The U.S. Securities and Exchange Commission (SEC) has started formal legal actions, known as cease-and-desist proceedings, against the venture capital firm Digital Currency Group (DCG), accusing them of negligent behavior related to a lending program provided by their subsidiary, Genesis Global Capital (GGC).
The action stems from discoveries suggesting that Digital Currency Group gave misleading information to investors regarding the financial status of Genesis Global Capital, particularly during a crucial phase in the middle of 2022.
Genesis Global Capital’s Financial Woes
As claimed by the SEC, Digital Currency Group – established in 2015 and situated in Stamford, Connecticut – neither registered with the SEC nor registered any securities since its inception.
In 2017, Genesis was established as a fully-owned affiliate of DCG. It introduced a crypto lending service targeted at individual investors. This service enabled clients to deposit Bitcoin (BTC) and other digital currencies, earning them interest returns. These returns were generated by loaning out these assets to larger, institutional borrowers.
In June 2022, GGC encountered a major predicament when one of its biggest debtors, the hedge fund Three Arrows Capital (TAC), failed to repay a $2.4 billion loan. The consequences of this default were substantial, as the collateral provided was not enough to match the original loan amount.
As events progressed, the worth of the security pledged (collateral) kept falling, making Genesis Global Capital’s financial difficulties even more severe.
In spite of concerning events unfolding, it’s said that DCG leaders encouraged their staff to present a picture of financial robustness. On the 15th of June, GGC made a public declaration about their financially sound balance sheet, a claim which was then shared on social media by DCG.
According to the regulatory body, the claim was found to be “deceptive,” as it neglected to disclose the substantial risk stemming from the Three Arrows Capital’s default on their unsecured liabilities.
After this, the CEO of GGC posted on Twitter that the company had “eliminated the danger” related to the default, potentially giving a deceptive impression to investors regarding the true financial status of GGC.
Digital Currency Group’s $1.1 Billion Maneuver
In an attempt to give off an impression of financial strength, DCG took out a promise to pay back $1.1 billion to GGC. This allowed their subsidiary to show a positive net worth on its financial statement.
Yet, it wasn’t made clear to Genesis Global Capital’s investors that this particular financial move had taken place, which added more allegations of neglect against Digital Currency Group.
The Securities and Exchange Commission found that Digital Currency Group had acted against the rules of Section 17(a)(3) of the Securities Act, a part of the law that forbids practices considered to be fraudulent or misleading in the process of selling securities.
As an analyst, I’ve come to understand that my assessment of Digital Currency Group’s (DCG) portrayal of Greenidge Generation Holdings Corp’s (GGC) financial status during a critical timeframe was found negligently misleading by the regulatory body. In simpler terms, it appears that DCG didn’t provide accurate information about GGC’s financial health, potentially leading investors astray.
Consequently, the Securities and Exchange Commission (SEC) has levied a civil fine of $38 million against Digital Currency Group (DCG). This amount is to be settled within 14 days following the order, and it can be paid via electronic transfer or by issuing a certified check.
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2025-01-18 10:11