Here’s how the most important dispute hanging over the crypto industry may play out, says industry watcher

DCG, says the Messari team, is one of the most systemically important companies in the crypto ecosystem. There’s more than $2 billion stuck at Genesis, whose primary borrower is DCG.

According to Messari, “the options look pretty bleak.” Creditors could strike an out-of-court settlement and agree to a haircut on deposits in return for debt or equity. Genesis alternatively could file for bankruptcy, dragging their parent or external creditors through a lengthy process. Or DCG could recapitalize.

But there’s some big open questions. One is whether DCG or Genesis own $700 million worth of Grayscale Bitcoin Trust
GBTC,
+3.88%
and the Grayscale Ethereum Trust
ETHE,
+0.63%.
If it’s DCG, that’s a big asset to borrow against, but if it’s already spoken for at Genesis, “we might yet see a further rippling out of contagion.”

Another big question is the nature of the $1.1 billion note DCG extended to Genesis, and whether it’s callable. “A callable note would mean that a Genesis liquidation process would put DCG on the hook to repay the full $1.1 billion immediately,” says the Messari report.

There’s also the issue of the FTX bankruptcy. So far, it doesn’t appear that FTX or Alameda were creditors of Genesis. And if they closed positions, the precise date would matter, given the 90-day clawback period that most bankruptcy cases contain. “If Alameda had loans with Genesis that were repaid after August 13, they might potentially be subject to the clawbacks,” says the Messari report.

The outlook at DCG will have a big impact on the Grayscale Bitcoin Trust. “A buyer without a large GBTC bag would have every incentive to shut down ETF conversion discussions and run the business as an annuity that’s openly hostile to GBTC shareholders,” says the Messari report. “Even though an ETF would open the door for redemptions and lower fees, DCG would notch a one time gain of $450 million from the closure of the GBTC discount to NAV. The incentives of the trust sponsor get ugly without that share hedge. A new buyer could be exploitative.”

And finally, there’s the issue of Eldridge, which has a $350 million revolving line of credit with DCG. “Since they are senior creditors at DCG and Genesis, their incentives are materially different from the Genesis credit holders, who seem much more inclined to strike a deal,” say Messari.

Bitcoin
BTCUSD,
-0.10%
in the early hours was trading below $17,000.

Also read: Sam Bankman-Fried says inability to communicate from prison drove him mad.

The market

Stock futures
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+0.72%
 
NQ00,
+1.02%
were stronger in the early going, and so was the U.S. dollar
DXY,
+0.92%.
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.739%
fell to 3.75%. All moves that seem to be consistent with market anticipation of an earlier-than-expected Fed pivot.

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The buzz

Tesla
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reported fewer deliveries than it targeted for 2022, at 1.31 million compared to its 1.4 million goal. After slumping 69% last year, Tesla shares fell sharply in premarket action. But China EV makers including Nio
NIO,
-2.40%
rose.

Regal Cinemas owner Cineworld said it’s not in talks with AMC Entertainment
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to sell its assets.

German chemicals distributor Brenntag said it’s no longer in talks to buy Univar Solutions
UNVR,
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An activist shareholder of Brenntag’s
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+5.83%
had opposed the plan.

Rep. Kevin McCarthy is seeking to become Speaker of the House, despite unrest from a minority of Republicans that could drag out the process.

Damar Hamlin of the Buffalo Bills suffered a cardiac arrest on the field, as the NFL suspended the Bills-Bengals game. He’s sedated and in critical condition, the Bills said.

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