Gemini Earn customers face potential $485M shortfall in Genesis bankruptcy case

Gemini Earn customers face a potential $485 million shortfall in their bid to be made whole following the Genesis bankruptcy.

Gemini Earn paid rewards to customers who lent cryptocurrency to the program. Customers’ tokens were then loaned to counterparties, in this case, Genesis, who generate yield by trading and investing.

After months of insolvency rumors, Genesis filed for Chapter 11 bankruptcy on Jan. 19, triggering panic among its creditors.

The bankruptcy filing showed that Genesis owed its creditors $3.5 billion; the largest is Gemini, with a $769 million balance due.

In an unexpected development, Genesis now claims it has fulfilled its obligations to Gemini by paying out the proceeds of a private sale of Grayscale Bitcoin Trust (GBTC) shares that collateralized the debt.

Gemini Earn customers on the back foot

On Aug. 15, 2022, Genesis pledged 30.9 million GBTC shares as collateral for Gemini Earn’s customers’ tokens. This arrangement was later extended on Nov. 7, 2022. Incidentally, FTX filed for bankruptcy on Nov. 11, 2022, following weeks of insolvency rumors beforehand.

On Nov. 16, 2022, Genesis froze withdrawals from its platform and informed Gemini that it had sold the collateralized GBTC shares at $9.20 per share, netting $284.3 million. However, with a balance owed of $769 million, the shortfall amounts to $484.7 million.

Given the “behind-the-scenes” agreement between the two parties, Genesis now claims the $769 million balance owed to Gemini Earn customers has been paid with the GBTC share sale.

What now?

The dispute requires the judge overseeing the bankruptcy to make a call on whether the agreement stands. However, Gemini will likely challenge the claim, resulting in court action.

This could further delay the bankruptcy case, meaning Gemini Earn customers may be set for a long wait before recovering their funds. However, the $284.3 million may be all that is due.

In a further blow, Genesis classified Gemini as a “Class IV” unsecured creditor. Gemini Earn customers are behind institutional creditors, secured creditors, and priority claims in carving out the company’s remaining assets.