Collapse? Grayscale boss is embroiled in lawsuits, will he follow in SBF's footsteps?

Eric Asquith told me: "It wasn't until November 16, 2022 that I learned the true identity of Barry Silbert and all the information related to him." On that day, he was convinced that his family's hard-earned savings of $1.05 million had been wiped out.

Asquith has always claimed to be a prudent cryptocurrency investor. He deliberately avoided Bitcoin or other popular altcoins, and chose to gradually convert his funds into GUSD at the beginning of the year, a digital currency that he believes is as reliable as cash. GUSD is issued by the well-known cryptocurrency exchange Gemini , and each token is backed by US dollars and assets, which also makes Asquith have special trust in this exchange. Gemini's advertising slogans "Crypto Without Chaos" and "The Revolution Needs Rules" also deeply impressed him, which coincides with his usual investment philosophy. For the safety of funds, Asquith did not rashly trade, but chose Gemini's Earn account to store the huge sum of money. This is a project similar to a savings account, with an annual interest rate of up to 5.5%, far exceeding the bank interest rate of the same period. Like Asquith, many investors have chosen the Earn project, including grandmothers who have invested their life savings in it, and people who are saving money for surgery.

But the world of cryptocurrency is full of layers of packaging tricks—wallets are identified by long strings of code rather than the user’s name; companies can appear and disappear without a trace. What Asquith didn’t fully realize was that his funds were no longer under Gemini’s control. In some ways, it looked like the money had been taken over by Genesis , a crypto company run by Barry Silbert, but the truth was far more complicated. Some hedge funds on the verge of collapse, such as Three Arrows Capital and Sam Bankman-Fried ’s personal fund Alameda Research , were secretly borrowing from Silbert’s company. In this way, Asquith and thousands of others’ money were used by SBF and others to bet on the most aggressive and volatile tokens. Earn accounts acted like a giant funnel, channeling the funds of the most cautious savers in cryptocurrency to the hands of the market’s most risky speculators. The ending is self-evident: Silbert’s Genesis company, like many other players in the industry, eventually went bankrupt. On January 18, 2023, a special committee independent of the company's owner control officially pushed Genesis into bankruptcy proceedings.

Asquith knew that his funds were wiped out by short-sighted decisions by crypto moguls like the Winklevoss brothers, Silbert, and SBF, and that this was just the tip of the iceberg of the crypto empire's collapse. In the world of cryptocurrency, such tricks have long been common. Throughout 2023, negotiations on the compensation plan for Earn project users broke down repeatedly, and Silbert's Digital Currency Group and creditors blamed each other and accused each other. However, the situation took a dramatic turn in November. Bankman-Fried was convicted of seven counts of fraud and conspiracy, which undoubtedly dropped a bombshell on the entire cryptocurrency market. At the same time, the market gradually warmed up, and the price of Bitcoin was about to double again, setting new highs, showing its tenacious vitality.

Bankruptcies are always tricky legal affairs, and creditors often get back only a fraction of what they are owed. But in February, the victims — customers of Silbert’s now-bankrupt crypto lending platform — reached an exciting deal with the Winklevoss brothers and regulators: full repayment for all user losses. The bull run in the crypto market in 2024 makes full repayment more feasible. This means that Earn customers will not only get back the original principal they invested, but also a higher return calculated at current market prices. For example, a user who invested one bitcoin will now not only get compensation worth $20,000 when Genesis went bankrupt, but a full bitcoin — and the market value of bitcoin has more than tripled since the incident. At the hearing announcing the new settlement, Earn victims cheered in the Telegram chat room. “Oh my God, I can finally buy a house! This is great!” one person said excitedly. “I’m so moved that I’m crying,” another person said with emotion.

The unexpected turn of events makes it likely to become a landmark case in the cryptocurrency space. Unlike bankruptcy cases such as FTX, where only a small amount of dollars was returned, the compensation method in this case is particularly eye-catching.

However, Silbert's involvement complicated things. The victims of the Earn project, who knew nothing about him, soon discovered that his road to success was achieved by exploiting loopholes in the bankruptcy system. Since February, the billionaire has been using controversial interpretations of bankruptcy laws to prevent Asquith and other victims from obtaining higher compensation based on current market prices. Obviously, he would rather keep the money for himself. In this regard, a DCG spokesperson firmly stated: "DCG cannot support any plan that deprives it of its corporate governance rights and violates US bankruptcy law." This case is not only about monetary compensation, but also poses severe challenges to the future regulation and regulation of the cryptocurrency industry.

The victims dubbed Silbert's move the "Barry deal," implying that if he succeeded, the $1 billion that was supposed to be returned to the victims would be pocketed by him. At the very least, Silbert may do everything he can to significantly delay the timeline for returning funds to Earn project customers.

Asquith has been holding out hope that he will get his money back, but he is perplexed by Silbert’s role in the whole thing. “Given Barry Silbert’s expertise in bankruptcy, his knowledge of the bankruptcy process and the benefits he would ultimately receive, many have speculated that he deliberately bankrupted Genesis,” Asquith said. However, a DCG spokesperson strongly denied that: “Neither DCG, nor Barry Silbert, nor any of its employees participated in the decision to file for bankruptcy.” So was Silbert manipulating the flow of funds to companies he controlled, or was he, as he argued in court, a well-intentioned executive who was blinded by industry scammers who are now either behind bars or in hiding?

Silbert grew up in Gaithersburg, Maryland, near Washington, D.C. When he was about 10 years old, his father died of cardiac arrest caused by an aortic aneurysm. This family tragedy prompted him to take on the responsibility of supporting the family at an early age. According to his mother, Silbert obtained the qualification certificates of trader and stockbroker while still in high school, and later entered the doors of well-known Wall Street investment banks Bear Stearn and Smith Barney.

But it was his post-business school job that really taught Silbert about the bankruptcy system and its potentially huge profits. While working for the smaller investment bank Houlihan Lokey, he handled the sale of fiber-optic cable and conduit for bankrupt companies like Enron and WorldCom, which were the subject of the nation’s biggest accounting scandals in the 1990s and early 2000s. He later told Congress that the experience fueled his passion for starting his own company, SecondMarket.

When a company goes bankrupt, its assets often become the focus of a fight among competing interests, often creditors who lent money to the company and are demanding repayment. These assets are often much riskier than stocks or bonds, in part because bankruptcy proceedings can be protracted, taking years. Silbert sees his new company as an eBay for bankruptcy claims and other hard-to-sell stocks — it won’t be as big or as influential as the New York Stock Exchange, but it will provide a far more convenient platform for the market than existing options.

Silbert’s startup was small but full of energy, located in a 400-square-foot office in downtown Manhattan. Despite the small number of employees and occasional overlapping responsibilities, everyone felt a strong sense of belonging to the company. Adam Oliveri, one of Silbert’s early hires, who had just graduated with an undergraduate degree in economics, recalled: “As a young man, I was passionate about my work. Sometimes I felt that the way I was doing things was not right, so I would talk to Barry directly and even stand on my desk to give a speech to discuss how to improve it.” A few years later, Silbert discovered a market with great potential: finding buyers for Facebook’s stock before it went public. Mark Zuckerberg’s employees wanted to sell their valuable stock, and Silbert’s company had almost monopolized the trading market. This business not only attracted a lot of attention, but also brought him a lot of profits, and even made him appear on the cover of Bloomberg Markets magazine.

In 2015, Silbert successfully sold SecondMarket to Nasdaq, but he did not stop there. Instead, he set his sights on the emerging field of Bitcoin. As early as 2012, he began to acquire Bitcoin for the trust fund to provide investors with the opportunity to participate in this emerging market. In order to support Charlie Shrem, an early Bitcoin evangelist, to establish the BitInstant exchange, Silbert once risked competing with the Winklevoss brothers for funds, but ultimately failed. Shrem was later imprisoned for his involvement in a money laundering case. According to journalist Nathanial Popper's description in the book "Digital Gold: The Rise and Fall of Bitcoin and Blockchain", Silbert even called Jamie Dimon, the CEO of JPMorgan Chase, to try to convince him that Bitcoin is the currency of the future, but failed. Despite this, Shrem said in a podcast in March that Silbert's efforts have made many venture capital companies truly recognize the potential of Bitcoin as an investment and asset class.

The Bitcoin Fund founded by Silbert was later renamed Grayscale Bitcoin Trust and quickly became a huge success in the market. At that time, there were few similar products on the market. The trust allowed investors to trade through stock codes in the open market, opening up their path to buy Bitcoin-especially for those who did not want to register for cryptocurrency exchanges. Although financial journalist Felix Salmon questioned whether it was "a good idea," the fund did bring in huge profits. At that time, investors needed to pay DCG 2% and 1.5% fees when buying and selling fund shares, which also brought DCG considerable income.

Over time, the fund grew in size. By the end of 2019, it held $1.87 billion worth of Bitcoin, and in the following year, its size grew nearly tenfold to a staggering $17.7 billion. Not long after, that number doubled again.

Silbert's wealth keeps flowing in, and his money seems to flow to every corner of the crypto space. Through DCG, he has invested in the world-renowned exchange Coinbase , hardware wallet manufacturer Ledger , and the multi-billion dollar altcoin Ripple . In addition, he also acquired the news media CoinDesk and founded Genesis to get involved in the institutional lending business, drawing on the operating model of Wall Street. Genesis is like a hedge fund, taking funds from investors like Asquith (although not directly lending), and then making high-risk transactions. According to people familiar with the matter, Genesis was one of DCG's main sources of profit during the market boom.

Despite Silbert's prominent position in the crypto space, he did not become the focus of the industry in 2020 like Bankman-Fried because of his unique look and celebrity friends. People are more familiar with the network of companies behind him than the person himself. In 2021, Genesis launched the Earn project in cooperation with the Winklevoss brothers' exchange, which "borrowed" about $1 billion in cryptocurrency for Silbert's company.

Yet even as the project experienced explosive growth during the pandemic’s cryptocurrency bubble, it ultimately became Silbert’s biggest threat as a crypto industry mogul.

Silbert's company has faced a series of legal challenges since January last year. Creditors such as Asquith have actively fought for their rights in the New York bankruptcy court in an effort to recover their losses. On October 19, New York Attorney General Letitia James filed a lawsuit accusing DCG, Genesis, Genesis's CEO, Silbert, and the Winklevoss brothers' exchange Gemini of defrauding customers. The allegation specifically pointed out that in the spring of 2022, after Genesis' client Three Arrows Capital collapsed, DCG issued a false $1.1 billion commitment note in order to cover up the holes in its balance sheet.

The lawsuit details a complex fraud scheme: the Winklevoss brothers' Gemini is accused of inducing investors to invest their funds in riskier products, while Silbert's DCG and its subsidiaries used these funds to conduct high-risk transactions. A former employee said: "Regardless of what Gemini did or did not do, Genesis's negligence in protecting customer assets and complying with best practices was more serious." In addition, according to the person, the company's problems also included failing to screen customers on the Treasury Department's blacklist, an allegation supported by another lawsuit filed by the New York Department of Financial Services in January.

Litigation by attorneys general and regulators is ongoing, with DCG and Silbert vehemently denying any wrongdoing. DCG even claims its promise notes were not fraudulent and has expressed its intent to honor them. Both sides are working to have their respective charges dismissed. Regardless of the state court's outcome, Silbert has taken his toughest stance yet against Earn project customers, the victims who initially lent him their funds out of trust. He has been using a seemingly unusual argument to refute it since February. DCG argues that under bankruptcy law, many people who originally lent Genesis cryptocurrency cannot be compensated at current cryptocurrency market prices. This means that for victims who lent Bitcoin and many other tokens at the time, the losses could be hundreds or even thousands of times higher.

Silbert’s legal logic is based on the fact that bankruptcy law sets a specific date for assessing the dollar value of victims’ claims. For Genesis, that date coincided with a market trough. “Your Honor, I can assure you that if the market price of Bitcoin was $10,000 today, the victims’ arguments would be completely different,” Jeffrey D. Saferstein, a DCG lawyer, told the judge at a hearing. Last month, at the hearing announcing the $1.1 billion settlement, DCG’s lawyers went even further and argued that the judge had no authority to approve it, a move that angered victims. “I’ve been in the crypto space for a long time, and I idolized Silbert before, but after everything I’ve been through, I really can’t stand him anymore,” one creditor, who asked not to be named, told me.

On March 18, Judge Sean H. Lane heard closing arguments in court. Lawyers on behalf of creditors, Genesis, and Gemini explained why Silbert's arguments should be rejected. Although there were many technical details involved in the debate, the core focus was on the properties of Bitcoin as a special asset, which is like a rare baseball card. Genesis's lawyer Brian Rosen gave an example at the hearing: "Suppose a creditor owns a rare Honus Wagner star card, then he should be entitled to the entire star card, not a part of the card." Coincidentally, Genesis now stands on the opposite side of Silbert and DCG, supporting the victims' claims.

However, Jessica Liou of DCG's legal team dismissed the victims' arguments as "Frankenstein theories" that lack support from bankruptcy court rules. "I understand this is a difficult decision for the court because of concerns about the impact on creditors in the Genesis case. But sometimes courts do need to make difficult decisions," she said. Other DCG lawyers warned that if the judge rules in favor of the victims, the decision could be appealed and "reversed," which could delay payments by further months.

Even if the judge ultimately sides with Silbert, he could still be held liable for the funds. If he and DCG can’t get out of the attorney general’s lawsuit, the state could seize the money as compensation — an outcome DCG and Silbert are trying to avoid. If Silbert wins, however, he could prevent the attorney general’s office from collecting the funds on behalf of Earn program clients, keeping them in his control.

The verdict is expected in April. Since the settlement was announced, victims have been preparing for a protracted battle due to Silbert's opposition. "A year ago, when the settlement was proposed, everyone was ecstatic," Asquith said. "But now, I will only breathe a sigh of relief when the funds actually arrive."