DeFi: Gemini's $1.5B lawsuit against Digital Currency Group; $130MM Multichain bridge hack, over $600MM in 2023
Did fraud follow investment losses?
Gm Fintech Futurists —
Today we highlight the following:
FINANCIAL INSTITUTIONS: Gemini Lawsuit Accuses Barry Silbert And Digital Currency Group Of Fraud (link here)
DEFI & DIGITAL ASSETS: Multichain Bridges Exploited for Nearly $130M Across Fantom, Moonriver and Dogechain (link here)
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FINANCIAL INSTITUTIONS: Gemini Lawsuit Accuses Barry Silbert And Digital Currency Group Of Fraud (link here)
Crypto exchange and custodian Gemini, the largest creditor of bankrupt crypto lending firm Genesis, a Digital Currency Group (DCG) subsidiary, has taken legal action against DCG and its founder, Barry Silbert, for failing to agree on a restructuring deal for Genesis's troubled unit. Previously, Gemini had partnered with Genesis on Gemini Earn, a service enabling Gemini customers to earn annual percentage yields ranging from 0.45% to 8% through the Earn program.
The program worked similar to the mechanics of securities lending, where assets are borrowed by parties wanting to go long or short beyond their buying power. Genesis loaned these customer deposits from Gemini Earn to various investors, including Three Arrows Capital (3AC), which is now defunct and, of course, cannot return the loan.
DCG currently has a total debt of $3.3B owed to creditors, with $1.2B owed to hundreds of thousands of Gemini Earn users. According to Gemini founder Cameron Winklevoss, in June and July of 2022, Silbert, DCG, and Genesis deliberately misled creditors, Earn users, and Gemini by disseminating false information. They claimed that DCG had absorbed the $1.2B losses resulting from the collapse of 3AC in May 2022. However, apparently, Digital Currency did not bear these losses but instead created a long-term promissory note without providing any capital to Genesis. DCG responded to these allegations with its own spin on Twitter.
In response to these events, Cameron Winklevoss made a "final offer" in the debt-restructuring negotiations with Genesis: $1.465B in forbearance payments denominated in USD, BTC, and ETH. The breakdown of debt payments is showcased below. DCG was given until May 1st to pay the first $630MM, but they defaulted on their obligations. Another deadline was set for July 6th, which DCG also failed to meet, leading Gemini to file a lawsuit against the company. In February, it appeared that Gemini Earn users were close to recovering their funds, as Gemini announced that the parties were close to reaching an agreement. According to the negotiation, Gemini would contribute up to an additional $100MM to Earn users. However, DCG missed the $630MM payment in May and once again defaulted on the final offer in July, leading to the lawsuit.
The water gets even muddier with the SEC accusing Genesis and Gemini of offering unregistered securities to the public, suspending the Earn program. Some have drawn parallels between this case and the infamous Enron fraud, where deceptive accounting tactics were employed to mask debts and inflate profits, ultimately leading to bankruptcy and significant investor losses. In question are the ways in which assets were categorized, usage of accounting to paint a different picture from underlying reality, and conflicts of interest.
Both Gemini and DCG / Grayscale / Genesis used to be seen as darlings of the crypto industry, having built large businesses on some of the more secure aspect of the crypto asset class — the largest and most liquid asset, Bitcoin, and regulated financial institutions providing capital markets services around it. It took the collapse of Terra/Luna, and the liquidation cascade of 3AC and FTX for the questionable lending practices and poor risk management to be exposed.
It is what happens after the investment losses that is the hard part — the desire by entrepreneurs to reframe the story, cover up the hole, save the company by getting just a little bit more time. If only the SEC would let GBTC convert into an ETF and get the asset managers make their investment loss whole. But the market stays irrational longer than you stay liquid. And this is where people keep crossing the line from ethical and bankrupt to fraudulent and illegal.
👑Related Coverage👑
DEFI & DIGITAL ASSETS: Multichain Bridges Exploited For Nearly $130MM Across Fantom, Moonriver And Dogechain (link here)
Multichain, a cross-chain router protocol that allows users to perform token swaps between any two chains freely, has halted services after being hacked for more than $130MM. The protocol is sizable, supporting over 25 chains, 1,100 tokens, and with $1.26B in total value locked. The exploit impacted primarily WBTC, DAI, USDC, ETH, and LINK tokens, and it was first identified by Peckshield, a blockchain security firm, after noticing token outflows of c. $102MM from the Fantom bridge. Large values of tokens were reported as being bridged to unidentified addresses, flagging concerns amongst crypto sleuths.
Acting quickly, the stablecoin issuers of USDT and USDC, Tether and Circle respectively, blacklisted five addresses. These addresses accounted for $67.5MM (c. 50%) of the funds stolen. Despite these efforts, phishing attacks have been rife, with one account posing as the Fantom Foundation tweeting a malicious link that garnered 50k views and 5k retweets under the guise of an airdrop to cover losses.
While the details of what exactly happened have not been released, security experts believe it is the result of a private key compromise. This private key is likely a master key that has control over the bridge connections with Multichain. Adding to the mystery is that the CEO, Zhaojun, went missing just over a month ago. Without his access Multichain is unable to gain the necessary access for specific server maintenance. There is further speculation that Zhaojun and some of his team are being detained by Chinese authorities.
This hack is one of the biggest in the space this year in which we have seen $330MM stolen in Q1 and $314MM in Q2, according to CertiK. DeFiLlama reports that DeFi projects specifically have lost $527MM. Importantly, it shows how nascent security still is in a space that is a prime target for digital attacks and the impact it can have on the underlying protocols. The Fantom ecosystem in this instance has suffered a substantial loss of TVL, a token dump and a halt of lending due to this attack on a single dApp. If crypto is to prosper, it needs better security measures, accountable teams and less dependencies on singular dApps.
We used to say that hacks are the costs of battle-testing onchain financial software, and that investors get compensated with high returns for their high risks. However, it seems that the same types of failures continue to hit bridges and DeFi apps that rely on oracles or flash loans. Immature protocols will always exist as they are getting built out, and adversaries will always be incentivized to go after the honeypot. To that end, solutions must come in the form of profoundly different architecture.
👑Related Coverage👑
Curated Updates
Here are the rest of the updates hitting our radar.
Financial Institutions and Adoption
Polygon Labs Names New CEO After Foundation Previously Ditched That Role - The Block
UK Advancing ‘Digital Securities Sandbox’ Keying In On Crypto Tech - Blockworks
DeFi and Digital Assets
⭐ Lido And Rocket Pool Duel Over Centralization Concerns - The Defiant
Aave Governance Will Migrate 1,600 ETH To wsETH And rETH - Blockworks
USDC Issuer Circle Launches Programmable Web3 Wallet - The Defiant
Ethereum Welcomes Another ZK Rollup To Mainnet - Blockworks
CowSwap Enables Complex Swaps With ‘Hooks’ - Blockworks
Blockchain Protocols
⭐ Consensys To Launch Linea zkEVM Mainnet At EthCC - Blockworks
Avail Offers To Bridge The Data Availability Gap For Ethereum Rollups - Blockworks
AI Can Now Move Bitcoin With New Lightning Labs Tools - Decrypt
Mantle Network Is Voting To Form A $200MM Ecosystem Fund - The Block
NFTs, DAOs and the Metaverse
Arbitrum DAO Locks Up $770MM In ARB Tokens Into Vesting Contract - The Block
Tom Brady's NFT Startup Autograph Shifts Strategy Amid Struggles - CoinDesk
FTX Partnership To NFTs In New ‘Virtual Ballpark’: MLB’s Crypto Journey Continues - Blockworks
Andy Murray’s Wimbledon Tennis Data Transformed Into NFT Artwork - Decrypt
Web3 Apps Gained Users In June Despite Regulatory Challenges - The Defiant
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