Digital Currency Group (DCG), one of the most influential investors in the crypto space, is facing a probe by the New York Attorney General (NYAG) over its ties to Genesis, a crypto trading and lending platform. The NYAG has issued a subpoena to DCG, seeking information about its relationship with Genesis, which is also a subsidiary of DCG. The probe is part of a broader investigation into the crypto lending industry, which has raised concerns about consumer protection, market manipulation, and systemic risk.
DCG is a venture capital firm that invests in over 200 crypto-related companies, including Coinbase, Grayscale, BitGo, and Blockstream. It also operates its own subsidiaries, such as Foundry, a mining and staking service provider, and Genesis, a platform that offers institutional clients access to crypto trading, lending, custody, and prime brokerage services.
Genesis was founded in 2013 as a Bitcoin broker-dealer and later expanded into other crypto assets and services. It claims to be the largest institutional crypto lender in the world, with over $40 billion in originations since 2018. It also offers over-the-counter (OTC) trading, derivatives, and yield products. In 2020, Genesis acquired Vo1t, a digital asset custody provider, and launched Genesis Prime, a one-stop shop for institutional investors to access multiple crypto services.
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The NYAG has been investigating the crypto lending industry since 2018, when it launched the Virtual Markets Integrity Initiative, a fact-finding inquiry into the policies and practices of crypto exchanges. The initiative revealed that many platforms lacked adequate safeguards to protect investors from fraud, manipulation, and abuse.
In 2019, the NYAG sued Bitfinex and Tether, two entities affiliated with DCG, for allegedly covering up an $850 million loss of customer funds and using Tether’s reserves to bail out Bitfinex. The case was settled in 2021, with Bitfinex and Tether agreeing to pay $18.5 million in penalties and submit periodic reports to the NYAG.
In 2020, the NYAG issued a cease-and-desist order to Coinseed, a crypto trading app backed by DCG, for operating as an unregistered broker-dealer and defrauding investors. Coinseed allegedly converted users’ funds into Dogecoin without their consent and ignored their withdrawal requests.
In 2021, the NYAG subpoenaed DCG as part of its ongoing investigation into the crypto lending industry. The NYAG is reportedly concerned about the potential conflicts of interest between DCG and Genesis, as well as the lack of transparency and regulation in the crypto lending market. The NYAG wants to know how DCG oversees Genesis’s operations, how Genesis manages its liquidity and risk exposure, how Genesis determines its interest rates and fees, and how Genesis handles customer complaints and disputes.
The probe could have significant implications for DCG and Genesis, as well as for the wider crypto industry. Depending on the outcome of the investigation, the NYAG could impose fines, sanctions, or injunctions on DCG and Genesis, or even revoke their licenses to operate in New York. The probe could also trigger similar actions by other regulators or law enforcement agencies in other jurisdictions.
The probe could also affect the reputation and credibility of DCG and Genesis as leading players in the crypto space. It could erode the trust and confidence of their existing and potential clients, partners, and investors. It could also hamper their growth and innovation plans, as they may have to divert resources and attention to deal with the legal challenges.
The probe could also have broader implications for the crypto lending industry as a whole. It could expose some of the risks and pitfalls of this emerging sector, such as liquidity crunches, defaults, hacks, scams, or market crashes. It could also prompt more regulatory scrutiny and intervention in this space, which could affect the availability and accessibility of crypto lending services for both retail and institutional users.