Digital Currency Group files lawsuit against subsidiary Genesis over $1.1. billion promissory note amid post-crash fallout

Global investment firm Digital Currency Group is suing its subsidiary Genesis Global Capital LLC over a $1.1 billion safeguard it handed out during the last crypto crash to support the now bankrupt firm. 

In a complaint filed on Thursday in the U.S. Bankruptcy Court in the Southern District of New York, DCG said it tried to fix a potential "hole" following the collapse of crypto hedge fund Three Arrows Capital in 2022, which the firm said was one of Genesis's largest borrowers, through that $1.1 billion promissory note. 

DCG said Three Arrows did not satisfy a margin call by Genesis in 2022, resulting in a $2.36 billion default and subsequently left a gap” in the book value of GAP’s (Genesis Asia Pacific Pte. Ltd.) equity," according to the lawsuit. 

"To address the potential 'hole' in GAP’s book equity, DCG — voluntarily and without any obligation to do so — made a unilateral contribution to Genesis, its indirect wholly owned subsidiary," DCG's lawyers said in the complaint.

However, later, crypto prices shot back up and Genesis had "massive gains from the TAC Collateral in excess of the value of the TAC Collateral at the time of the issuance of the Note — which are denominated as 'TAC Recoveries' — immediately and automatically reduced the Principal Amount of the Note on a dollar-for-dollar basis." 

"In fact, Genesis has realized gains on the TAC Collateral subsequent to issuance of the Note that far exceed its initial $1.1 billion Principal Amount," according to the filing. 

DCG is asking the court to order Genesis Global Capital to pay it over $105 million plus interest. 

In a statement, DCG said it "took extraordinary efforts" to help Genesis in 2022 following the collapse of Three Arrows Capital. 

"We have consistently met our contractual obligations under that note, but believe those have now been fully satisfied," a DCG spokesperson said. "We are simply asking the Court to confirm that the valid and binding obligation was fully satisfied.”

Counsel for Genesis pushed back. 

“DCG’s unfounded, haphazard and convenient about-face to withhold 3AC distributions is meritless. It flatly contradicts the written agreements, DCG’s representations to the bankruptcy court, and the fact that DCG already handed over $100M+ in distributions," said Luke Barefoot, partner at Cleary Gottlieb and counsel to Genesis, in a statement 

The lawsuit marks the latest in the saga between Genesis and DCG. In May, the Genesis Litigation Oversight Committee filed lawsuits against DCG and its CEO Barry Silbert and other executives to recover billions of dollars worth of funds that allegedly were falsely taken away from the company in 2022.

Genesis was one of several crypto firms affected by turmoil in the industry in 2022 including the collapse of the algorithmic stablecoin Terra USD and later the downfall of crypto exchange FTX, after which Genesis froze its lending operations. Three Arrows was one of the firms that also collapsed. Genesis filed for bankruptcy in 2023 and completed its subsequent restructuring a year later. 

As part of this restructuring, Genesis has begun distributing approximately $4 billion in assets to creditors, with varying recovery rates for different cryptocurrencies. DCG, as an equity holder, is last in line for repayment and has contested the bankruptcy plan. Genesis has also sued its former parent company for $2.1 billion in order to pay back additional customers. 

Updated at 5:40 p.m. UTC on Aug. 15 to include comments from DCG

Updated at 7:00 p.m. UTC on Aug. 15 to include comments from Barefoot