Press Release

New York AG Rejects DCG Silbert’s Request to Drop $1 Billion Fraud Case

The New York AG opposes DCG’s effort to dismiss the $1 billion fraud lawsuit, which includes Genesis and the 3AC Collapse.

TakeAway Points:

  • Letitia James, an attorney in New York, is opposing the requests of DCG, Silbert, and Moro to dismiss the fraud lawsuit due to a $1 billion hole in Genesis’ balance sheet.
  • According to the lawsuit, DCG violated New York’s Martin Act by issuing a false $1.1 billion promissory note to offset losses resulting from the failure of 3AC.
  • Executives’ attempts to hide Genesis’ financial problems while publicly assuring investors of the company’s stability are exposed in internal conversations.

NYAG’s Legal Action Against DCG

New York Attorney General Letitia James is intensifying her legal battle against Digital Currency Group (DCG), its founder and CEO Barry Silbert, and former Genesis CEO Soichiro “Michael” Moro. On Tuesday, James’ office filed a motion opposing the defendants’ attempts to dismiss the case initiated in March. 

The lawsuit accuses Genesis, DCG, Silbert, and Moro of defrauding investors by concealing a $1 billion deficit in Genesis’ balance sheet, a shortfall caused by the collapse of Singapore-based crypto hedge fund Three Arrows Capital (3AC), which was Genesis’ second-largest borrower at the time.

James’ suit alleges that Genesis and DCG made “false assurances” on social media, claiming that DCG had absorbed Genesis’ losses. Instead, DCG issued a promissory note to Genesis, pledging to pay $1.1 billion over ten years at 1% interest, which James claims was never honored. Genesis halted withdrawals in November 2022 and declared bankruptcy two months later. DCG and Silbert have denied these allegations, arguing that the promissory note was legitimate and that they had transferred hundreds of millions of dollars to Genesis to stabilize its balance sheet.

Internal Communications Make Strategy Visible

The lawsuit includes transcripts of internal communications that suggest a coordinated effort to mislead investors. In a June 15, 2022, Microsoft Teams chat, Genesis executives discussed how to manage investor perceptions following 3AC’s collapse. Matthew Ballensweig, then-Managing Director, expressed concerns about leaking their net position, to which Moro agreed. Silbert emphasized the need to maintain confidence in Genesis, referring to it as the “blue chip” in the crisis.

James’ motion argues that these communications were part of a “concerted misinformation campaign” to hide Genesis’ financial instability, violating New York’s Martin Act, which prohibits fraudulent business activities related to securities or commodities. The NYAG’s office has a history of using this law to pursue cases against crypto companies, including a 2019 inquiry into Tether and Bitfinex.

Cull, a Crypto Client of Customers Bank

In a separate development, Customers Bank has reportedly informed some hedge-fund clients that it will no longer provide banking services to them. While the extent of this action is unclear, sources suggest it involves offboarding inactive accounts rather than a widespread debanking of the crypto industry. This move underscores the challenges crypto companies face in accessing U.S. dollar banking services, especially after the collapse of Silvergate Bank and Signature Bank last year.

Customers Bank, which services major crypto firms like Galaxy Digital, Coinbase, and Circle, offers a real-time blockchain-based payments platform called Customer Bank Instant Token (CBIT). The bank has capped deposits in CBIT at 15% of total deposits, which were around $18 billion at the end of Q1 2024, with CBIT contributing approximately $2 billion. A spokesperson for Customers Bank stated that the bank is selective about its clients to limit exposure to crypto, performing extensive due diligence in each industry it serves.

Stablecoins and the Regulatory Environment

JPMorgan has highlighted that U.S. crypto regulations are increasingly moving against the launch of a central bank digital currency (CBDC) and non-compliant stablecoins like Tether (USDT). Regulatory initiatives have intensified, raising questions about the future of crypto regulation ahead of the presidential election later this year. 

Analysts led by Nikolaos Panigirtzoglou noted that emerging regulations appear to oppose a Fed coin, U.S. banks engaging with crypto, and non-compliant stablecoins, while also resisting a blanket classification of all tokens outside Bitcoin (BTC) and Ether (ETH) as securities.

The Clarity for Payment Stablecoins Act has a higher chance of being approved before the November election compared to other initiatives. If passed, it would bolster U.S. compliant stablecoins but threaten the dominance of non-compliant ones like Tether. 

The Financial Innovation and Technology for the 21st Century Act (FIT21) still needs Senate and presidential approval, which is unlikely before the election. Additionally, Congress passed a resolution overturning the SAB 121 accounting rule, which complicated banks’ custody of crypto assets, but it was vetoed by President Joe Biden.

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