Disaster looms for Digital Currency Group thanks to regulators and whales
The cryptocurrency tide is flowing out, and it looks more and more like Digital Currency Group (DCG) has been skinny dipping. But let’s be clear: The current crypto contagion isn’t a failure of crypto as a technology or long-term investment. DCG’s problem is one of failure by regulators and gatekeepers.
Since its 2013 inception, DCG’s Grayscale Bitcoin Trust (GBTC), the largest Bitcoin (BTC) trust in the world, has offered investors the ability to earn a high rate of interest — above 8% — simply by purchasing cryptocurrency and lending it to or depositing it with DCG.
In many ways, the company performed a major service to the crypto industry: making investments into crypto understandable and lucrative for beginners and retail investors. And during the crypto market’s bull run, everything seemed fine, with users receiving market-leading interest payments.
But when the market cycle changed, the problem at the other end of the investment funnel — the manner in which DCG leveraged user deposits — became more apparent. While not all questions have been answered, the general idea is that DCG entities loaned user deposits to third parties, such as Three Arrows Capital and FTX, and accepted unregistered cryptocurrencies as collateral.
Related: My story of telling the SEC ‘I told you so’ on FTX
The dominos fell quickly thereafter. Third parties went defunct. The crypto used as collateral became illiquid. And DCG was forced to make capital calls in excess of a billion dollars — the same value of FTX’s FTT token that DCG accepted to back FTX’s loan.
DCG is now seeking a credit facility to cover its debts, with the prospect of Chapter 11 bankruptcy looming if it fails. The venture capital firm apparently fell prey to one of the oldest
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