevoss, partners with Genesis on a product that pays customers interest for lending out their crypto assets. Gemini is now trying to help customers redeem their funds as quickly as possible.

What’s more, Gemini spot trading volume has been on a steady decline for most of the year. Gemini said it was an “incredibly challenging and stressful time for our industry”. Certainly is.