Cameron Winklevoss and Barry Silbert are locked in a bitter crypto battle

Cameron Winklevoss and Barry Silbert were early believers in it bitcoin who have made a fortune on their investments and built big businesses along the way. to Almost two yearsThey enjoyed a mutually beneficial partnership that made their clients a lot of money.

Now, the heaviest Bitcoin weight is in range The war of verbal bruises This illustrates the depth of the cryptocurrency crisis and underscores the risks eventually borne by ordinary investors caught in the trap of a massively unregulated market. As it stands, hundreds of millions of dollars in client funds are left in an unreachable limbo as two crypto entrepreneurs vie over who is in charge.

Silbert is the founder of the Digital Currency Group (DCG), a crypto conglomerate that includes the Grayscale Bitcoin Trust and trading platform origin. Winklevoss, along with his brother Tyler, co-founded Gemini, and is famous Cryptocurrency exchange, unlike many of its peers, is Topics New York Banking Regulations.

Winklevoss and Silbert hooked up through a show called Earn, which is a nearly two-year-old Gemini product that has been syndicated Returns of up to 8% on customer deposits. With Earn, Gemini lent client funds to Genesis for placement across various cryptocurrency trading desks and borrowers.

As the cryptocurrency markets soared in 2020 and 2021, this capital produced high returns for Genesis and easily paid users their return, which was very attractive at a time when the Fed’s benchmark rate was at nearly zero. Other riskier (and now defunct) crypto platforms such as Celsius and Voyager Digital were offering returns of up to 20%.

It was a thriving business. Genesis had 260 employees and a strong sales office, and Gemini was one of the largest lending partners, sending $900 million in crypto customers to the company. Gemini considers Genesis, which is regulated by New York State and the Securities and Exchange Commission, to be the most reliable name in cryptocurrency lending, according to a person with first-hand knowledge of the matter. The source, who asked not to be named due to confidentiality, said diversification has been a challenge, because other players have less flexible risk parameters.

In 2022, the cryptocurrency market collapsed, and the Earn model collapsed.

Cryptocurrencies have turned south, borrowers have stopped paying their debts, hedge funds and lenders have collapsed, and activity has ground to a halt.

The gates opened wider in November, when FTX It escalated into bankruptcy and customers of the crypto exchange were unable to access billions of dollars in deposits. Soon, Sam Bankman Fred was appointed founder of FTX Arrested on fraud chargesaccused of using client money in trading, lending, venture investments and his accounts Lavish lifestyle in the Bahamas.

An industry-wide crisis ensued as cryptocurrency investors across the board tried to withdraw their assets. Five days after the collapse of FTX, Genesis was forced to freeze new lending and Suspension of refunds. “FTX has created unprecedented market turmoil, resulting in abnormal withdrawal requests that have exceeded our current liquidity,” the company said in a tweet.

The infection was so fast that both Gemini and Synesis appointed experts To guide them through a Possible Genesis bankruptcy.

All Earn withdrawals have been paused since November. Gemini’s 340,000 customers are angry, and some of them have come together Collective actions Against Genesis and Gemini. Placing the blame on Silbert’s shoulders, Winklevoss has gone public with his fight to recover the $900 million in deposits his clients placed with Genesis.

in Message To Silbert on January 2, Winklevoss said that the money belonged to clients including a schoolteacher, a police officer and “a single mother who lent you money for her son’s education”.

Winklevoss said Gemini had been trying for six weeks to make good faith dealings with Silbert only to run into “ill-intentioned stalling tactics”. A source said the Gemini lawyers tried to work with the Genesis team over the Thanksgiving holiday, but found their efforts effectively rebuffed.

Another person, who asked not to be named, told CNBC that Genesis advisors, DCG and the Gemini creditor committee met several times throughout the six-week period Winklevoss referred to.

Gemini’s creditors are represented by attorneys from Kirkland & Ellis and Proskauer Rose and financial advisors at Houlihan Lokey.

DCG and Genesis advisors include law firm Cleary Gottlieb Steen & Hamilton and investment bank Moelis and Company.

The last meeting between the three groups of lawyers and bankers was on Monday, according to that person.

TuesdayAnd Follow Winklevoss with open letter to the DCG board of directors, asking him to replace Silbert.

One of Winklevoss’ central complaints stems from the loan Silbert made to Genesis after the demise of hedge fund Crypto Three Arrows Capital (3AC) last year. Genesis was More than 1 billion dollars By 3AC when the company defaulted on its debt. Silbert and Sand effectively intervened to expose his business with a $1.1 billion intercompany loan to Genesis.

At the time, Genesis sought to reassure Gemini that the DCG unit was still strong, resilient, and backed by the parent company. Silbert justified the decision in a letter to investors this week, writing that “Genesis has unrivaled expertise and the best institutional customer base in the world.” Court filings show that on July 6, Genesis reassured Gemini that liquidity was not a concern, and the two parties agreed to continue working together.

Gemini claims that Genesis provided misleading information regarding the Silbert loan. Rather than bolster Genesis’ operating position, Winklevoss wrote, the loan amounted to a “10-year promissory note” and was “a complete ploy that did nothing to improve Genesis’ immediate liquidity position or make its balance sheet solvent.”

Silbert has avoided responding directly to Winklevoss’ latest accusations, though the company has taken up his defense. In a tweet on Tuesday, DCG called the letter “another desperate and unconstructive publicity stunt,” adding that “we reserve all legal remedies in response to these malicious, fake, and defamatory attacks.”

“DCG will continue to engage in a productive dialogue with Genesis and its creditors with the goal of achieving a mutually beneficial solution,” the company said.

A DCG spokesperson told CNBC that the company denies Winklevoss’ allegations of financial wrongdoing.

For the 41-year-old Winklevoss twins, a public and high-profile feud is nothing new. They are best known for their role in the birth of Facebook, now known as Facebook metaAnd Founded by a Harvard Fellow Mark Zuckerberg. They sued Zuckerberg, eventually settling in 2011 in favor of A $65 million payout Facebook cash and stocks.

Soon the brothers turned to cryptography and by 2013 They said they control 1% of all bitcoins in circulation. The stake rose from $11 million at the time to more than $4.5 billion when bitcoin peaked in 2021.

Silbert, 46, hit the market around the same time. he Sold His previous company, SecondMarket, to the Nasdaq in 2015, and DCG started that year. But he invested in bitcoin for the first time in 2012.

Silbert and the Winklevoss brothers were bitcoin bulls long before any exchanges or trading apps facilitated the purchase of cryptocurrencies and before institutional interest in the field. Now that the trade has been reversed, they are deep in conflict.

In the face of mounting pressure from creditors and the imminent threat of bankruptcy, Genesis recently cut staff by 30% in its The second round of layoffs. Gemini cuts 10% of its staff in June 2022, Another tour Seven weeks after the layoffs.

Thousands of Gemini clients are “looking for answers,” Winklevoss says. On Tuesday, Gemini told Earn customers it was terminating its customer loan agreements with Genesis and ending the program.

Gemini and Genesis insist they are negotiating in good faith. But the harsh reality is that with the emergence of the cryptocurrency bubble last year, both companies were not left with nowhere to hide. Their customers are now scrambling to get complete.

— CNBC’s Kate Rooney contributed to this report.