DCG Shareholder Letter from Barry Silbert, Founder & CEO
Published 2:00pm EST, Tuesday January 10, 2023
Dear Shareholders,
Happy New Year. I’ve been reflecting quite a bit recently about the past year, the state of the industry, and where things go from here.
First, I’m incredibly proud of the role that DCG and I have played as pioneers and builders over the past 10 years. Since our founding, we have invested in more than 200 companies that have developed and shaped the industry, and we have helped build the first publicly-quoted BTC fund, the largest asset manager in the space, the most influential crypto media platform, the #1 bitcoin mining pool in the world, the leading crypto prime broker, and a dominant crypto wallet/exchange in the emerging markets. DCG has also backed a tremendous group of emerging fund managers, crypto protocols, and cutting-edge blockchain projects.
I have fond memories of the early days of our industry, working hard to help educate and fighting in the trenches with fellow entrepreneurs and investors to gain legitimacy. Speaking at conferences to rooms with three people, getting snickered at on CNBC, and being dismissed by most legitimate investors was, I found, empowering and motivating.
In contrast, this past year has been the most difficult of my life – both personally and professionally. Bad actors and repeated blow-ups have wreaked havoc on our industry, with ripple effects extending far and wide. Although DCG, our subsidiaries, and many of our portfolio companies are not immune to the effects of the present turmoil, it has been challenging to have my integrity and good intentions questioned after spending a decade pouring everything into this company and the space with an unrelenting focus on doing things the right way.
I shared this sentiment in my previous shareholder letter this past November: DCG is committed to remaining at the forefront as we strive to build a better financial system. As this new year unfolds, we are hunkering down with our “lean and mean” mindset, and we are making meaningful changes to position the firm for long-term success. We’ve been aggressively cutting costs over the last few months in reaction to the current state of the market, which has included cutting operating expenses, and regrettably, reducing the DCG workforce. We also made the difficult decision to wind down HQ, the wealth management subsidiary that DCG incubated in 2020. While we still believe in the HQ concept and its outstanding leadership team, the current downturn is not conducive for the near-term sustainability of that business.
Looking ahead to 2023 and beyond, the industry has a lot of hard work to do to re-establish its credibility and reputation, which have been all but destroyed by a wave of unprecedented fraud and criminal behavior unlike anything I’ve seen in my career. This is going to be a challenging year for all of us, but I remain optimistic. I hope this letter and the accompanying Q&A that explains other developments and addresses some of the speculation about DCG – some of which is reasonable and some that is completely baseless and false – help to clarify our position.
To my peers in the trenches, now is a time to collaborate, cheer each other’s successes, and collectively take our industry to the next level. Let’s all grow together, treat others with respect, and get back to having fun and making a dent in the universe. I can assure you that DCG is certainly committed to doing so. I also have no doubt that DCG will emerge from this year a stronger company than ever before.
Barry
Q&A
1. What is DCG’s business model structure?
Founded in 2015, DCG is a holding company that builds, buys, and invests in businesses in the digital asset space. Some of these businesses are wholly owned, and in most we own small minority stakes. Today DCG has a portfolio of 200+ companies in over 35 countries and has invested in over 50 crypto funds and numerous digital asset tokens and blockchain projects.
2. How does DCG interact with its wholly-owned subsidiaries?
Since DCG was founded, our subsidiaries have launched and operated as independent companies with their own management teams, financial and risk management protocols, and legal and compliance oversight. Each subsidiary has its own culture, operational structure, and incentive mechanisms. Every aspect of each subsidiary’s day-to-day business is directed by the respective subsidiary’s leadership team.
DCG has a team of approximately 50 individuals that makes investments, supports our portfolio companies, and provides strategic guidance and general oversight to our subsidiaries. To be abundantly clear, DCG does not direct any trades, loans, or borrows for Genesis’ business.
3. Do DCG and any of its wholly-owned subsidiaries commingle cash?
No. Each of DCG’s wholly-owned subsidiaries has its own bank accounts, securities accounts, and crypto accounts, and maintains separate books and records.
4. How does DCG interact with the rest of its portfolio companies?
Our team maintains close relationships with our portfolio, providing business leaders with direct strategic and operational advice and access to a wide range of resources, programs, and value-add partners. In this way, DCG has fostered one of the most collaborative and vibrant communities of businesses in the blockchain and crypto space.
5. Where is DCG headquartered?
DCG is a U.S.-based company with headquarters in Stamford, CT.
6. How much debt capital has DCG raised from its non-affiliates and when?
DCG raised $350M of external senior secured term debt in November 2021 from a syndicate of lenders led by Eldridge.
7. How much does DCG currently owe Genesis Capital?
Like hundreds of other institutional investors, DCG borrowed capital from Genesis Capital, the lending arm of Genesis. These loans were always structured on an arm’s length basis and were priced at prevailing market interest rates. In addition to the promissory note discussed in question 14 below, DCG currently owes Genesis Capital (i) $447.5M* in USD and (ii) 4,550 BTC (~$78M), which matures in May 2023.
DCG borrowed $500M in USD between January and May 2022 at interest rates of 10%-12%.
DCG’s investment entity borrowed BTC during 2021 and 2022 at a weighted average interest rate of 3.85%, which include amounts previously borrowed that have since been repaid to Genesis Capital, leaving the current 4,550 BTC loan balance.
To put these loans to DCG into context, at the time they were issued in early 2022, DCG’s equity was valued at $10.0B, DCG’s trailing twelve-month EBITDA was in excess of $1.0B, and Genesis Capital’s aggregate loan book size ranged from $12.0-$15.0B. BTC prices ranged from $30.0K-$47.0K during this period.
In addition to the BTC loans, DCG’s investment entity borrowed 14,048 BCH tokens (approximately ~$1.5M) in late 2020 and is currently paying 9% interest.
DCG has not borrowed from Genesis Capital since May 2022, has never missed an interest payment, and is current on all loans outstanding.
*The figure represents the amount that has been subject to a setoff.
8. How did DCG use the proceeds of the USD loans borrowed from Genesis Capital?
The amounts borrowed by DCG were initially held as cash in Treasury to be used as opportunities arose. The key opportunities ultimately identified were the repurchase of DCG stock from one of our earliest venture investors and investments in liquid tokens and public equities.
9. How did DCG’s investment entity use the BTC borrowed from Genesis Capital?
DCG’s investment entity used the BTC borrowed from Genesis Capital to hedge GBTC long positions to remain market neutral on such positions. DCG’s open market purchases of GBTC were made when GBTC traded at a meaningful discount to NAV and, like all other investments, these decisions were based on an assessment of the likely returns weighted against the risks. Our purchases of GBTC on the open market have been in compliance with Rule 10b-18 under the Securities Exchange Act and transparently disclosed in filings and press releases.
10. What is DCG’s relationship with FTX?
DCG made a small equity investment of $250,000 in FTX’s Series B in July 2021. This was part of our ongoing strategy to invest in exchanges all over the world – we’ve invested in close to two dozen. DCG held a trading account with FTX with less than 1% of all our trading volume transacted on that platform.
Barry has no personal or professional relationship with Sam Bankman-Fried. Aside from a conversation in the Summer of 2022 and a few emails at the time, Barry does not recall ever meeting, speaking with, or otherwise privately communicating with him.
11. What was DCG’s relationship with Alameda?
DCG has never had a relationship with Alameda. Genesis had a trading and lending relationship with Alameda.
12. Has Sam Bankman-Fried ever been on the board of directors of Genesis?
No.
13. What was DCG’s relationship with Three Arrows Capital?
DCG has never had a relationship with Three Arrows Capital. Barry does not recall ever meeting, speaking with, or otherwise privately communicating with the Three Arrows Capital principals, aside from an introductory call with one of the co-founders in 2020. DCG has never coordinated purchases or sales of GBTC or any other investments with Three Arrows Capital.
Genesis had a trading and lending relationship with Three Arrows Capital, and Three Arrows Capital defaulted on its loans from Genesis. Separately, Three Arrows Capital was an investor in various Grayscale products.
14. Why did DCG take over the bankruptcy claim against Three Arrows Capital and what did DCG get in return from Genesis Capital for the $1.1B promissory note?
Until the summer of 2022, Genesis Capital was the premier crypto lending firm in the world. When Three Arrows Capital defaulted on its loans from Genesis Capital and numerous other lenders in June 2022, there was palpable fear in the market of contagion spreading through and devastating the entire industry. That was one consideration in DCG moving to assist Genesis Capital.
In addition, DCG firmly believed that substantial demand for institutional prime brokerage services would continue once the crypto market stabilized. Genesis had unrivaled expertise and the best institutional client base in the world, having built the first institutional crypto trading desk in 2013 before eventually launching Genesis Capital in 2018. Thus, DCG believed that Genesis – both the trading division and the lending desk – were worth protecting.
DCG and its board determined that it was in the best interest of Genesis, its lenders, and DCG to try to help support Genesis. The mechanism that was recommended by our financial and legal advisors, with input from our accountants, was for DCG to assume the Three Arrows Capital claim and replace it with the promissory note due to Genesis.
The $1.1B promissory note, which matures in 2032, represents DCG’s assumption of liabilities owing to Genesis from Three Arrows Capital in connection with their default in June 2022. DCG agreed to assign and exchange Genesis’s $1.1B unsecured loan receivable from Three Arrows Capital, the recovery on which was highly uncertain, with the promissory note from DCG. DCG did not receive any cash, cryptocurrency, or other form of payment for the promissory note. DCG effectively assumed Genesis’s risk of loss on the Three Arrows Capital loan with no obligation to do so.
Importantly, the $1.1B promissory note is not callable and does not contain any other similar features of a callable bond. Additionally, Genesis assigned to DCG its claims against Three Arrows Capital and as part of the transaction agreed that any recovery received by DCG in respect of the Three Arrows Capital liquidation will go directly to paying down the $1.1B promissory note.
Of note, during the period following Three Arrows Capital’s default, DCG contributed approximately ~$340M of new equity across Genesis entities to provide it with additional capital.
15. What role is DCG playing in the Genesis Capital restructuring process?
As a separate and distinct operating subsidiary, Genesis has its own Board of Directors and management team. The Genesis board formed a special committee, comprising two independent directors with decades of financial, legal, and restructuring expertise, to oversee the Genesis Capital restructuring process and any other matters involving related parties. Genesis Capital also retained independent outside advisors to lead the restructuring process, including Cleary Gottlieb, Moelis, and Alvarez & Marsal.
DCG and its independent outside advisors, including Goodwin Procter, Weil Gotshal, and Ducera Partners, have productively engaged with Genesis, its advisors, and an ad hoc group of certain Genesis creditors and its advisors with respect to the restructuring.
Because of the outstanding loans and the promissory note that DCG owes to Genesis Capital, DCG executives, including those on the Genesis board, have no decision-making authority related to any restructuring of Genesis Capital.
16. Is DCG the subject of an Eastern District of New York investigation regarding intercompany loans?
DCG has no knowledge of or reason to believe that there is an EDNY investigation into DCG.
DCG is in regular communication with regulators as part of our day-to-day business operations. If contacted by any regulators or investigators, as always, we will openly engage, answer questions, and provide any information needed.
17. Did DCG have any involvement with Terra Luna?
DCG did not buy, sell, short, or otherwise trade the Terra stablecoin and had no relationship with the issuer of those tokens.
DCG purchased ~60,000 Luna tokens in late 2021/early 2022 to assist Foundry, a wholly-owned subsidiary, with creating a staking node. DCG did not buy, sell, short, or trade the Luna token as part of its investment strategy.
18. What was DCG’s involvement with Celsius?
DCG did not buy, sell, short, or otherwise trade the Celsius token. DCG had no relationship of any kind with Celsius.
19. Does DCG issue its own tokens?
DCG has never issued its own tokens.
撰写：Jason Choi
