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Crypto conglomerate, Digital Currency Group, under investigation by US authorities. Crypto investors concerned.

According to reports, Digital Currency Group (DCG), the self-described “epicenter of the bitcoin and blockchain industry”, is under investigation by US authorities. The US authorities are federal prosecutors in Brooklyn and the US Securities and Exchange Commission (SEC). Given DCG’s octopus-limb interests in the global crypto industry, crypto investors are concerned.

The probe has not been made public, neither by Federal prosecutors in Brooklyn nor DCG management. Also, none of DCG executives as well as subsidiaries have received any allegations of wrongdoing, civil or criminal.

The investigation specifically relates to DCG’s financial relationship with an embattled subsidiary that offers crypto lending services, reports Bloomberg. DCG’s subsidiaries include CoinDesk, Genesis, Grayscale (the world’s largest digital currency asset manager), and Luno. The crypto-lending service here is Genesis. 

Genesis’s response to the press was simple: “Genesis maintains regular dialogue and cooperates with relevant regulators and authorities when it receives inquiries”.

Meanwhile, DCG says it has no knowledge of any investigations: “DCG has a strong culture of integrity and has always conducted its business lawfully. We have no knowledge of or reason to believe that there is any Eastern District of New York investigation into DCG”.

Three Arrows pierced Genesis badly; turned out bloody.

When the hedge fund Three Arrows Capital crashed last year, Genesis was badly hurt. 

Also, after the FTX crash, the lending arm of Genesis, Genesis Global Capital, suspended customer withdrawals and fresh loans. It cited unfavorable market conditions. 

Till date, the suspension has not been lifted. Favorable market conditions is also certainly not back, yet.

Genesis Global Trading Inc., the brokerage unit of Genesis, announced DCG was laying off roughly 30% of its staff. 

Considering the Domino effect being witnessed in the crypto space since that crash and further reinforced by the more recent FTX crash, it is no surprise to see regulators getting more interested in the books. Any web of loans will, logically, be suspect. 

Barry Silbert’s disclosures, so far, about its relationship  with Genesis.

According to Barry Silbert, DCG Founder & CEO, loans between DCG and Genesis were made in the ordinary course of business and “always structured on an arm’s length basis and priced at prevailing market interest rates”. 

Two months ago, Silbert disclosed that Genesis Global Capital loaned DCG about $575 million. Silbert also disclosed that DCG is assuming liabilities Genesis had from exposure to Three Arrows Capital. The liability is a $1.1 billion promissory note due in June 2032.

Although DCG also already maintained that it is not affected by Genesis issues, searchlight has continued to beam on Silbert.

Implications of a possible DCG shakeup on the global crypto industry

With its footprint across the crypto space, DCG’s portfolio comprises 200 companies, including Coinbase, Ledger, and Silvergate. DCG virtually has its interests everywhere. Logically, any major shakeup of DCG by law enforcements or regulators is bound to cause yet another Domino effect in a crypto industry that is yet to recover from or perhaps even complete the ongoing FTX contagion. 

No doubt, FTX collapse has reinforced the need for more transparency to the crypto industry. This is a win-win, if consumer protection and investor safety is a common interest.

DCG is a US-based crypto conglomerate founded by Silbert in 2015. One of the fastest growing-conglomerates in the digital asset space, six years later, DCG was valued at $10 billion in 2021.