BlockFi and Genesis Misrepresented Financials, Creditor Alleges

Transcript

hi everyone I'm here with Steve sokolowski Chief technology officer at Pro hashing and I actually I know Steve from years ago but I haven't talked to him in a long time and I've seen him be pretty active in the discussions around genesis's bankruptcy so I figured I'd reach out and it turns out he also has um certain grievances with what has happened with the block five bankruptcy which we can go over so Steve um I leave it up to you kind of how you want to tell the story would you want to start with block five first uh yeah I could talk about block five first I could talk about Genesis too

thank you for interviewing me Laura I think that the key thing to understand about this whole lending industry is that it's pretty much all built upon lies and misrepresentations sometimes outright fraud all the way from the top down it pretty much all the companies and many of the journalists who are reporting on this are making it sound like this is an isolated incident like that you know it was only Genesis that had this 1.1 billion dollar promissory note or maybe only some other company but in reality the whole industry it turns out was probably misrepresenting most of what they were offering to their customers all right so yeah why don't we I so I

think chronologically at least for you the story um starts with blockfi am I right about that or actually it starts with Genesis uh I was Landing to Genesis for a long time uh since early 21 and I started talking to block five around September of 22 when our term loans were expiring and I was doing a lot of research around that time to compare all the companies oh okay so then let's start the story with Genesis tell us yeah how you started working with them and what your relationship was and what you discovered so I uh work with a fund which consists of me and my brother and pro hashings Reserve like

the money that the company uses to pay bills and things like that some of that and two other people who are involved in it and we began lending money to Genesis early in in 21 continued with that through uh 22 we lent them at one point the total amount had gotten up to about 20 million and at the time in September of 22 when all of the the misrepresentations and and lies were being made it was around seven or eight million dollars or so at that point and I did quite a bit of research at that time basically spent the entire month of September of 22

researching these companies is because you know it was a lot of money and we wanted to be sure when to diversify our investments across across as many companies as possible uh you know and we I did the research I searched for documents I talked to people talked to Zach Prince's I'll talk about in a little while and came up with a whole bunch of documentation about both companies all right so yeah tell us a little bit about you know kind of what your due diligence was on Genesis and how you started working with them and you know what kind of relationship you entered into so with Genesis I asked them to see their company balance sheet I actually

asked block fi for this as well and I received a balance sheet that listed their their top 10 lenders and my understanding is that this balance sheet was presented to a number of other customers perhaps the Gemini although I don't know whether it was that or some other sheet that was similar to it and it showed not the names of the customers but what the percentages of loans were out how much was collateralized it also listed their assets they listed current assets that exact phrase current assets in one column and then liabilities and in another column and then they added them up and then it showed that they had

positive equity which indicated that they were a solvent company okay and this was when again uh and this was in I was presented that sheet on September 21st of 2022. wait I'm sorry that was Genesis or block five I thought you said that that was Genesis so it blocked fire also saw sheets for in that same week uh but if you're asking about Genesis that was the Genesis sheet that I was presented in September of 22. so uh the off on that sheet there was a row that said other assets on that sheet in a significant amount which was like one point uh you know six or seven

billion or something like that and it was listed under current assets so my interpretation of that was I was offering Genesis a one-year loan or considering offering them a one-year loan and since that's a current asset that means that all the assets that are listed in that column should be able to be called before my one year loan is due and apparently now it turns out that one of their assets is this 10-year promissory note to digital currency group and if that was listed in the one in the current assets then obviously they do not borrow I've never heard of them ever borrowing from a customer for 10 years

so how can they say that they are solvent when they borrow from customers for one year and then their loan their books are backed by a 10-year loan that is that apparently and no I can't say this for certain but apparently it's it's rumored that it was at a very low interest rate like 1.1 percent or something like that right and then um did you ever confirm that that 1.7 billion dollars in current assets was the one you know was comprised of that promissory note and then the additional um I guess it was a loan that was due in May of this year they they will not confirm that but they will be publishing the uh they do have by law to publish their assets and

liabilities in the bankruptcy docket uh I'm told that that'll be in March Rahm ahwalia who you've interviewed had a Twitter space yesterday and so he believes that'll be published in March so we will know for certain whether that uh that note was published in the uh is part of those assets and if it is then you know obviously that document was not a true representation of what Genesis actually had on their books they were not solvent in that one year time frame and I would never have invested uh with a company that was saying that they were you know that they were going to be able to make money over 10 years in the

cryptocurrency industry who would who would trust digital currency group to be good on its loans in 10 years in this industry you know companies go belly up constantly lead right and just to um like fill in part of it you said that you had actually started your conversations with Genesis in 2021 but but then when I asked you about the relationship you only mentioned what happened in September 2022 so what happened in between those times so in between those times I was just talking with them and I did not see that sheet so when the three arrows collapse happened I talked to them during that week and I I asked them this was after their tweets on I believe it was June

17th when Michael Morrow said that they had the the digital character group had assumed the liabilities and that essentially everything was fine so I asked them how how things were you know what was going on at the company and they said you know everything is fine during during that time uh if you feel that the risk is too high at this time you know for the rates you're getting then we can offer you a significantly higher rate if you lock the loans in for a brief period like a locked term not a year-long loan in this case it was three months so you know I talked with them and decided uh we think that it's okay for three months

and then I want to see you know then I I wanted to see all this documentation when we're renewing so that's why when the end of August came around I started doing a ton of research into block fi in Genesis and you know started asking for this documentation and you know unfortunately it turns out that that both types of the documentation appears have not been telling the whole truth and so um just so I understand so you started doing research into crypto lenders in 2021 but you didn't actually invest any money until after the three arrows collapse no we invested money then and the entire time you know I was being told that everything was fine that you know and nobody ever said anything

about this gbtc trade for example right so if any if anybody had said something about that I probably also would have not not gone with Genesis either so I should have in the beginning maybe specifically asked them are you doing you know gbtc trades or something like that but in my opinion you know I think that there's also some sort of uh you know obligation that you should maybe uh be a little bit more honest about your business practices I mean obviously everybody tries to make a sales pitch right but you also should shouldn't be misleading customers about you know how ever about how we're we're you know just kind of like making loans and then you

know charging a higher interest rate and uh and you know spread is pocketing the difference I mean that was my understanding of what these companies were doing and it's pretty clear that that was not their entire or even their primary business model to just borrow money and then lend it out at a higher interest rate okay um so one thing that I need to understand is so you you had successfully lent money to Genesis um and then after three arrows um did you perceive that any money that you had lent them was at risk in any way or no well I asked them about that you know I thought that you know well I gotta

investigate this but see you know Genesis was the Prime lender at the time right I mean nobody would have thought that Genesis of all places was the one that would fail you know I thought well you know nexo seems kind of strange because I researched them and they have company tokens uh you know crypto.com has company tokens and they have these ridiculous interest rates at uh with their uh with their credit cards I believe uh and you know I wrote posts about this all my research that I did in 21 I hadn't seen the balance sheets at that time but I ruled out a lot of other lenders because of all these crazy schemes but Genesis didn't have any company tokens they were backed by

digital currency Group which which had a bit license and everything like that they operated in New York Genesis is in Park Avenue uh you know there was no there's there's nothing that really indicated to them that they were violating any rules or regulations or perhaps what we're finding out is that even if all these companies did adhere to every rule or regulation it simply would not have prevented this the rules were insufficient I don't know but whatever the case is Genesis was the Prime lender in the industry and you know it was Unthinkable to all the people who I talked to at the time that Genesis would be involved in this sort of thing

yeah and a disclosure for the audience my one of my former sponsors is nexo and a current sponsor is crypto.com so one thing then you know that I so now we we've kind of covered that period of what happened um before I think things started to really go south for you and you have this extensive blog post about conversations you had with block fi in September and you also now have talked a little bit about your conversations with Genesis in September so tell us um you know I guess what you haven't yet told us about block fi and then um and then we can go to the point when yeah afterward you realize that maybe um certain things were not represented

accurately so with block five the way I actually found out about this Hall industry was by lending some money to block fi early in in 21 but I withdrew it and then hadn't really had anything to do with block five for the next year and a half uh in August though I I was doing the research and was contacted by one of block fi sales people and they had were talking about you know different different loan terms they had and everything like that and the rates were more attractive than Genesis so I wanted to understand exactly why it is that they could offer more attractive rates than Genesis my conclusion at the time

was that after doing the research I thought was the reason their rates are more attractive is because they had more uncollateralized loans than Genesis did and so that extra rate was was paying essentially for the risk because there were more secure loans at Genesis uh but uh so they contacted me I I talked with them pretty much throughout like the first two weeks of September because our loans were about to become due towards the end of September or they expired on September 20th so before this I started an email thread which I posted with a few things like the the person's phone number redacted and the conversation goes on for a while with some mundane

stuff asking for their rates and so on then uh then I became concerned a little bit after reading more into their deal with FTX because I thought that they seemed to be a little bit too intertwined or too dependent upon FTX so when I asked them in the email was I wanted to see did block five actually borrow any money from FTX because they had a credit line and it was for 400 million dollars and it's a lot different if they had borrowed the money already and had a you know had drawn that debt a lot and and we're dependent on them or whether they were independent but that that credit line was just there in case

they you know some of their loans defaulted and I was told on September 21st we have drawn on this but paid it back since it's a revolving credit facility that was in the emails then after after that I continued to do some more research I looked at block five's balance sheets they made no mention of FTX they looked good then a little bit later I a few days later I basically though concluded that even though the balance sheets didn't mention FTX there was still kind of a little too much uncertainty over that so I said in the emails that your balance sheets look good but because the FTX deal closes

during the fixed loan term we believe that the uncertainty introduced by that deal is more risk than uh than the spread between urine genesis's rates so I basically told them that you know because of FTX we're not really going to be uh we're not going to be lending to you so I send a message to Genesis after having seen their balance sheet and said okay let's get a loan to you instead of to block fire and uh then I was told in the next email would you be interested in having a call with Zach Prince to further talk through the FTX deal and any other questions you may have and so I went to that meeting with Prince and what did he say

uh the meeting was it was pretty long so I don't want to bore you and and all of your listeners uh you know he talked about I was concerned about how many employees blockfy had and you know whether that was going to increase their cash burn uh he talks about the SEC a little bit uh he talked about Minor loans a whole bunch of other things that really aren't pertinent to this but then we also talked about FTX and so we there were six people there and three of us asked Zach Prince about what is the relationship between blockfi and FTX and uh he stated that blockfi and FTX were independent entities and you can see

that there's actually public tweets where his co-founder Flory stated the same actually the day after FTX I believe had uh had started to encounter problems or maybe it was a few days after that I'm not sure so I I kept getting this reassurance that they were independent entities and I also was led to understand that the FTX line of credit was not being used and we know that so this meeting took place on September 23rd and we know in both the blockfi and the FTX bankruptcy filings that they actually had drawn 250 million dollars from the credit line on September 30th so it's it's probably likely that they had already drawn upon

it or certainly if they had not then they had to have known that they were going to draw upon it within the next few days uh I I just don't understand how how the CEO of a company that is going to with to borrow 250 million dollars would not know about the you know that there were plans to do that in a call that was just a few days before that so I suspect that as the bankruptcies come out we'll probably find out that that loan was drawn before the 23rd but even if it wasn't then that was certainly a very misleading statement to say that they had not drawn upon that line or that they had drawn the sorry to be specific they had drawn

upon that line and had fully paid it back and um so because of that call did you then move money over from Genesis to block fi is that what happened yes uh and I I have that evidence there too uh there's a person at Genesis who uh you know I have the the conversation with him I mean that was the reason because I talked with Prince uh then all of the members of this fund we we got into a meeting after that we all said Prince is trustworthy uh you know he it seems like what he said was true uh let's go and move the money so we moved money to block fi and uh and it was solely based upon this call and those representations

that uh you know that were made in the emails and you know again I don't know whether the uh whether the people who were writing the emails were aware of the loan or not so I have no evidence to either implicate or exonerate the employees who wrote the emails just to be clear about that but I I guess it gets down to the logic here was that if FTX and block fiber independent companies then then both of them would have had to fail for separate and independent reasons if if I was going to lose money so if if block fi had trouble with their loans or something then FTX had 400 million

dollars of Junior credit ready to step in and if FTX were to fail well then block five hadn't actually borrowed anything from FTX just yet and they didn't have any money in FTX custody so therefore there wouldn't be any any issues there I mean then one or the other company could fail and we would still be okay and that was the main reason that we went with blockfi because we had two companies that would have had to fail independently and we just assumed that the odds of both companies independently failing were extremely low and of course they they would have been block five would not have if they were independent FTX would have failed if block five would not and I wouldn't have lost any money okay so

um presumably you didn't move everything from Genesis over to block Phi which is why um yeah so as of the time of this recording um you have not yet published um your allegations against Genesis but why don't we go over those right now so tell us what your relationship was with Genesis after you moved at least some of the money to block fi yeah so we moved about three million dollars to block fi and it was about four million dollars remaining at Genesis and uh we we had a few options you know when we were doing this research we were considering either you know we could have gone to more lenders uh we could have uh we could have moved money to block five it could have kept money at Genesis or or we could have uh

one of the options was take like half the money out and keep half the money at Genesis or just go all out all together so we had all the options on the table and uh you know we came to this conclusion because we didn't think that the other companies were trustworthy like Lenin for example I did have a meeting with Mauricio day uh divorce bartolomeo I'm sorry if I got that name wrong Maurice yeah and uh and John Glover who's their risk management uh head and they told me that they were doing low risk trades and uh they uh they wanted to offer a lower rate 8 but they wouldn't present their balance sheet to me so that was the reason we

didn't go with London I kept asking him for that balance sheet and they wouldn't present it to me so really the end result is that we were presented misleading balance sheets and that's why we went with these two companies because you know we were getting we thought that because these companies presented balance sheets that you know that they were safer as the Genesis you know the the allegation is pretty simple they present I asked them for a balance sheet they presented a balance sheet it listed like 1.6 or however many billion dollars under current assets and if we find out in March that that loan that promissory note which is 10 years was represented as a current asset then that balance

sheet was false that is not how accounting is done okay yeah yeah uh those uh comments and that analysis has been making the rounds on Twitter um you know none of it has been confirmed but obviously you know because of what the definition of a current asset is versus the terms of that 1.1 billion dollar promissory note it does seem likely that um dcg or Barry silbert were um using kind of a different definition of current uh meaning you know we're current on paying this loan uh which is which is funny because yeah it's just uh you know well I also would dispute I

mean maybe legally you could call it a loan but I would dispute that in common language that we would call what happened there alone right I mean when do when does a loan ever involve not actually giving somebody any money right when I take out a loan to buy a house they give me money and then I use it to buy the house I don't get some promise that they'll pay for the house in 10 years right exactly yeah and that's by the way what I understood their June 17th statement to read that you know they they took 1.1 billion dollars you know and and in exchange they gave they took the debt and they paid Genesis 1.1 billion dollars maybe I should have read

between the lines or something like that in June you know but uh I I that's a little dishonest to me that they didn't State exactly what happened at the time and you know use these terms like they netted against their balance sheet or whatever the exact quote is the main thrust of your allegations against Genesis the misrepresentations well I mean it the I think the the most obvious the most obvious fault is simply that if that promissory note is true and we're going to find that out then this balance sheet that they presented to me is not true I think that that's what it goes down to uh pretty easy and I don't

know how many others represented this balance sheet but I would expect that there were many people who who were presented this I mean the people inside Genesis told me that this was something that they present to people so I would assume that many people relied on this and I would assume that if they did present this to many people then that means that there is you know a lot more liability for uh for Genesis and digital currency group than is is being reported right now and uh that was why I decided to sell my claim because I don't want to stick around in this bankruptcy and find out what is going to happen if digital currency group goes to bankruptcy and

and you know all the chain reaction down the line there got it okay what have I not asked you that you would want my listeners to know well I uh I don't know I think that the as I said in the beginning I I think that all of these companies are built upon kind of a a flawed premise and you know I think that there's there's probably something wrong with with today's blockchains maybe maybe like they work fine for what they're designed for you know they they do fast irreversible transactions and you know that's fine for certain things I'm but the Legacy system excels at getting rid of fraud because transactions are slow

so there's time to get rid of you know time to reverse them and because they're reversible so I I don't know if today's blockchains have the sufficient technology to be able to prevent this sort of stuff from happening in lending you know their their needs if you're going to have fast and irreversible transactions then some other technology which we probably can't conceive of right now you know uh and and it'll be developed Someday I'm sure needs to be developed to automatically detect this fraud or prevent it in some way because I don't see this lending industry having any future you can't just decide that you're going to put existing rules or regulations on

it when anybody could take a cold wallet like a ledger device out like this you know get the device open it up start typing in things on it and now 250 million dollars is gone at some other company and you can't reverse that transaction so I that's why I'm just not bullish on this idea that crypto lending will ever will ever really grow into a legitimate industry well clearly after this past year there is a lot of questions about how to make this work uh in a better way so um yeah I think a lot of people would agree with you on that um although obviously in D5 there was a lot more

um how many times have you heard that word anybody who says yes right right but you know that that's an even more nascent technology so um we'll have to see how that plays out but all right Steve well it was a pleasure reconnecting with you thank you so much for sharing your experience thank you