The U.S. Securities and Exchange Commission (SEC) has announced a $38 million settlement with Digital Currency Group (DCG) over allegations that the cryptocurrency venture capital firm misled investors regarding the financial health of its lending subsidiary, Genesis Global Capital (GGC).
The settlement, disclosed in an official SEC filing, reflects the authority’s aggressive campaign to hunt down crypto firms accused of deceptive practices.
Founded in 2015 and led by Barry Silbert, DCG has long been considered a dominant force in the cryptocurrency industry. However, the SEC found that between June and July 2022, DCG “negligently engaged in conduct that misled investors” concerning GGC’s lending program, which offered yield in exchange for crypto deposits.
According to the SEC, GGC lent out investor assets to institutional borrowers while commingling funds. The firm’s financial troubles began when one of its largest borrowers, Three Arrows Capital (3AC), defaulted on a margin call in June 2022. 3AC has amassed $2.4 billion in outstanding loans from GGC, backed primarily by collateral tied to Bitcoin’s fluctuating price.
The default left a significant hole in GGC’s balance sheet, with an estimated $1 billion deficit by mid-June 2022. Despite the looming financial crisis, Digital Currency Group (DCG) executives reportedly attempted to project confidence.
In a Tweet on June 15, 2022, GGC claimed its “balance sheet was strong,” a statement that SEC investigators have now deemed materially misleading. Additionally, GGC’s CEO assured investors that the firm had “shed the risk” from the 3AC default. SEC found this assertion false, given GGC’s continued exposure to market fluctuations.
To mask the financial shortfall, Digital Currency Group (DCG) executed a $1.1 billion promissory note to GGC on June 30, 2022. The note, structured as a long-term obligation payable by 2032, was presented on GGC’s balance sheet as an asset, artificially inflating its financial position.
However, investors were not made aware of the full terms, leading to what the SEC described as a “materially false impression” of the firm’s stability.
In November 2022, GGC halted withdrawals due to liquidity constraints, and by January 2023, the firm filed for bankruptcy. This event was part of a broader industry downturn that saw multiple high-profile crypto firms collapse after catastrophic defaults and market instability.
In response to the SEC’s findings, Digital Currency Group (DCG) has agreed to cease and desist from further violations under Section 17(a)(3) of the Securities Act of 1933, which prohibits fraudulent conduct in the sale of securities. The firm has also agreed to pay a $38 million civil penalty within 14 days, though it neither admitted nor denied the SEC’s findings.
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