What Happened: Embattled crypto lender Genesis is negotiating with creditors on the terms of its Chapter 11 bankruptcy filing, sources told The Block on Wednesday.

Under the proposed terms of the plan, creditors would agree to a forbearance period of between one and two years. In exchange, they would receive cash payments and an equity stake in Genesis’s parent company Digital Currency Group (DCG).

The terms of the deal were reportedly in the works for several weeks, according to the sources, who said that Gemini’s ad hoc creditor committee had been privately negotiating with Genesis on finalizing a bankruptcy protection plan.

How did they get here? It all started (on paper, at least) on Nov. 16, when Genesis halted withdrawals and new loan originations from its lending business. At the time, the firm revealed that it didn’t quite have the liquidity to meet an unprecedented number of withdrawals that followed FTX’s collapse.

What followed was a public feud between DCG CEO Barry Silbert and Gemini CEO Cameron Winklevoss over a resolution plan for the $900 million Genesis owed to Gemini Earn users, who were essentially collateral damage in Genesis’s liquidity crisis.

Adding to the chaos was an SEC lawsuit filed against both Genesis and Gemini, alleging the Earn program was actually an unregistered securities offering.  

While recent events have made the true nature of DCG’s situation more obvious, cracks in Silbert’s crypto empire may have begun far before Genesis reported $175 million worth of funds stuck on FTX. DCG stepped in to assume some of Genesis’ liabilities after Three Arrows Capital defaulted on a loan, leaving Genesis with $1.2 billion in debt. 

DCG now owes Genesis $1.1 billion in the form of a long-term promissory note due in 2032 – the terms of which are still unknown, but remain a very important variable in DCG’s scenario.

Filing for bankruptcy protection is undeniably a last resort measure for liquidity-strapped Genesis – but the question on everyone’s mind is why its crypto behemoth parent company DCG hasn’t stepped in to save the day.

DCG, Genesis and the $1.1 billion promissory note: The lack of any kind of cash infusion from DCG over the last two months conveys an obvious reality – DCG doesn’t have what’s required on hand. The firm recently shuttered its $3.5 billion wealth management division HQ and suspended dividends to DCG shareholders in an effort to conserve cash.

DCG is also looking to offload a part of its $500 million venture portfolio and is even considering a full and partial sale of its media company CoinDesk. The issue with the sale of these kinds of illiquid assets, however, is that they will take a considerable amount of time.

Here is where the undisclosed terms of the $1.1 billion promissory note become very interesting. For a while, observers wondered whether the note was structured so that DCG would be forced to pay back its full value as soon as Genesis began liquidation proceedings. If so, DCG would effectively be pulled into bankruptcy as well. However, in his shareholder letter, Silbert said that that promissory note was not callable, which then raises the question of whether it was an “arm’s length” transaction — one structured equivalent to a note between two parties who are not related. This is what the Eastern District of New York prosecutor’s office and the SEC are reportedly investigating. 

In the event that DCG itself needs to file for bankruptcy, it is likely that more systemic risk will echo through the crypto ecosystem. Analysts at Arcane Research believe that such a scenario would force DCG to liquidate some of its most valuable assets, including sizable positions in the Grayscale Bitcoin Trust (GBTC.).