Venture capital firm Digital Currency Group (DCG) recently filed a lawsuit against its two subsidiaries to resolve the promissory note issues following the default of Three Arrows Capital (3AC) in 2022.
In documents submitted to the U.S. Bankruptcy Court for the Southern District of New York on Thursday, DCG accused its subsidiaries Genesis Global Capital and Genesis Asia Pacific of receiving excess payments in the repayment of 3AC.
According to the complaint, DCG issued a 10-year, $110 million promissory note to Genesis Global Capital in June 2022 to mitigate the impact of 3AC's collapse on Genesis Asia Pacific's equity. However, Genesis actually profited significantly after 3AC's default.
This lawsuit is the latest legal dispute between DCG and Genesis regarding the collapse of 3AC. In May of this year, Genesis sued its parent company and CEO Barry Silbert, alleging fraud and insider self-dealing, seeking $3.3 billion in damages.
DCG pointed out that due to the recovery of cryptocurrency prices, Genesis profited from the collateral of 3AC—Grayscale's Bitcoin trust shares—from loans. The complaint states that this allowed Genesis to recover nearly $2.8 billion from 3AC loans, while its original loan amount was $2.36 billion.
The aftermath of the FTX crisis
The 2022 cryptocurrency market crash, influenced by the Terra collapse, led to the bankruptcy of multiple companies and liquidity constraints, with major exchanges like FTX also filing for bankruptcy. This volatility exacerbated market instability, and Genesis Global Capital filed for bankruptcy in January 2023.
Although Genesis had limited direct credit risk with FTX, the collapse of FTX triggered widespread market turmoil, accelerating Genesis's decision to halt withdrawals. DCG is requesting the court to order Genesis to pay over $105 million plus interest.