Why DCG is Crypto's Enron Moment | Ram Ahluwalia

Transcript

this episode is brought to you by the chronicle protocol a cost-efficient transparent and decentralized Oracle Chronicle has developed a Next Generation Oracle primitive called scribe which reduces Oracle gas fees on l1s and l2s by over 60% you'll hear more about Chronicle later in the show all right everyone welcome back to uh another episode of Empire we've got Rah CEO of Co and co-founder of Lumina wealth joining us ROM welcome to show man thank you for having me big fan of the show glad to hear it so it's funny so we were talking earlier uh before we recorded about kind of frauds within frauds and the blockworks website someone created this duplicate

blockworks website and put up this fake news story but to do that they had to do another thing and frauds within frauds and we are using this episode to talk about a potential other fraud within a fraud which is Genesis dcg and everything that is kind of unfolding as we see it today I think a lot of eyes are on this SBA F trial right now but you've been shedding a lot of light on Twitter on what's happening with dcg Genesis Barry silbert and the like so maybe you could just set up this conversation with uh the cast of characters basically and and and really what I'm curious about is like who owns what and how does the money flow and then we can drive this conversation forward terrific so it starts off with a digital currency group founded by Barry Silver you know it's a blue chip storyed

institution and dcg has a number of subsidiaries the main character there being Genesis right Genesis is a prime broker they extend loans against digital assets dcg also owns grayscale Which was the and is the issuer of grayscale Bitcoin trust gbtc dcg also owns coindesk and has investments in dozens of startup companies cool perfect easy so take us into when you first started to get kind of Spidey senses that this was not unfolding in the right way sure well I'll start by saying like I'm a creature

of the financial crisis I gr graduated school in the 2001 recession and the reason why that matters is that a lot of what we see crypto doing today is speedr running history and what we saw in 2008 was non-banks pretending to be Banks so you had companies like General Electric funding via commercial paper markets and barring short and funding these long duration assets and investment Banks were doing the same thing and so that was really the pattern match to the present day so Celsius and blockfi and Genesis I was looking at that I said oh this is the

pattern is back it's non-banks pertaining to be Banks and this pattern happens roughly every 10 years by the way it happened in 2001 too so that one so I was primed to spot this if you will and uh previous to lumid I was the head of crypto at cruster which is a bank and so in that capacity I wanted to extend loans on digital assets except when you're a bank you have FDIC Insurance You've Got A lender of Last Resort you've got the risk managment systems youve got the counterparty r systems in place to do it responsibly and we couldn't find any good loans to make because of just the

weaknesses uh in the underwriting and not being able to quote perfect your security interest when you make a loan and uh so that that's what oriented me towards these issues and then when Mike Morrow I believe it was early July of 21 said we quote unquote shed the risk I replied in his tweet there I said how exactly did you sell the loan and recognize an impairment on your balance sheet did you write a CDS transaction which ultimately means you're paying for the fair value of the losses how exactly did that happen and there was no clear answer to that innocuous question coming just from a place of curiosity was trying to understand what happened and that's when I said something doesn't

make sense here and I stayed on the hunt so one thing that's become really obvious now looking back in in in hindsight is uh the interconnectedness of capital markets in crypto and at the heart of all of this disconnectedness often times was this Widowmaker trade was was was gbtc right so gbtc the grayscale Bitcoin trust was one of the first regulated entities that allowed ordinary investors to get bitcoin price exposure and over time over years trust turns into this Behemoth and there's there becomes all these kind of players and and funds uh and and and actually companies as well making these big massive like leveraged bets on gbtc and that turned into what

is kind of known today is the Widowmaker trade so I think it would be helpful if you could almost set up what is the Widowmaker trade and how did that lead to a lot of the things that we're seeing today great question so here's the background as you pointed out gbtc had a premium to the nav of the underlying Bitcoin and it was a trade that motivated players like blockfi and hedge funds like three hours Capital to the to do the following sequence they would buy Bitcoin spot and then they would notify grayscale their intention to deliver that and that trade would enable them to lock in the spread between the traded price of gbtc versus

the nav and that premium was 20% to 50% and that trade just for blockfi made well over100 million and that's just one entity so three are CP and others of the same thing it's a it's a form of a carry trade because you can't hedge out your risk you are taking risk that the spread is stable and at least remains positive so now as coinbase was approaching its IPO that spread started to narrow to zero and then flipped to negative and that kind of makes sense because coinbase is an alternative way to mainstream access to digital assets so that spread flipped to negative it fell

down to 10% to 20% and AV so now hedge funds like 30 Capital said hey we believe this discount is going to close and they and other hedge funds started buying that that discount now where it went wrong is three capital was borrowing from Genesis to execute that trade so they had a levered carry trade position that was put on and of course the demise of Luna uh and then uh with spreads blowing out further caused three Earth Capital to default and that set in chain a series

of dominoes that led us to where we are today dcg oh go ahead Santi I was just uh Curious Ram I mean there's a lot of people that again in hindsight say hey why were you even lending unsecured um or you know under coll caliz or no collateral why did three arrows get such special treatment I mean I at the time was a Pary you know I even now as you know most of these loans for the vast majority of players are heavily collateralized at what point did you in your capacity back then or even today like how did standards become so loose

because this happens in every Market not just in crypto but why did 3 hours specifically get sounds like they got some pretty special have no idea I mean the the panders were awful it's not as it tightened and loosened over time they started a baseline level of awful so when we were at Cross River uh we interviewed all of these firms as well because again I'm a bank I'm like how do I give Warehouse lending to others how do I lend to the lender in a senior secured position and I'll give you an example I spoke to Celsius was 30 minute call after that call I told my team we will never ever issue a loan to we didn't even done any diligence it was the initial 30 minute call where they're putting their best foot forward but you could see that they were acting like

hedge funds and that's what's fundamentally flaw here um so I'm not sure look you have massive concentrated positions you saw that Genesis too they had a massive concentrated loan not just against three's Capital but also against Alama I think part of it Santi is trust they said oh these guys are blue chip players they know what they're doing and then you also had these roundtrip Equity Investments right so remember blockfi had an equity investment from FTX and blockfi was also financing FTX so I think that was a part it yeah um okay well let's let's move on

now into kind of how this all kind of unfolded and I think you were at the time kind of sounded the alarm Fair fairly early on and as this was going down the market was already very skittish because you FTX is had already transpired and so the the the skepticism when Morrow which was the the CEO I think of Genesis start saying hey our balance sheet anytime now the market our balance sheet is strong it's sort of like it's definitely not my friend sort of like the but the market was learning back then but I think you were very much in that conversation and asking Genesis to

provide more straightforward answers now we have the complaint and in hindsight a lot of the things that you were talking about back then you know turned out to be true made a lot of sense so walk us through kind of all that flow and how that sure sure in in July there was no smoking gun I was just asking those questions out of curiosity even in November after Barry Silber published his letter to investors in general my Approach was differential and I was taking them at face value although things still didn't make any sense right namely where was the impairment if you have a loss that takes a hit to a balance sheet and that question was never answered so I I I stayed on that question then over time my attitude and

perception of dcg changed so November my view was yeah these guys will raise the money they'll fill the hole and they'll move on they've got great assets and great scills a cash machine and when we did not see those answers and then they started to play word games with terms like current account and hiding behind technical word salads then my skepticism started to deepen and say doesn't make any sense um and now of course here we are the NY AG has filed a complaint against dcg and Barry Silber personally you know as as well as Gemini

and they validated actually those hypotheses which we never really knew for sure and it it was it was great that it was definitely satisfying to see that but I'll tell you this when you make a public observation uh that could jeopardize someone's business you are taking the risk of of being accused of defamation so I mean I I took I don't take satisfaction in calling those issues out but it was satisfying to see the nyag say yeah here here's what happened look like a recap of all these Twitter threads have been writing for such a long time and just to conceptualize this which we talked about on a prior episode The Gap was roughly 1.1 billion correct um that Genesis was in the hole because

largely because of three arrows this Widow trade correct and the Barry at the time as a CEO of this holding company dcg had a few options one was personally guarantee it plug the hole he's probably worth a couple billion back then I don't know how much now but you know he's done incredibly successful for himself he has multiple other business lines you could take a view on the stream of grayscale which is a Golden Goose and like use some of that to you know go to someone like Apollo some hedge fund some Venture fund and say hey guys we're in a tight spot we need some rescue financing help us through get survive this patch

right he didn't do any of that he basically just pretended to plug the hole through a promiser note that had 1% interest in repayable in sort of like uh what is it like 10 years or something like that um which was intended really to dress it up and um not and provide a false sense that the balance sheet was sound but it wasn't the case as we now learn specific to complaint before we even dive into all of the mechanics let me ask you if you're in Barry's situation what would you have done then and there yeah it's it's a phenomenal

question I've actually been trying to sort that out and my first reaction was to say certainly after the demise of three capital when Genesis clearly had a negative equity position that's come out now would have been to let Genesis default and go into bankruptcy Genesis was a subsid subsidary th fully owned but they could have Cen off the liabilities and that's that but here's what we learned in the NY complaint what we learned is that dcg and Barry himself was personally directing Genesis to refinance its loans and therefore the reason I allege that dcg did not let Genesis just go into bankruptcy and

protect the mothership is because then Genesis would have called in the loans and not refinance dcg and dcg didn't have the cash right so that that was a puzzle that finally was answered last week now now let's back up from there like well how do you avoid having been in that position like what's the me what's the root cause learning the root cause learning would would be to not do the Widowmaker trade not to borrow from Genesis to go levered long on your own product believing your own vs that the discounts going to close now could Barry have foreseen the demise of three capital which was considered a blue chip hedphone much less the demise of alam

and FTX which were considered Blue Chip by world class VCS hindsight's 2020 right nevertheless it's just bad judgment you know here's another interesting story I I heard this from an informed party that worked for Barry and he said that Barry's Vision was to build the next Berkshire halfway they had the cash cow in great scale and they're funding new Investments and build a modern Burkshire haway Berkshire haway is actually a carry trade they borrow that's what they do right they borrow they have debt that's outstanding well over100 billion dollar in debt and they buy assets with that they get the depreciation off the debt and it's a carry trade the difference is this Burkshire halfways loans are one

they're non-callable okay two they're investing in assets that generate cash flow that help to pay down the debt and they're great assets that they own whereas what Barry was doing was a margin trade Buffett never does a margin trade so he had a good concept and built an extraordinary business especially around gry scale but he uh whether ego or believing other people around him and he himself arguably was deceived by three R Cal on FTX of course he was yeah they B so the for listeners the real key here is Barry personally I if it's personally or DC at the dcg level um did this did this carry trade meaning like playing

the spread at the dcg level for sure at the dcg level and because of that had he not done that then you could have just put Genesis in receivership but go through bankruptcy or plug the hole yourself that that's it yeah Genesis would just go through bankruptcy and that's they could create a new genesis a year later if they wanted to it have been fine wait but but didn't DC dcg didn't have the cash so they needed Genesis they needed Genesis here that's why they didn't let Genesis go into bankruptcy right because they needed the cash they because right Happ refinance themselves basically right because Genesis would have pressured dcg into bankruptcy they would have called in their loans yeah so again oh if Genesis had gone

into bankruptcy dcg then loses control of dcg you're say exactly because a trustee would take over Genesis like if a trustee now and the trustee of the fiduciary obligation to man maximize recoveries for the creditors right so in Genesis is not in bankruptcy then Barry can control Genesis that's why in July he did not let Genesis go into bankruptcy that's why I alleged my hypothesis might be wrong I believe that's the right answer though right he if he can control Genesis then he can issue orders and he did that's what the [ __ ] complaint shows that Barry Silber personally directed Genesis to refinance loans and he set loan terms that's self-dealing

yeah tell us tell us more about that like so there's this $ 1.1 billion doll promissary note why is that so why is that so problematic here here here's why so the messaging from Genesis and its Executives and from Barry in the summer of last year was that dcg was going to save the day dcg put its balance sheet on the line and quote unquote a assumed certain liabilities end quote okay meaning they ate the three Earth Capital losses that was a message designed to reassure the public and reassures genesis's customers okay but now what the N nyag complaint shows is that Barry and other executives are making comments

such as we cannot let the public our customers understand that we have a solvency issue okay so the promising note was a deception when you want to bail out a subsidiary what do you do you inject Capital if there is an impairment I mean an impairment is when you have a a write down of assets on your balance sheet now Genesis has negative equity that's last summer the only way to fill that negative equity hole is to have an equity infusion that's the only way to do that and the promisory note did not do that in fact the promise ing note uh

borrowed from Genesis at favorable terms now they they didn't uh borrow digital assets at least in that financing but it was really a shell game it was a way to swap out this bad asset that Genesis had on its balance sheet to three hours Capital with this good asset called a loan to dcg so it did strengthen technically the balance sheet of Genesis but the promiser notes primary purpose was to deceive the public and its customers it replaced the as it says here in the in the in the nyag thing it replaced the liability with this ill liquid 10year promiser correct and that promiser not well what's the presentent value of that promiser note it's not

even equal to the size of the hole on the balance sheet if you take a $ 1.1 billion do loan that's not liquid payable in 10 years it's worth one 1% interest rate you present value discount that at dcg's credit risk I got something like $250 million in chain but the whole is 1.1 billion dollars right so it's a fiction that was designed to deceive yeah do you have a sense for the magnitude in the cash position uh that dcg was back then because they were doing this Widow trade so that's all private information uh clearly they didn't have the funds and that has been made clear through the nyag report but we know that they

shoveled over $760 million in the gbtc Widowmaker carry tra think about that so they had a lot of cash but running up to the 3 hours Capital demise every quarter they were doing that trade with their free cash flow it's nuts they took this great business dcg and they bet on their own product the gptc what so the the discount has um compressed fairly dramatically like it it I think at the time where this was

going down the the discount was like 20 30% I want to say right yes it went all the way down to 47 48% uh beginning of this year when you know crypto markets hit a bottom it is now tightened to like I want to say negative 15 the discount is like 15 177% which kind of like normal sort of like largely on this news that at some point it will be converted to an ETF right um was was Barry in Barry's mind like because we'll get to this later but will involve like um Gemini here and The Wil putting pressure on Barry and was Barry just trying to buy time thinking that at some point

this will be converted the premium will compress and then you know you you kind of like dig yourself out of a great hole yeah great question so absolutely he was buying time because the more time he has then the more grace scale can generate hundreds of millions of dollars of Revenue and cash flow for the mothership so absolutely he was buying time and that's why we saw endless extensions in the negotiations with Gemini and Genesis so that is their strategy by time now was it that they were waiting for the ETF conversion I don't believe that's the case and the reason why is dcg did did not own enough gbtc such that if the ETF was approved that pull

to par or that discount goes away would not have been enough to enable dcg to make uh whole Genesis I believe they wanted to buy time so grayscale could generate enough cash so it could pay off their liabilities got it um uh one of your recent tweet threads got a lot of attention because as the complaint was coming out and you reviewed it in short order you said hey this is actually worse than Enron and a lot of people were caught off guard you say wait a minute like we're we're so walk us through your thinking as to why why that is so right so Enron was an elaborate accounting fraud that uh the

then CFO Andrew F and their CEO you know perpetuating public markets they had subsidiaries that they controlled they had Executives on those subies like the CFO they had self-dealing but here's the thing about Enron each one-off transaction is legal on the surface it was the aggregation of all of that together plus the intention to deceive that made that fraud okay and they were able to get their Auditors Arthur Anderson since no longer does not exist and there rest some bankers go along with they said Hey look

it's it's legal on a one-off basis every step of these hundreds of transactions but what dcg did was beyond that right dcg uh for example um allegedly issued fraudulent balance sheet statements via Genesis to their customers I don't want them do that uh Genesis was playing technical word games with the term current assets which can be used to define assets that are performing in other words assets that are current or assets that are current meaning can be liquidated within one year it's a technical kind of word salad that they were playing and also the promisory Noe the

lack of disclosure around that so Genesis and dcg um cross the line in that deception in a way that Enron did now now Enron cost public a lot more money BCG but in terms of the brazenness of it it was more uh serious than what you saw with Enron yeah and particularly I I remember reading they they sort of admitted certain footnotes around this hole that they were plugging I mean that that in of itself is just you know fabricating statements yeah nyag is requesting that dcg be prohibited from being the SEC

secur the commodity's business well grayscale is that type of entity so grayscale will need to be sold I expect uh that BCG will challenge the nyag complaint so this has time to play out but ultimately I think the nyag will prevail and grecale will be auctioned off uh and so that is one consequence from this second is dcg will be mired in Endless settlements and lawsuits I they just keep piling on and on and of course the seccc already filed a complaint against dcg so I think dcg is effectively an insolvent zombie company they will never

be able to raise Venture Capital what kind of career risk is anyc gonna take putting fire into that mess right and if they can't raise vent of capital then how are they going to make everyone whole um it'll be interesting because grayscale is the cash cow so in a way dcg is going to be in a form of indentured servitude to its creditors for a long time just leeching the cash flow off of grayscale to make their creditors whole and I think when that's done then the assets of dcg are auctioned off and dcg is functionally

dead and I also think Barry uh may very well go to prison right Enron Executives went to prison if you believe that this is fraud and you believe it's more egregious and Enron in the brazenness and behavior then my opinion not a lawyer is that Barry um could go to prison let's double click on that um for for listeners that might not be aware so um when you say dcg has a fair amount of uh obligations because they were doing this Widow trade they were borrowing out Genesis as a center really interacted with pretty much everyone in crypto I mean they they were the dominant Market maker they you know they would borrow

assets from a bunch of people funds whales whatever to and then give you some yield um they would take assets from folks like Gemini and then what you're saying is those creditors that are that are owed because if if you were interacting a lot of people had money with Genesis and they are now stuck until they're some resolution um those creditors at some point May recover part of their assets made hold in some capacity yeah through the three arrows estate kind of liquidation through kind of all the debtors that are involved on the other side including dcg itself because it was borrowing from yes Genesis right and and that's what might trigger a sale of

grayscale a sale of all the hundreds of Venture investment um that dcg I mean dcg is one of the largest Venture funds yeah that's right so all of those positions would be auctioned off by the trustee right yeah ultimately that's what'll happen I expect ultimately to recoup and and maximize recovery for the creditors here I believe that'll that'll happen ultimately yes again and you know dcg will dispute the Nui AG's complaint and we have not heard the answer from barrier dcg so you know maybe they can find some plausible explanation I doubt

it I doubt it this looks pretty damning the evidence that they've put in the NY AG complaint but yeah dcg owes something north of 6700 million doll to a subsidiary Genesis depends on the price of Bitcoin and even beyond that dcg and Barry are being sued for being defrauded they're being sued by Gemini and others will act on the nyag complaint and cite the evidence in that complaint to make additional lawsuits so it's not enough to make the credit as whole and they will be sued to Oblivion what what is the uh possible effect of the G of this on the gbtc ETF conversion do you think do you think it's dead Dead

on Arrival yeah yeah it's dead it's Sor I think the gbtc will convert ETF will convert this is a so you think gray scale will get it even though the yeah I don't think there's any impact they're fully uh segregated like this does not from a creditor liability exposure perspective you're not affected from a reputation uh on the margin I'd say they don't they don't get appr I I don't think that they will be approved first I'm just hear like and the reputation is important right like I'm hearing ROM say that you know dcg can never get a invest you know Barry might go to jail dcg will never have an investor again on the other side Barry Barry owns grayscale too so now you're

saying that so so Grace scale uh is in good standing with the law yeah that's it and due process applies yeah so there's no there's also a um it will be a dispute between Barry dcg and the New York AG right so Barry will have an answer he'll say I deny these it is not the role of a regulator to prejudge that dispute will have to go through a legal process I think I believe we know how that's going to conclude and even if it does conclude in that way um which will take at least a year to play out right

and then maybe that's appealed these ETF decisions have to happen before then and then the SEC will make their determinations based on the cue in which those applications were filed so I don't believe there any actually impact to to grayscale or to gbtc or or e e that's interesting when you talk about the the creditors Gemini is the biggest creditor who who are the other big creditors the biggest creditors are Genesis and Gemini so yeah dcgo is 67 million plus to um Genesis uh and um you know depending how you count the math I want to say about a

billion to Gemini but there's also colado that they've pledged in the form of gbtc so that reduces the amount that they that they ow a Gemini and there 220,000 borrowers that have been impacted people that have lost their life savings retired couples and yeah so I I know you're not a lawyer but what like the the nyag complaint was I think civil in nature yes why if you're if this is worse than Enron why is it why is it such a why why is it just a civil complaint a criminal action would come from likely the southern district of New York okay so I that could very well be coming especially if nyag prevails right in other words

those findings effect are um agreed upon right and you know the nyg complaint uh does say in one area that uh that multiple repeated criminal Acts were conducted yeah um Playing devil's advocate in thinking kind of in what version is this not like fraud in what version because Barry's statement and dcg statement right after the complaint was hey we're actually disappointed in this complaint we've tried to work with our counterparties we've engaged with the reg the you

know southern district of New York I guess and they were they were disappointed that of this kind of complaint and they said we've been doing the right thing continue to do the right thing we try to like work through the situation like I I I I know where you stand but yeah what are what would be a situation where that might be true interesting question so let's let's play it out right so Barry would say hey no we were defrauded by three or Capital we were defrauded by Alama we communicated with our clients uh we should have done a better job adding footnotes we should have done a better job defining where current

assets are um Barry probably says I did not know the CFO refused to join client calls I did not know that the CFO and others were uh you know having bullet points that were designed to optimize for dcg uh and Genesis retaining capital and deposit so it's something it's something like that it's like the BF defense right so hey we were negligent we could have done a better job we could have dotted eyes crossed teas um but it was fast moving and we ourselves were negatively impacted uh something like that this episode is brought to you by

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million some 350 million right that they had they're owed by Genesis I believe I believe it's more than that it's more than that um okay yeah well so it's more than that yeah and throughout this process the wle by Brothers have been very vocal right you know against Barry and dcg and and of course now the the complaint also involves them in the sense that they should have stop the program much earlier given what has come to light that in board discussions they actually knew of the degrading situation of Genesis their counterparty they some exec withdrew from the earn program ahead of

time um and so the complaint here says that they I'm not sure I don't think it's as severe but it does make the point where hey you guys should have done a way better job of protecting users and internally you knew something was up and you didn't act fast enough how I read it yeah you know G story is definitely complicated for sure so you're first off you're right the um the nyag complaint does call Gemini fraud number one just serious but they accuse Gemini of lack of disclosure and not being faithful to the

representations they made to their clients on the website and then they cite as evidence which you pointed out s that you had Executives that uh had uh redeemed from Gemini n while they were formed of the the risk rating which was Triple C um and also Gemini continued to funnel deposits to Genesis while they were aware of these risks so um Gemini is a complicated story because they were also defrauded yeah there were no question there's no question they def FR not and not only that here's what happen so the Gemini issues a letter to redeem

from uh Genesis after they've done what they're supposed to do right and then Barry says if you if you force us to redeem we will fall for bankruptcy so you're screwed anyway now think about that for a moment right the kind of position that Gemini is in I mean they are between a rock and a heart place I mean I this is what happens when you deal with a frauder you're screwed on day one right so let's say Gemini six months earlier had put in a Redemption notice and I think they should have right that have been the right move Genesis would have said the same thing they would have said oh we're

going to file for bankruptcy because those loans are not liquid and many of them were open term loans but their borrowers were folks like Alama would not have been able to deliver yeah so they were they were in a they're in a difficult position I I agree it's a lesser set of infractions than dcg and Barry but they're open questions like why why do they let the money keep flowing in I don't understand that um maybe it's because they thought that if they said hey we're stopping the program then people in the program would redeem in Mass which would also kill Genesis I don't know I want I want answers those

questions though I but I think something that the public does appreciate is that it's not enough for someone on the board to say oh that business is bad as Leman right it's like what do you do with the current situation you got an illiquid loan book by the way that board member is not an executive board members are allowed to have opinions it is it's definitely a bad look for sure yeah but also people allowed to redeem from programs if they would like but clearly the pretty people that did that had asymmetric information that the public did not have the public should have yeah you could you could have argued that they were Triple C they had an internal rating system you could have argued that that system and that rating scoring system was off from day one

everything is Triple C in crypto guys like there's smart contract risk there is yeah volatility risk there's just a liquidity risk like everything compounded and stacked on each other you could argue it's like junk status what what I'd also want to know is that Triple C rating it looks like they arrived at that after the program had launched yes because they initially had it at Triple B and then the downgraded at Triple C because crypto prices were they were largely looking at crypto prices and said okay gosh this might really lead to a situation of impairment right right I think the case against Gemini is gonna be weaker than the case against

dcg they'll be held accountable they will have a restitution order that's going to come from the SEC or NY AG or settlement anyway so I think that'll help Gemini earn but the punches they landed on dcg were much more daming right there these uh complaints have a lot of Storytelling going on in there too right I mean they're trying to make a public case for example they'll say uh and no less than one year later it was found to have a Triple C R well no kidding crypto fell apart so that's not a that's not an indictment that's just the nature of the business and of course it was a bad decision to have these programs to begin

with yeah the other part I think where the that case is weaker and they alleg Securities fraud they say this is unret Securities offering and that part of the law and regulation is very vague look they are people that uh raise money for like a Hollywood film they earn a finders fee so they're raising money to invest in a project where they're success is based on the efforts of others all the criteria the highway tests are met the SEC doesn't take enforcement actions against people that raise money in finders fees right it's a legitimate gray area and I saw this with companies like Lending Club and prosper in the 2008 2009 cycle they were uh crowdfunding uh dollars to invest in loans to Consumers and then the said oh

that's not a loan that's a security so when is a loan a loan and when is a loan and a security yeah um in so we talked about kind of the different outcomes here um what are you mostly paying attention to in terms of second order effects um you know you we we've talked a little bit about they have a huge Venture portfolio they have multiple other units um in crypto we always talk about the contagion of of stuff um yeah how do you yeah Play Play that out for us I don't think there's actually much contagion you know I really don't think there's much contagion left I mean there's some

smaller offshore changes that may have credit risk issues but they're not in a chain of contagion um that's one notwithstanding what Tech's going on with binance I don't know I don't know if anyone knows let's figure out let's get that cleared out there yeah once you figure that out let us know right exactly so uh that Venture portfolio is going to cause markdowns in the secondary markets right so would you rather invest in a new crypto startup or own a chunk of Foundry or luno at a at a big discount to their initial investment price I'd rather do the latter so you know I think that could have a negative effect on Venture markets of course you're seeing that across Alla Venture you're' seen that the fintech Venture

you're' seen that in every Market these dislocated secondary sales and markdowns are happening that's one number two is Michael sonine gets a promotion he's actually a winner of all this right so he's a CEO of gray scale they'll get spun off yes he'll have to cut the fees to make it more economical as more ETFs come online but he doesn't have to report to very Sil tomor not that there was any negative relationship there but yeah he's set he's set for life Michael Sunshine's doing all right fellow em guy with me well funny he was at fake we were both JPM morg in Investment Banking he was a year uh I think he was a year ahead of me and he was in the financial institutions group in the investment bank and so we kind of yeah interesting yeah third is you know

you are seeing um startups saying hey we're going to do this the right way right so you're seeing the rise of St of trying to do decentralized Prime brokerage which is what the business of Genesis was uh and you're also seeing startups trying to do just classic Prime brokerage Goldman is entering the business Goldman is now financing Bitcoin and ethereum using their balance sheet that's how it should be by the way Goldman has like a credit rating to Prime brokerage I'm very critical of Goldman and other areas but that's that's what you want to be seen as a counterparty that's issuing loans yeah definitely so the winners here are maybe potentially the folks who might be able to pick apart the Venture portfolio by s

in the dollar folks that might maybe a Fidelity black rock that might buy grayscale and just buy that black rocks I don't know who's gonna buy it's not gonna be a name brand that buys this thing because the reputational risk and they can build it themselves they just buy depositor base right I mean and the the you know whoever buys them is going to inherit all the lawsuits too so they're not going to they're even those those losers at the dcg level it's just the reputation alone the brain damage I thought you could carve that out like like when when credit s bought UB well other way around right uh so how would that work though so say they auction off it's look it's possible like a grave steale so far is clean right yeah

they're clean I don't think they have any and you can make a provision in there with the the price reflects you know maybe I I think there's a lot of brain damage reputation risk I don't think I think black rocks like look we have our docs we know how to go do this they already filed their docs they you know they've got the right vendor equos system in place who are the other how would you by the way how would you value grayscale grayscale I would look at their cash flow stream and then assign a multiple to that so A couple for mile for conversion because the management fee is not going to be what it is today right correct correct so I i' I'd assume that steady state bips are closer to 30 to 40 they probably try to land at 50 but their ETFs in Canada that 30 bips to

40 bips um and if you're not competitive then you lose assets it goes to the you know goes to someone else so you know they probably have an efficient operation so 30 bips times whatever uh the remaining Bitcoin that'll be held is right now it's north of 10 billion uh in terms of Bitcoin value with a dozen to two dozen ETFs coming online inevitably there there's over 20 applications right so you're going to have a market share game unfold uh and there's a lot of animosity towards grayscale like that brand is very sour so I think they're going to lose a lot of a so I don't know

let's say it's two billion times 30 bips can we do the quick math on that yeah that's F yeah ongoing um income but here the other losers folks that invested in DC 6 million of management fees it seems too low maybe 60 60 60 million sounds about right 60 sounds about right so Michael sonan do well he's okay yeah Ron when you said that um their their portfolio so they have dcg has owns a couple companies like luno and Foundry and stuff and then they've made about 120 Investments out of their Venture arm uh I would push I don't think their Venture arm is going to get impact like their um I don't think the 120 portfolio companies are going to get impacted it's

just one less company on your on your on your cap table right I they were they were largely minority investors in many of these companies those continue companies will continue to operate do what they're supposed to do right it's just that you're saying it's more like the lunos found like Foundry is actually the largest um Bitcoin mining pool I think right now and I'm I'm pretty sure in the world now for it's always been number one number two yeah yeah right so that there stock will be sold and auctioned off by dcg that doesn't impact those companies uh directly well there'll be a mark on that that's probably a discount to their true value because that whole portfolio will be sold so it's going to impact Venture markets also Equity investors in dcg so dcg did a round in November 2021 which

is top of the market at A1 billion do valuation those Equity investors are going to get a zero I was looking at buying secondary way before that at like a two billion then three billion and it was always rered the company was always buying back and bar was super super protective but the thesis was just that it is like can be a birkshire pathway it has multiple business lines great Venture portfolio and even if you did some of the parts and we did a whole sensitivity analysis on like even if you ascribe zero value to some of the units like it was still like gra skill Alan was very it's it is a great business oh absolutely it's a

phenomenal business and you know what's interesting is that Barry never sold shares in fact they they were buying back shares from investors using the cas always right now in retrospect that's another decision he would have done differently this is the kind of the interesting thing like the psychology of Barry to get in crypto early accumulate on bitcoin bet on his convictions and build these businesses and that foresight allow them to create this you know Empire here we on the Empire podcast we built this Empire yeah but that same conviction also spelled his demise yeah well I mean it's sort of a Scarface you shouldn't get high in your own Supply yeah right right like that was take that levered b yeah on on it's an interesting

kind of tragic flaw though right like that psychology that made him this extraordinary entrepreneur and create enormous wealth through that single-minded Focus even when Bitcoin was non-consensus you know 10 plus years still not this now that caused him to believe that oh this will work out and we'll figure this out and that I think if you had a really good person on the board I don't know who was on the board of dcg but anyone in finance that is worth their assault would have told you carry trades are incredibly risky particularly if they had looked at the structure would have said no to your point on Brookshire is Brookshire because it does it in a very particular way right the

way this was being done was in one version risking it all for an incremental you know decent bump in in profitability but with a huge kind of asymmetry on the downside they could have lost it all and in crypto you sort of have to assume that a there's always going to be volatility and there could be moments of rough like very tough liquidity in the market and so the structure of all of that like maybe that's I don't know the particulars of who was on the board it it was Barry it was Barry Glenn Hutchins and then um Larry Su on the board he left Glenn Hutchin that's from silvergate

right uh from yes exactly so Glenn Hutchins and then um Larry Lenahan I think was his name it's the guy who started uh he started first Mark capital and one of the other funds he had Larry Summers as well from you know then Larry removed himself Larry Larry's very Larry's thee of the game Larry's like I'm out yeah but you know I would love to kind of understand that Dynamic and how involved they were in understanding this particular operation so Larry's interesting because Larry was on the board of Lending Club okay and Lending Club I worked with my prior life I was an angel investor in Lending Club I know that business very well and Larry also

removed himself from the Lending Club board when their then management was accused of fraud not not nothing actually transpiring da d da but he took off at that point right so but I think you you he's an excellent point around you know Barry was this in his own thought bubble and who was there really to challenge I mean did Barry never had a co-founder it seems like no right so maybe that's one of the lessons right you need someone to check to check you or call out your own BS right like Hey look it's a good idea but maybe this doesn't make any sense for these reasons yeah I I doubt the board was really hands- on roer look if you get a board if you have a celebrity board

folks Like Larry Summers then that board is probably more about bis Dev and marketing rather than actually talking to them to get great advice how to build your business so I doubt that that board was highly engaged yeah yeah I think uh there's a lesson there probably in corporate governance and and and making sure that you have I mean FTX didn't most of the VCS didn't have a board seat never asked for a board seat and I think uh yeah I think in crypto you see these personalities like look we're all in some capacity a bit crazy to believe in this stuff especially like but I think it's always worth having someone that will the Temptation is you're you're

thinking that look a lot of this is Cutting Edge a lot of it is innovating but there's some things that shouldn't be reinvented investing schedules uh so many things like that we don't need to reinvent the wheel and all these other things um and I think he did a very miscalculated bet on doing carry trades and I think a lot of hedge funds a lot of sophisticated Risk Managers will tell you don't do it like it just absolutely abely absolutely I mean the hedge funds and and banks have far more risk management they don't have concentrated counterparty risk which they had both in three years capital and Genesis they made a lot of mistakes I think the other thing that that Genesis and dcg Barry missed was they did not

use defi to manage their risk but why were they taking on counterparty risk Three A's Capital allegedly double or triple pledge of their collateral to multiple parties which is which is fraud and we saw that by the way back in 2008 again with these subprime mortgage lenders so that's another thing you know if he he was highly convicted around crypto but did not insist upon the technology or even basic lending standards of the market Market yeah yeah raan this is great um appreciate you coming on yeah anything else I guess uh ROM I mean you're I would encourage everyone to go follow ROM you're constantly tweeting about not just crypto but I think you have a very fresh

traditional Finance lens and apply it to crypto you're also talking about a lot of stuff in the market and so some some great threads um anything else like you know parting thoughts and just maybe things that looking out for in the current environment sure s first off very kind if you big fan of your podcast and Santa you and I are both uh trafy crypto crossover and uh so it's good to have both world like the promise of digital we're cool again now for a while like guys go back we're cool yeah if we're cool then we're near the top and then we're gonna find something perhaps a little bit more respected I guess right right I I would say um you know I I think the Venture side is going

to be NE negatively impacted right there's hundreds of venture funds and there's maybe 30 protocols that matter and maybe a dozen institutions that matter the majority of which are trafi so I think on the Venture side there's still more of a reckoning that's going to happen we talked about some of the knock on effects from the dcg portfolio um so that's something to to watch out for yeah cool uh closing question do you think another Genesis gets built and gets the level of scale or does this happen on chain it'll be both um another Genesis will be built yes and it should not be built I think it will and should not be

that's a good not but if it's on chain proof of reserves or proof of whatever with some privacy components you kind of mitigate a lot of this correct correct yeah exactly like that it's a really interesting question to say how would you build Genesis on chain because compound and and maker are not that we need to those are consumer apps you make them institutional um and that's a big lift right you need an app that can do a UCC filing for instance that's just one element I've talked to St about this by the way and because the key feature that someone needs to build on chain is uh delayed time lock liquidations because it's nice when

Genesis can call you in March uh of 2020 and say hey guys uh you need to refill your collateral three times we had I had to refill collateral three times that day um and in Oba you get immediately liquidated and it's high gas and I think you can build in a t some logic at the Smart contract level because I think a lot of funds appreciate that and I think that would it's not perfect but just that feature like that would kind of move the needle I think I agree that that's that's another feature you need I mean there's there's a lot you have to do for example Genesis is financing Soul you do not have a deep liquid market so your eligible collateral what you're Landing against has to be deep and liquid you need to have the ability to

integrate with uh Bloomberg terminals you know there something called like a fixed protocol where trades go through so trafi can access it you need a liquid loan Market meaning you can't be the only game in town you know in trafi you have corporate loans that are issued and we can't the three of us can't buy those corporate loans off of schwap but those corporate loans do trade from One bank to another to the hedge funds over the counter and there's standards that enable that to happen and the custody framework around that you can custody on chain here but look this can be built on chain but it's a multi-year effort that's required it takes industry standards also so does that make you a tokenization bull or skeptic yeah I'm a

big tokenization bull I think tokenization is one of the promises of digital assets because what do banks and exchanges do banks and exchanges intermediate between two parties one they exchange value that's represented in a ticker which is a pointer to a legal contract which is a claim on assets and cash flows and you can do all of that on chain and if you look at the risks and the issues in the 2008 crisis uh a lot of that center around counterparty risk counterparties didn't trust each other counterparties have balance sheets with holes in them um and you know digital asset defi blockchain crypto transparent 247 365 exactly so yeah no I'm I I agree I

think tokenization is an incredible opportunity and certain chains like ethereum I think should benefit from that but also you know other trains like like a avac maybe Stellar Etc as well nice well Ron I I will leave it there I would love to bring you on down the road to talk about tokenization maybe all and applying that traditional Finance lens uh but it's been a real treat thank you so much for uh pleasure always a pleasure thank you bro yeah [Music] thanks