Crypto Lender Genesis Reportedly Preparing for Bankruptcy

What happened

Beleaguered crypto lender Genesis Global Capital could file for bankruptcy before the end of the week, according to Bloomberg. Citing people close to the situation, Bloomberg's report said that Genesis had been in confidential negotiations to try to raise cash. Genesis, which had some exposure to FTX, had been struggling since the failure of the Three Arrows Capital hedge fund last summer.

So what

If Genesis declares bankruptcy, it could make it harder for customers to recover their funds. This includes Gemini Earn users, who haven't been able to access their crypto since Genesis froze withdrawals on Nov. 16. Genesis was Gemini's lending partner for its Earn product. 

Gemini's founders, Cameron and Tyler Winklevoss have been in increasingly fraught discussions with Genesis's parent company, Digital Currency Group in an attempt to recover their customers' money. Gemini says there's around $900 million on the platform, belonging to over 340,000 Earn customers.

Last week, the SEC filed charges against both Gemini and Genesis for selling unregistered securities. Both the SEC charges and bankruptcy reports raise questions about the status and safety of many crypto lending products. Genesis is not the only crypto lender to find itself in troubled waters. Other crypto lenders such as Celsius, BlockFi, and Voyager have already filed for bankruptcy.

Now what

The difficulty for crypto investors is that different platforms and exchanges are connected in many ways. It's difficult to know what shockwaves will follow from a Genesis bankruptcy, and whether more companies will follow. Crypto prices, which had nudged upwards in the past week, dropped on the news. Bitcoin (BTC) had pushed above the $21,000 mark for the first time since November, but it fell 4% after the Bloomberg story broke.

If you own cryptocurrency, it's important to think about where your assets are stored. Many people keep their digital currencies on the crypto exchange where they bought them. It's more convenient and several platforms offer a number of ways to earn interest on your assets. Unfortunately, crypto exchanges do not offer the same protections as a bank or brokerage firm. 

It's important to understand the risks:

• Crypto exchanges: If the crypto exchange you use goes bankrupt or is hacked, your funds could be at risk. Some platforms offer third party insurance, but usually only against crime. Some also offer FDIC insurance on dollar deposits, but crypto is not covered.
• Crypto earn products: If you use a crypto lending product, make sure you understand how the interest is generated and who owns your assets. For example, the Gemini Earn terms and conditions state that assets will leave its custody, which is why users can't access their funds. 

The best way to ensure your crypto does not get tied up in bankruptcy proceedings is to move your funds to a wallet you control. There can be a learning curve in understanding how crypto wallets work and you are taking on full responsibility for your funds. If you lose the password or security phrase, you may not be able to access your assets.