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Genesis and other firms under investigation for securities violations in multiple U.S. states

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(Kitco News) - Cryptocurrency lender Genesis Global Capital and several other crypto companies are under investigation by state securities regulators in the U.S., according to a Barron’s report.

Joseph Borg, director of the Alabama Securities Commission, said that Alabama and several other states are investigating Genesis and other crypto firms to determine if they violated securities laws. Borg did not name any other firms involved in the investigations.

Borg said that the focus of the investigations is whether Genesis and other crypto firms enticed state residents to invest in crypto-related securities without obtaining the proper state-level registration.

Genesis told customers on Nov. 10 that they had around $175 million stuck in an FTX account. Then, on Nov. 16, Genesis suspended customer redemptions in their loan business citing “unprecedented market turmoil.”

Venture capital firm Digital Capital Group (DCG), the parent company of Genesis, tweeted on the morning of the 16th that the decision to freeze Genesis’ loan division was made “in response to the extreme market dislocation and loss of industry confidence caused by the FTX implosion.”

The following evening, markets received more bad news from Genesis, as reports emerged that they were scrambling to raise $1 billion to continue operating. Genesis had $2.8 billion in active loans at the end of Q3 2022.

DCG also owns Grayscale, whose $11 billion in bitcoin make them one of the largest holders in the world.

With rumors spreading that Genesis faced possible bankruptcy, DCG CEO Barry Silbert sent a letter to shareholders on Nov. 22 in an attempt to reassure them.

“DCG will continue to be a leading builder of the industry and we are committed to our long-term mission of accelerating the development of a better financial system,” he wrote in the letter. “We have weathered previous crypto winters and while this one may feel more severe, collectively we will come out of it stronger.”

Silbert said Genesis’ decision to suspend redemptions and new loan originations on Nov. 16 did not mean the company’s solvency was at risk.

“This is an issue of liquidity and duration mismatch in the Genesis loan book. Importantly, these issues have no impact on Genesis’ spot and derivatives trading or custody businesses, which continue to operate as usual,” Silbert stated.

The board of directors of Genesis decided to hire financial and legal advisors to navigate the current difficulties following the implosion of FTX, according to Silbert. He also sought to calm fears of any potential misappropriation of company funds similar to what happened between FTX and Alameda.

“For those unaware, in the ordinary course of business, DCG has borrowed money from Genesis Global Capital in the same vein as hundreds of crypto investment firms,” the CEO stated. “These loans were always structured on an arm’s length basis and priced at prevailing market interest rates. DCG currently has a liability to Genesis Global Capital of ~$575 million, which is due in May 2023.”

Market sentiment toward Genesis has improved since that time, with an ongoing Polymarket poll showing that as of Nov. 28, only 44% of respondents believe the lender will declare bankruptcy by year-end, down from the peak of 81% who expected it on Nov. 22.

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