Genesis on the verge of bankruptcy, what exactly does it do?

Original author: Ram Ahluwalia, CEO of Lumida Wealth Management

Original compilation: Leo, BlockBeats

Genesis is the only full-service provider of prime brokerage in the encryption field, and it is also the signboard of DCG (Digital Currency Group). Its role is to enable large institutions to access and manage risks. Previously, the question of Genesis seeking $1 billion has not yet been resolved, and where will it go. Next, let’s talk about Prime brokers (PB) and Genesis.

What is Prime brokerage, in simple terms, is the prime brokerage business, mainly responsible for three aspects :

- Managed Assets

-OTC (such as the ability to buy and sell unlisted securities on trading platforms and block trades)

-Provision of credit< /b>(Derivatives and research reports also available)

Prime Brokerage and Yourself Brokerage firms are no different. You can buy/sell, borrow, short, hedge, derivative positions. Brokers charge transaction fees and are regulated. Prime brokers primarily target large and complex institutions: hedge funds, institutions, sovereign wealth funds, large family businesses and governments. For example: Bank of Merrill Lynch, Morgan Stanley, Goldman Sachs, Jefferies, Citigroup, Credit Suisse, etc.

Traditional prime brokers provide access to listed securities by using bank funds such as The difference between margin loans) that finance these securities and OTC transactions that involve unlisted securities is important because OTC transactions are not centrally cleared. Centralized clearing means there is one clearing house where trades are 1:1 matched, netted and cleared. (Examples: ICE and CME)

The trading platform is the buyer of the seller and each The buyer's seller, the liquidation company has a large amount of capital, strong supervision, and is rock-solid. Prime brokers benefit from the "interdealer market". One prime broker can hedge the risk by selling or buying to another. OTC platforms seek to run "matched books," which means that each position has an offsetting position with a counterparty.

Actually, matching books in OTC products never really existed Pass. This was mentioned on Odd Lot, an economics podcast channel. Clients expect traders to open up the market, and traders temporarily stand on the side of holding a trade until they hopefully find the other side and then stand on the other side. Traditional prime brokers have a strong inter-dealer market. Since they are not listed on an exchange and have no central clearing, this market is critical for OTC products, meaning they can avoid directional exposure and focus on capturing bid-ask spreads or financing fees.

The CeFi infrastructure has a deep ecosystem that enables these prime brokers and clearing firms to access And manage risk: FIX protocol (trading API), DTCC, ISDA framework, trading desk, options clearing company, Bloomberg terminal, etc. Genesis, a pioneer brokerage firm in the crypto space, does not benefit from the liquidity, standards, inter-dealer relationships, clearing houses and deposit financing enjoyed by traditional prime brokers.

This reveals two important points:

1. Genesis must seek to match the maturity of assets (loans) and liabilities (borrowings). A bank can borrow short-term money (like your checking account) and lend out long-term money (like a 7-year large mortgage). Banks don’t need “term funding,” bank-backed PBs can allow mismatches in the maturity of their assets and liabilities, it has the FDIC, lenders of last resort, and a liquid market with standardized contracts. Non-bank-backed prime brokers must seek "maturity matching" parties, which is not easy to do.

Genesis is funded through Gemini Earn and Circle Yield Deposits in wealth management products, which are short-term sources of funding, if those sources dry up, then Genesis will be forced to liquidate its loan book (at unattractive or extremely low prices). In addition, long-term loans are illiquid and may not be redeemable by market standards, which also exposes Genesis to a "bank run risk" in which Genesis cannot liquidate its assets quickly enough if everyone withdraws their deposits at the same time (due to contractual, operational, or lack of fluidity).

2. Genesis is both buyer and seller in derivatives and OTC books , Genesis bears counterparty risk, Genesis will seek to run an on-time "matching book", but if their counterparty (such as 3AC) fails, then Genesis is exposed. Counterparty risk exists because: There is no CeFi or DeFi clearinghouse to sell risk to; There is no inter-dealer market composed of higher quality parties. (Note: Even TradFi players with strong infrastructure like Credit Suisse can crash - see Archegos blowout)

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The insolvency of the counterparty means that Genesis now faces directional exposure and capital losses. When 3AC goes bankrupt, market participants can review 3AC's bankruptcy filing and determine the size of the capital loss. This could lead to a loss of confidence in markets and bank runs. A prime broker is inherently an attractive fee machine, provided the ecosystem and conditions discussed previously are in place. Without these conditions, it is just a fragile business, prone to counterparty risk, bank runs and asset-liability mismatches.

According to my estimates and public reports, Genesis (due to the bankruptcy of 3AC and FTX ) lost more money than Genesis has made since its inception. Losses at 3AC alone are said to exceed $1 billion. So what's next for DCG?

There are two paths, raising capital at DCG holding company level. Then inject capital into the subsidiary and restore confidence. However, Genesis is capital intensive, it relies on capital and borrowing to make loans, its ROE has declined as funding sources have dried up, and its net present value (NPV) is negative;

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In order for Genesis to truly salvage the status quo and fill a void in the market, it needs an inexpensive and reliable More capital, an inter-dealer network, and the right thing to do for Genesis was to get acquired.

Potential acquirers could be GS, ICE or investment banks consortium. It won't be easy - existing risks, regulatory scrutiny, asset quality issues, risk-off climate, etc. (Microsoft, Merrill Lynch, CS, Deutsche Bank, and Jefferies wouldn't do this for various reasons) If there is no acquirer, then DCG will be needed to plug this hole, but I don't think DCG will do it at high rates Adding capital to a negative NPV business would mean that Genesis would go bankrupt.

As an institution, Genesis brings a lot to the crypto space, It's impossible to ignore, and the Genesis could be a gem in the right hands.

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