The Digital Currency Group (DCG) has initiated legal action against its subsidiary, Genesis Global Capital LLC, in a dispute centered on a $1.1 billion promissory note issued during the crypto market turmoil of 2022.
The lawsuit, filed on Thursday in the U.S. Bankruptcy Court for the Southern District of New York, seeks to resolve claims regarding the financial support DCG extended to Genesis following the collapse of a major crypto hedge fund, Three Arrows Capital (TAC).
According to the court filing, the collapse of Three Arrows Capital, one of Genesis’s largest borrowers, triggered significant financial strain for the subsidiary.
In 2022, TAC failed to meet a margin call issued by Genesis, resulting in a default of approximately $2.36 billion.
This default created a substantial shortfall in the equity value of Genesis Asia Pacific Pte. Ltd. (GAP), a related entity.
To mitigate this “hole” in GAP’s financial position, DCG stepped in with a $1.1 billion promissory note, an action the company described as a voluntary contribution made without any legal obligation.
DCG’s legal team emphasized that the promissory note was intended to stabilize Genesis during a period of market instability.
However, the lawsuit contends that subsequent developments in the crypto market have altered the financial dynamics of the agreement.
Following the issuance of the note, cryptocurrency prices rebounded significantly, leading to substantial gains in the value of the collateral tied to Three Arrows Capital, referred to as “TAC Collateral.”
These gains, labeled as “TAC Recoveries” in the filing, reportedly exceeded the initial $1.1 billion value of the promissory note.
According to DCG, these recoveries automatically reduced the principal amount of the note on a dollar-for-dollar basis, effectively satisfying the obligation.
The filing asserts that Genesis has realized profits from the TAC Collateral that surpass the original $1.1 billion principal, rendering the note fully settled.
As a result, DCG is now seeking a court order to compel Genesis Global Capital to repay over $105 million, plus accrued interest, arguing that the subsidiary’s financial obligations under the note have been met.
In a public statement, a DCG spokesperson underscored the company’s efforts to support Genesis during the 2022 crisis.
The spokesperson said:
“We took extraordinary measures to assist Genesis following the collapse of Three Arrows Capital. We believe we have fully met our contractual obligations under the promissory note and are now asking the court to confirm that the obligation has been satisfied.”
The lawsuit comes at a time when Genesis Global Capital is navigating bankruptcy proceedings, adding complexity to the dispute.
The collapse of Three Arrows Capital was a pivotal event in the crypto industry, contributing to a cascade of financial challenges for firms like Genesis, which faced significant exposure to the hedge fund’s default.
DCG’s decision to issue the $1.1 billion note was a critical intervention aimed at preventing further destabilization of its subsidiary’s operations.
This legal battle highlights the volatility and unpredictability of the cryptocurrency market, where rapid price swings can dramatically alter the financial landscape for companies and their investors.
For DCG, the lawsuit represents an effort to clarify the status of its financial support to Genesis and recover funds it believes are owed based on the improved value of the collateral.
The outcome of the case could have broader implications for how intra-company financial agreements are handled in the crypto sector, particularly during periods of market distress.
As the case progresses in bankruptcy court, industry observers will be watching closely to see how the court interprets the terms of the promissory note and the impact of the crypto market’s recovery on the obligations between DCG and Genesis.
For now, DCG remains focused on securing judicial confirmation that its support for Genesis has been fully resolved, marking another chapter in the evolving saga of the 2022 crypto crash.