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Share to FacebookShare to TwitterShare to LinkedinBarry Silbert, founder and chief executive officer of Digital Currency Group Inc., speaks during the Skybridge Alternatives (SALT) conference in Las Vegas, Nevada, U.S., on Thursday, May 9, 2019. (Joe Buglewicz/Bloomberg)

© 2019 Bloomberg Finance LP Digital Currency Group CEO Barry Silbert has been accused of fraud by his ex-business partner turned rival, Cameron Winklevoss. The stunning allegations follow Forbes’ estimates last month that Silbert’s fortune had evaporated, and as government investigations into Silbert’s companies ramp up. Barry Silbert, the CEO of troubled crypto empire Digital Currency Group (DCG), defrauded some 340,000 crypto investors using Gemini Earn, according to allegations made by Cameron Winklevoss, CEO of crypto exchange Gemini, in a scathing open letter published to Twitter Tuesday morning.

The allegations come nearly two months after Genesis Global Trading, DCG’s wholly owned lending firm, suspended withdrawals for customers in the wake of FTX’s collapse. Gemini had partnered with Genesis for its “Gemini Earn” product, which offered investors annual interest returns of up to 8%.

Silbert and his companies “defrauded” Gemini customers by “conspir[ing] to make false statements and misrepresentations about the solvency and financial health of Genesis,” alleges Winklevoss. “By lying, they hoped to buy time to dig themselves out of the hole they created.”

In response, a DCG spokesperson said in an emailed statement to Forbes: “This is another desperate and unconstructive publicity stunt from Cameron Winklevoss to deflect blame from himself and Gemini, who are solely responsible for operating Gemini Earn and marketing the program to its customers. We are preserving all legal remedies in response to these malicious, false, and defamatory attacks. DCG will continue to engage in productive dialogue with Genesis and its creditors with the goal of arriving at a solution that works for all parties.”

The US Attorney’s Office for the Eastern District of New York is investigating transactions within the DCG empire and the SEC has also opened an investigation, Bloomberg reported last week. Silbert and his companies have not been charged with any crime. DCG has “no knowledge of or reason to believe that there is any Eastern District of New York investigation,” a spokesperson said. Last month, Forbes wrote down the value of Silbert’s stake in DCG from $3.2 billion to $0. “Forbes estimates the value of DCG’s outstanding liabilities are greater than the fair market value of its assets in the current market environment,” we wrote at the time.

The last few months have been a stunning fall from grace for Silbert, a longtime crypto evangelist who says he first invested in Bitcoin in 2012. Prior to his involvement in digital assets, Silbert was an investment banker and financial entrepreneur. He graduated from the Goizueta Business School of Emory University in 1998, followed by a six-year stint at investment bank Houlihan Lokey, where he specialized in financial restructurings. There, Silbert worked on some of the most prominent bankruptcies of the Dot-Com collapse, including Enron and WorldCom.

In 2004, Silbert founded Restricted Stock Partners, a secondary trading platform for employees of companies with restricted stock in public companies. “It’s the largest asset class without a developed secondary market,” Silbert told the New York Times in a 2005 profile. “It’s not a new or novel concept but the time is right because of the proliferation of hedge funds.”

Silbert rebranded his company to SecondMarket in 2008 as he expanded the trading platform to include private company stock and alternative investments, after an early Facebook employee approached Silbert’s company to ask if they could help him sell his shares. By 2011, SecondMarket had facilitated billions of dollars in private market transactions and had over 75,000 registered users.

As SecondMarket grew, so did Silbert’s reputation as a financial entrepreneur. In 2009, he was named one of Ernst & Young’s Entrepreneurs of the Year, and as Crain’s’ Entrepreneur of the Year. Michael Bloomberg, then mayor of New York City, invited Silbert to join his Council on Technology and Innovation. Silbert was named to Fortune’s “40 Under 40” list. He provided testimony to the U.S. Senate on financial regulations.

One former SecondMarket employee remembered Silbert as “very much a by-the-book kind of guy.” Dealing in unregistered securities, Silbert was “focused on making sure we were in good standing” with regulators.

A second early former employee, who worked at the company for several years, described SecondMarket as “a master class in the Silicon Valley trait of hyping a company prior to actually building it.” SecondMarket representatives were “pitching it as an online marketplace of illiquid assets,” but the company “never moved passed a highly manual process requiring humans to executive every aspect,” says the ex-employee.

As for Silbert’s management style: “Barry as a person was cold and wouldn’t even make eye contact with anyone but the few senior people he interacted with,” the former SecondMarket employee says. “He delegated morale building to others and rarely spoke to people even when it was 20 people in the office.”

Nasdaq bought SecondMarket in 2015 for an undisclosed amount. That same year, Silbert launched Digital Currency Group and styled it as an old-school holding company, but built for the Web3 age. DCG founded and acquired assets including news site CoinDesk, bitcoin public trust Grayscale, bitcoin mining company Foundry, and approximately 200 other digital asset investments and tokens.

“Being part of DCG has been great in the sense that Silbert lets us think long term, in terms of decades, and is not really worried about month to month, quarter to quarter results,” Mike Colyer, CEO and founder of bitcoin miner Foundry, told Forbes last month.

The value of DCG’s portfolio ballooned amid crypto’s bull market run during the pandemic. In November 2021, some Digital Currency Group investors sold around $700 million of their shares at a $10 billion valuation.

“We’re the best proxy for investing in this industry,” Silbert boasted to CNBC at the time. Silbert also compared himself to 19th century oil tycoon John D. Rockefeller. “The model I use as an inspiration is Standard Oil,” he told the Wall Street Journal, comparing DCG’s crypto portfolio to Rockefeller’s oil conglomerate.

Grayscale, an investment trust that holds Bitcoin on behalf of investors, quickly became DCG’s most valuable asset, as institutions and high-net-worth investors clamored for a way to gain exposure to Bitcoin. The publicly traded shares of Grayscale’s Bitcoin Trust (GBTC) offered investors access to Bitcoin’s upside–but without having to actually buy and store the digital currency, which many were prohibited from doing. In turn, Grayscale charged a flat 2% fee, higher than other ETFs and closed-end funds, and restricted investors from making immediate redemptions for the underlying asset. At its peak, GBTC’s underlying Bitcoin assets were worth over $43 billion. Grayscale offers similarly structured products for other crypto assets, including Ethereum.

“In the early days everybody kind of celebrated it,” recalls Mike Belshe, CEO of crypto custodian BitGo. “I think a lot of people were a little bit jealous of Grayscale for having such a lucrative product. It is a bit of a cash cow.” Indeed, Grayscale’s GBTC product generated $471 million of revenue in 2021.

As Grayscale caught on with investors, a so-called “GBTC premium” emerged, in which the price of GBTC shares were trading for a higher price than the underlying Bitcoin held by Grayscale. That presented an arbitrage opportunity for hedge fund investors, including the ambitious Three Arrows Capital. Genesis, DCG’s lending unit, began lending money to Three Arrows, which it plowed back into GBTC shares, thus continuing to prop up the GBTC premium.

This trade between Genesis and Three Arrows Capital “ballooned the AUM of the Grayscale Bitcoin Trust and, as a consequence, the fees earned by its sponsor, Grayscale Investments,” according to Cameorn Winklevoss, who alleges that Three Arrows Capital, “was acting as a mere conduit for Genesis, allowing it to enter into what were effectively swap transactions of bitcoin for GBTC shares with the Grayscale Trust.”

In 2021, the GBTC premium turned into a GBTC discount (wherein GBTC shares began trading for less than the underlying Bitcoin). Yet, Genesis continued to lend to Three Arrows Capital. “This had the desired effect of keeping GBTC shares from being sold into the market,” Winklevoss notes, “but for Genesis, this had the undesired effect of keeping its risk position open and allowing it to grow.”

Meanwhile, the parent company Digital Currency Group began borrowing money from Genesis, its own lending firm, which it plowed back into GBTC, the publicly traded trust of its own subsidiary Grayscale. DCG bought nearly $800 million worth of GBTC shares after the GBTC premium became a discount.

“DCG was making a hedge fund-like trade, buying their own product on leverage,” says Ram Ahluwalia, CEO of crypto investment advisor Lumida Wealth.

When Three Arrows Capital blew up in June 2022, Genesis was left with a roughly $1.2 billion hole on its balance sheet, which it then moved to the books of its parent company, Digital Currency Group, in the form of a promissory note due over 10 years.

“They had a solvency issue at Genesis, which they transformed into a liquidity issue,” says Ahluwalia. “But those losses don’t disappear.”

For another five months after Three Arrows’ collapse, Gemini, the Winklevoss’ exchange, continued to rely on Genesis for its Earn Program, and users could continue to redeem their crypto. But the blowup of FTX tipped the scales, causing Genesis to pause all redemptions.

Following FTX’s collapse, Genesis was reportedly seeking a $1 billion cash infusion, but there were no takers as investors ran for the hills. A few days ago, DCG wound down its HQ wealth management business, and Genesis laid off 30% of its staff.

This story was updated to provide comment from DCG on Bloomberg’s report about a New York investigation.

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