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Winklevoss vs. Silbert: The Social Network, Part 2

Cameron Winklevoss released an open letter to DCG CEO Barry Silbert that seems to mark a significant escalation in the DCG-Genesis-Gemini saga. What happens next?

As we wrote previously it looks as though Gemini's Earn program just dumped all the funds into Genesis. And Genesis, in turn, sent a lot of those funds on to the DCG parent company, which bought some mixture of GBTC and DCG stock.

Gemini Earn, at about US$900 million, looks like Genesis's largest individual creditor. The program involves a large number of individual investors, but Genesis has a contract with Gemini Earn for that money. The Earn program itself was merely a pass-through vehicle, taking in investor funds and sending them on to "earn yield" with Genesis. Consequently Earn's managers, headed by the Winklevoss twins, are negotiating with DCG on behalf of their own creditors.

Read more: DCG: Et Tu, Barre?

And Earn did one more thing here: it collected fees. Lots of them. To give Gemini credit, this fee schedule is still online here. And the fees are big: between 3% and 4% for GUSD and USDC, with a few tokens still coming in at 4.29% as of now. The Wayback Machine shows us that 1%+ fees have been around for a long time. And now it looks like Gemini collected those fees only to dump all the assets into Genesis/DCG. What were investors paying for exactly?


At even a 1% annual fee, Gemini was earning nearly US$10 million per year for this program. It was launched just shy of 2 years ago, so we are likely talking US$5-15 million or more in total fees. Measured against the US$900 million that is missing, that is a relevant, if still not huge, sum: 3% for 2 years on the full sum amounts to US$50 million. Whatever the exact amount is we can be sure it is not small and we will find out "soon."

Now go back and read the open letter again:

these people entrusted more than $900 million of their assets to you...

reach a consensual resolution for you to pay back the $900 million that you owe...

you hide behind lawyers, investment bankers, and process...

idea in your head you can quietly hide in your ivory tower and that this will all just magically go away, or that this is someone else's problem, is pure fantasy.

One way to read the statement is that Gemini is concerned about being sued by investors for the fees! Whoever was trusted for what, certainly those very same investors trusted Gemini to do some work to evaluate risk. And they paid them fees to do so. And then it turned out all the assets were in one place and that place suspended withdrawals.

Any investor in Gemini Earn is surely going to consider suing Gemini. That's just common sense.

Gemini's Role, Legally

Gemini was clear with its investors that all the assets went to Genesis. This is, again to their credit, still clear in the program's terms where only a single "approved borrower" is listed. The language around risk is even clearer:

We are not a depository institution, and our Program does not offer a depository account. Participating in our Program may put your Digital Assets at risk...We are not a principal to any Loan, and we have no obligation or ability to return the Loaned Digital Assets from your Borrower in the event of a Borrower default...Your counterparty in each Loan transaction is a Borrower, and you alone bear the risk of loss of your loaned Digital Assets principal should a Borrower default.

So that makes clear this is the borrower's problem. The document even makes clear that Gemini is not obligated to do so much as send this open letter later:

We shall be entitled to exercise any rights and remedies under the Loan Agreement on your behalf, and will be fully protected in acting in any manner we deem reasonable and appropriate. If the Borrower does not return the Loaned Digital Assets, it may not be possible to recover the assets from the Borrower, and we shall have no obligation to pursue such recovery on your behalf.

This does make you think "what were they paying fees for then?"

Gemini's Role, in Practice

Gemini fed funds into Genesis. Genesis is now facing insolvency. And they seem to have spent the money on assets linked to related parties (again, mainly buying back equity in the parent and investing in securities managed by a sibling company). Where have we seen this before?

Feeder funds were a notorious part of the Madoff scandal. There a wide range of funds existed solely to funnel money to Madoff. And a lot of them were sued by some combination of regulators and folks looking to claw back funds.

Now these are not exactly the same situation. Nobody is asserting that DCG is a Ponzi scheme that made no real business investments. At the same time the idea that pass-through investment vehicles which collect fees for relatively simple investments that ultimately fail are on somehow on the hook (or at least will be sued) is definitely not new.

What we see now are the opening stages of this dispute. Investors are likely to go after everyone even tangentially related to Gemini Earn. And the larger likely-targets are not jostling for (defense) position.

Infighting: Begin

As this is a crypto problem the fighting has already started on Twitter. DCG's CEO Barry Silbert replied to the open letter here and Cameron Winklevoss replied back, derisively, in near-real-time.

Silbert has been near-silent since Genesis froze this feels like the beginning of a more public phase.

A few weeks ago we discussed the possibility of a protracted creditor fight. That now looks all but certain. If the Winklevoss' letter looks heavily lawyered that's because it probably is. Many folks in crypto forget their money originally comes from suing Facebook co-founder Mark Zuckerberg claiming they were unfairly cut out of the company. It is a portion of that settlement they invested in Bitcoin.

They are surely surrounded by lawyers now plotting strategy to avoid losing control of their new-found empire. Further, as has been widely reported, their public image suffered greatly during the Facebook litigation. Or, as the Vanity Fair article linked above put it:

They were torn apart in the media and ridiculed by the blogosphere as spoiled and entitled brats with a nasty case of sour grapes.

This time they are out in front of things and trying, quite hard it would appear, to make Barry Silbert out as the bad guy. Whether he will fight back in a similar manner we do not yet know.

But the scene is now well set for an epic battle over whatever fees were collected and whatever value remains. And it still looks like the only pile of money in the DCG orbit large enough to cover these debts concerns Greyscale. And while there may be words flying back and forth but so far nobody has proposed a solution outside the scope of our earlier speculation.