And then there were none.

On January 10 2023 Cameron Winklevoss, co-founder of Gemini wrote an open letter to Barry Silbert, the founder of Digital Capital Group, DCG. In his letter Winklevoss argued that DCG owes?$1.675 billion to Genesis Global, which in turn owes money to Gemini. Barry denied many of the accusations. A lot had happened before their relationship soured. Many other entities and events were indirectly involved in scripting this drama.

Today we will learn about these players and in the next article, we will see how they were all interlinked and why they ended up losing investors' money.

Grayscale Investments

Grayscale Investments ('Grayscale'), founded in 2013, is a leader in digital currency asset management. It is the parent company of (i) Grayscale Advisors ("GSA"), which is a SEC-registered investment adviser, and (ii) Grayscale Securities ("GSS"), which is a SEC-registered broker/dealer and a FINRA member. It is the sponsor of a number of trusts, allowing investors who might not have access to digital assets due to regulations or expertise to gain exposure.

Grayscale Bitcoin Trust is a Delaware Statutory Trust that was formed on September 13, 2013. On January 11, 2018, the Trust changed its name from Bitcoin Investment Trust to Grayscale Bitcoin Trust. The Trust issues shares, which represent common units of fractional undivided beneficial interest in, and ownership of the Trust, on a periodic basis to certain "accredited investors" under Regulation D of the Securities Act. For tax purposes?the Trust is classified as a grantor trust (January 2016), which means that the beneficial owners pay the taxes.

Grayscale Investments is the sponsor of the Trust and collects the recurring sponsorship fees from the holdings of the Trust.?Genesis Global Trading was the sole authorized participant and acted as the distributor and marketer of the shares that it sold through private placement. Grayscale Securities is the sole AP as of October 2022. Coinbase Custody is the custodian for the Trust and holds the digital assets in segregated accounts. Continental Stock Transfer & Trust Company serves as the transfer agent. The administrator for the Trust is BNY Mellon Asset Servicing.

The Trust currently does not support the redemption of shares for bitcoins. It supported redemption in the early days of the launch (April 2014) but had to stop after receiving a "cease-and-desist" notice from the SEC in June 2014. SEC contended that redeeming while also creating shares by Genesis is a violation of rule 101 of Regulation M, which prohibits distribution participants from purchasing the distributed security until after the restricted period.

The shares are issued in batches of 100 (a "basket") on a periodic basis as determined by the sponsor ("offering period") to the authorized participant. Accredited investors can subscribe to newly issued shares through a private placement under Regulation D. The newly subscribed shares are bought at NAV and have to be held for the restricted period before they can be sold in the secondary market. When they were issued under Section 506C of Regulation D, the restricted period was twelve months. The Trust registered with the SEC on January 21st, 2021. Since then, the restricted?period has been reduced to six months. The shares have been publicly traded on the OTCQX U.S. Marketplace of the OTC Markets Group Inc. since March 2015.

The Trust’s investment objective is for the shares to reflect the value of the bitcoins held by the Trust. The sponsor’s fee accrues daily in U.S. dollars at an annual rate of 2.0% of the Trust’s bitcoin holdings and is paid in bitcoin on a monthly basis.

Genesis

Genesis, along with its affiliates, is a digital asset prime brokerage. It was among the first to provide over-the-counter trading of digital assets in 2013. Genesis Global Trading is a non-custodial digital asset market maker registered as a broker-dealer with the SEC and FINRA. Genesis Global Capital is a provider of lending and borrowing services for digital and fiat currency to and from institutions and HNWI. It is registered as a money services business with FinCEN. Genesis Custody is a UK-based provider of non-fiduciary, digital asset storage services to institutions and HNWI in permitted jurisdictions. Genesis, as a borrower and lender of cryptoassets, accumulated assets from institutions and accredited depositors and then lent them out at a rate higher than the one it paid the depositors. Genesis Global filed for Chapter 11 protection on January 19, 2023. It owes over $3.5B to creditors with $765m to Gemini.??

Digital Currency Group

In 2015 Barry Silbert sold his SecondMarket Solutions to NASDAQ. Soon afterwards, he started the Digital Currency Group with funding from the likes of MasterCard, Bain Capital, and New York Life. DCG is a holding company with a prolific venture capital investor’s appetite and more than 200 crypto-related companies in?It owes creditors over $3.5 billion, including $765 million to Gemini.

Grayscale and Genesis, both coming from SecondMarket heritage are two of the five wholly owned subsidiaries. The other three are Coindesk (2016, media), Foundry (2019, Bitcoin mining), and Luno (2020, crypto exchange). In his January 2023 letter to the investors, Barry stressed that the subsidiaries are independent companies with their own risk management and business strategies and that DCG does not commingle cash with any of them.

DCG announced in January 2023 that it was suspending its dividend payout. DCG had written a $1.1 billion promissory note to Genesis in November 2022 to assume the lender’s liabilities following the collapse of the 3AC hedge fund. It had earlier borrowed $500 million from Genesis in early 2022. Proceeds were used to buy GBTC in the open market and to repurchase DCG stock from early investors.

Gemini

Cameron and Tyler Winklevoss launched Gemini Trust Company in 2014. Their ownership in Gemini is through their flagship Winklevoss Capital Fund which has a portfolio of 50+ fintech investments. In October 2015, Gemini Exchange opened as a crypto exchange as a chartered limited liability trust company under the NYDFS. Gemini introduced the first ever daily Bitcoin auction in 2016. For a short while from 2017 to mid-2019, CBOE used the auction price to settle Bitcoin futures through Gemini. CFTC sued Gemini in June 2022, contending that the auctions were being used to manipulate futures markets. The exchange has stayed clear of margin and short trading. It also provides clearing services for off-exchange trades. As a licensed custodian, it holds customers' digital assets in trust while honoring reserve requirements and banking standards.?

In January 2023, the SEC charged Genesis Global Capital and Gemini Trust Company with the unregistered offer and sale of securities to retail investors through the Gemini Earn program. It was launched in February 2021 to retail investors in the United States, Hong Kong, and Singapore, whereby the investors entered into a tri-party Gemini Earn agreement with Gemini and Genesis. The workflow was simple: investors would first transfer their assets to Gemini, which would aggregate them and tender them to Genesis. Genesis, for its part, had full discretion to lend them out in the institutional market and pay back a daily accrued interest to Gemini Earn investors. Gemini would deduct an agent fee from the returns. According to the Gemini Earn Agreement, the crypto asset transactions were "open term" and investors could terminate their investment in Gemini Earn at any time, and Genesis was also obligated to return the invested crypto assets within three business days. It specifically stated that Genesis was responsible for repaying the crypto assets and interest to the Gemini Earn investors. Genesis halted withdrawals on November 16, 2022. Shortly afterwards, Gemini Earn did the same.

Three Arrows Capital

Su Zhu and Kyle Davies started the Singapore-based hedge fund, Three Arrows Capital ("3AC"), in 2012. It filed for protection under Chapter 15 in July, 2022. It owed $2.36bn to Genesis and another $660m to Voyager. The fund started?as an emerging market forex fund. Around 2019, they entered the crypto markets and were very bullish on the landscape. It had $10 billion in AUM at its peak. 3AC’s main crypto trade was the GBTC arbitrage, which worked well while the premium was expected. At one point, it was the largest holder of GBTC (6.1%).?

The founders of 3AC were one of the most outspoken bulls of Terra’s LUNA/UST and had close ties to Terra’s co-founder, Do Kwon. Active on Twitter before bankruptcy, they went radio silent on social media till November later that year, when they resurfaced to comment on Sam Bankman-Fried’s FTX role in their demise. Lack of cooperation spurred Teneo, the court-appointed liquidator, to demand documents through Twitter in January 2023. The same month, Su Zhu, along with the two founders of CoinFlex, Mark Lamb and Sudhu Arumugam, proposed to raise $25 million for a new claims exchange called GTX.

Terraform Labs

Promising a "modern financial system on the blockchain,"?Terraform Labs raised $32 million in August 2018. It raised another $25m?in January 2021 from heavyweights like Coinbase and Galaxy. The Singapore-based firm was founded by Do Kwon and Daniel Shin in April 2018. Terra, the blockchain proposed by Terraform Labs, did an ICO in January 2019. LUNA was the utility token for this ecosystem. TerraUSD (UST) was announced on September 12, 2020. Touted as "the first decentralized stablecoin that is scalable, yield-bearing, and interchain," it was in direct competition with other asset-backed or over-collateralized stablecoins.

The price stability of the UST was maintained algorithmically through a simple economic thought experiment: the UST is always equal to 1 dollar.Users can mint 1 UST by supplying equivalent LUNAs for 1 dollar's market value. The supplied LUNAs were "burned" to maintain the supply scarcity. The reverse was also allowed. Users can supply 1 UST and get $1 worth of LUNAs in return. Again, the supplied UST was "burned." The assumption was that market forces would supply and create UST and LUNA to maintain the UST peg of $1.

The Terra ecosystem showed exponential growth. In July 2020, Terra introduced the Anchor protocol, which was a DeFi marketplace for borrowers and lenders. The yields on UST deposits were as high as 20%. The LUNA collateral depositors were given tokens, which could again be used to borrow, thus leveraging their positions. In January 2022, the Luna Foundation Guard was established, and it raised $1 billion from 3AC and Jump Crypto by selling LUNA. The foundation held BTC reserves to assist UST in pegging during any perceived volatile period. By April, LFG had 80k BTC and another $1bn in UST. LUNA outperformed other coins as UST became the largest stablecoin by market share.

LFG’s BTC reserves proved ineffective in early May 2022, when capital flight started from UST to other stablecoins. UST briefly lost its peg of 1 dollar on May 7th, but quickly recovered. Anchor protocol saw a large withdrawal of UST that day. However, the second time was not so lucky. By May 16th, the LFG’s reserves were depleted, LUNA was trading 99% below its peak, and exchanges were halting its trading. Over $50 billion vanished in a matter of days.

On 14th September 2022, a South Korean court issued an arrest warrant for Kwon. An Interpol Red Notice was issued to arrest him. A slew of class-action lawsuits were filed against him and LFG in various jurisdictions. While he stayed in hiding, Terra morphed into Terra 2.0. A new coin was airdropped to the holders of the original LUNA and UST tokens. The old native token was renamed LUNC, while the brand new one took up the old name LUNA. Even before this, SEC had already entered the legal arena when, in June 2022, LFG lost the case on the legality of the jurisdiction of SEC on Terra’s Mirror Protocol.

FTX

Ex-Billionaire Sam Bankman Fried (SBF) was the poster boy of crypto before his creations FTX and Alameda Research?spectacularly imploded in November of 2022. SBF left the quantitative trading firm Jane Street to start his own cryptocurrency trading firm, Alameda Research, in November 2017. In the early days, the main trade was the Bitcoin price differentials between Japanese and US exchanges. His co-founder, Tara Mac Auley left Alameda in April 2018 due to concerns over "risk and business ethics" and started Larten Venures. Alameda Research took directional risk and promised "high returns with no risk" to investors to gain assets.

Gary Wang and SBF launched FTX, a crypto currency exchange registered in the Bahamas, in May 2019. The revenue model relied on exchange fees, leveraged token fees, and OTC margins just like any other exchange.?SBF's empire became a dominant player in the market. At its peak, Alameda was managing $15 billion in assets, and FTX was trading $3 billion in crypto daily. Alameda got another venue for a revenue stream as it was the principal market maker for the exchange. Later in November 2022, some analysts will claim that Alameda was front running the listings at FTX.?Along with Alameda, FTX Ventures, a $2 billion fund established in January 2022, had a portfolio invested in more than 100 crypto entities covering DeFi, Gaming, and Web3.?

In December 2019, Binance announced a strategic investment in FTX and invested an undisclosed amount. In return FTX would develop the derivatives and OTC markets for Binance. Apart from Binance, FTX also raised $1bn in Series B in July 2021 from likes of Sequoia and Paradigm. A $420m series B1 in Octorber,2021 and $500m in Series C in January,2022 showcased the growth engine FTX had become. The investment relationship between Binance and FTX suddenly ended in July,2021. SBF bought out the share from Binance and paid roughly $2.1bn in BUSD and FTT tokens. While both were heavyweights in the same business, both had very different approach to regulators with SBF appearing closer to Washington.??

The ERC20 utility token FTT was the backbone of the FTX ecosystem. The tokenomics were designed to incentivize its use through increased network use and carefully manage the supply through weekly burns. FTT token holders were given trading fees discount. One third of FTX trading fees was used to buy and burn FTT tokens, thus controlling inflation. FTT token saw a 800x rise?to $84 in summer 2021. The token is a simple play to get exposure to growing FTX ecosystem.

On November 11, 2022, FTX Trading, West Real Shires Services (FTX US), Alameda Research, and approximately 130 affiliated companies filed for Chapter 11. This was ironic, as until the start of the month, SBF and FTX were busy saving other crypto entities that were struggling after LUNA and 3AC. In May 2022, FTX US extended a loan of $400 million to BlockFi to help with client withdrawals after the 3AC collapse. There was also an option to buy the embattled lender based on performance. BlockFi, founded in 2017 by Zac Prince and Flori Marquez, never issued its own token but relied on a more traditional approach. BlockFi filed for Chapter 11 on November 28th, 2022. By that time, the bankrupt FTX and Alameda owed it $1 billion. Another lender to be blessed by FTX's benevolence was Voyager. Voyager filed for Chapter 11 on July 5, 2022. At that time it was owed more than $600m by 3AC and $400m by Alameda Research. Alameda had extended a revolving loan of $200 million and 15000 BTC to Voyager a month earlier.

FTX’s trouble started on November 2, 2022, when an article in Coindesk pointed out that Alameda’s $14.6 billion balance sheet was mostly made up of self-issued FTT tokens. The vested interest in making sure FTT stays pricey was immediately clear. Any liquidation of FTT assets by BlockFi or Voyager would have led to margin calls for the loans taken out by Alameda. Binance, which held FTT as a result of the equity buyout, announced on November 6 that it plans to liquidate its FTT holdings due to "recent revelations that have come to light." A bank run on FTX started, leading to FTX halting withdrawals on November 8th. Binance’s CZ, who had earlier announced a non-binding agreement between Binance and FTX to acquire FTX, withdrew his offer on November 9th after completing "corporate due diligence."

Unlike others, SBF was definitely not media shy after filing for bankruptcy. The published balance sheet showed $9 billion in liabilities against $900 million in assets. Later on, the lawyers for FTX would discover an additional $5 billion in assets. Soon, news of backdoor arrangements to divert $10 billions of customers' money from the FTX exchange to fund Alameda’s bad loans emerged. He appeared in New York court on January 3 2023, and pleaded not guilty to all the charges of fraud and related crimes. He was released on $250 million bail. His co-founder, Gary Wang and Alameda’s CEO, Caroline Ellison had pleaded guilty earlier and are cooperating with the government.