Full text of DCG's letter to shareholders: 19 core issues clarified together

Translator for Odaily Planet Daily | Moni

In response to many recent doubts about DCG, its founder and CEO Barry Silbert published a "Letter to Shareholders" today, responding to key issues one by one. Odaily Planet Daily compiled its full text as follows:

Happy New Year. I've been reflecting on the past year, the state of the crypto industry, and where it's going in the future lately.

First, I'm incredibly proud of the role DCG has played as a trailblazer and builder over the past 10 years. Since the establishment of DCG, we have invested in more than 200 companies, continuously developing and shaping the encryption industry. We have helped establish the first publicly quoted BTC fund, as well as the largest asset management company in the encryption field ( Grayscale ), the most influential The encrypted media platform (Coindesk), the world's No. 1 Bitcoin mining pool, a leading encrypted prime broker, and an encrypted wallet / exchange that dominates emerging markets. DCG also supports a large number of emerging fund companies, encryption protocols and leading blockchain projects.

I have many fond memories of the early days of the crypto industry, trying to help with education, and fighting other entrepreneurs and investors for legitimacy. Whether it's being in a conference with a handful of people, or getting ridiculed on CNBC and getting fired by most legitimate investors, all of this energizes and motivates me.

By contrast, this past year has been the toughest of my life—both personally and professionally. Bad actors and repeated incidents in the crypto space have wreaked havoc on the industry, triggering widespread ripple effects. While DCG, its subsidiaries, and many of its portfolio companies have not been immune to the current turmoil, after spending a decade putting everything into this company and the space, my integrity and good faith have been called into question, and I have been Focus on doing things the right way.

In my last shareholder letter, published last November, I shared the following view: DCG is committed to working towards a better financial system and wants to remain an industry leader. As we enter the new year, we're rooting for a "Lean in" mentality, and we're making meaningful changes for long-term success as a company. In the past few months, we have been aggressively cutting costs in response to current market conditions, including cutting operating expenses, laying off employees, etc., and also made the difficult decision to close HQ, a wealth management subsidiary incubated by DCG in 2020. While we still believe in the HQ concept and its excellent leadership team, the current downturn is not conducive to the short-term sustainability of the business.

Looking ahead to 2023 and beyond, the crypto industry needs to do more hard work to rebuild credibility and reputation. 2023 will be a challenging year for all of us, but I remain optimistic. It is my hope that this letter and accompanying Q&A will explain other developments and address some of the speculation about the DCG - some of which is reasonable, some of which is entirely unfounded and wrong - and helps to clarify our position.

For my colleagues in the trenches, now is the time to collaborate, cheer on each other's success and collectively take the crypto industry to the next level. Let's grow together, respect others, get back to having fun and making a difference. I can assure you that DCG is committed to doing just that, and I have no doubt that DCG will emerge this year as a stronger company than ever.

1. What is the business model structure of DCG?

Founded in 2015, DCG is a holding company providing purchase and investment business services in the digital asset space, some of which are wholly owned in some portfolios, while in most businesses DCG has only a small minority stake. Today, DCG has a portfolio of more than 200 companies in more than 35 countries and has invested in more than 50 cryptocurrency funds and numerous digital currency and blockchain projects.

2. What is the true relationship between DCG and its wholly-owned subsidiary?

Since the inception of DCG, the subsidiary has launched and operated as an independent company with its own management team, financial and risk management protocols, and legal and compliance oversight. Each subsidiary has its own culture, operating structure and incentives. All aspects of the day-to-day business of each subsidiary are guided by their respective leadership teams.

DCG has a team of approximately 50 people who invest in, support portfolio companies and provide strategic direction and general oversight to subsidiaries. Specifically, DCG does not direct any transactions, loans or borrowings for Genesis' business.

3. Are DCG and any of its wholly owned subsidiaries commingling cash?

No. Each DCF wholly-owned subsidiary has its own bank account, securities account, and crypto account, and maintains separate books and records.

4. How does DCG interact with other portfolio companies?

The DCF team maintains a close relationship with the portfolio, providing business leaders with direct strategic and operational advice and access to a wide range of resources, programs and value-added partners. In this way, DCG has fostered one of the most collaborative and vibrant corporate communities in the blockchain and crypto space.

5. Where is the headquarters of DCG?

DCG is an American company headquartered in Stamford, Connecticut.

6. How much debt capital has DCG raised from its non-affiliated companies? When was it recruited?

DCG raised $350 million in external senior secured term debt in November 2021 from a syndicate of lenders led by Eldridge.

7. How much does DCG currently owe Genesis Capital?

Like hundreds of other institutional investors, DCG borrowed money from Genesis Capital, the lending arm of Genesis. However, these loans are always structured on an arm's length basis and priced at prevailing market rates. In addition to the promissory note discussed in Question 14 below, DCG currently owes Genesis Capital:

• $447.5 million

• BTC(approximately $78 million)

These payments are due in May 2023.

DCG borrowed $500 million between January 2022 and May 2022 at an interest rate of 10%-12%.

DCG's investment entities will borrow BTC at a weighted average interest rate of 3.85% during 2021 and 2022, including the amount previously borrowed but repaid to Genesis Capital, with a current loan balance of BTC.

When these loans are issued in early 2022, DCG's equity value is approximately $10 billion, DCG's trailing twelve month EBITDA is over $1 billion, and Genesis Capital's total loan book is $12-15 billion. During this period, the price of Bitcoin was around $30,000-$47,000.

In addition to the BTC loan, DCG's investment entity also borrowed 14,048 BCH tokens (approximately $1.5 million) at the end of 2020, currently paying 9% interest.

DCG has not borrowed money from Genesis Capital since May 2022, has never defaulted on interest, and has all outstanding loans up to date.

Note*: The above figures represent the amount that has been eliminated.

8. How will DCG use the USD loan borrowed from Genesis Capital to earn income?

The amount borrowed by DCG is initially held in a vault as cash to be used as opportunities arise. Ultimately, we settled on repurchasing DCG shares from one of the original venture investors, as well as investing in liquid tokens and public shares.

9. How does the investment subject of DCG use the BTC borrowed from Genesis Capita?

DCG's investment entities hedge their long GBTC positions using BTC borrowed from Genesis Capital to maintain market neutrality on such positions. DCG's purchases of GBTC on the open market are made when GBTC is trading at a significant discount to NAV, and like all other investments, these decisions are based on a risk-weighted assessment of likely returns. Our purchase of GBTC on the open market complies with Section 10b-18 of the US Securities Exchange Act and is transparently disclosed in filings and press releases.

10. What is the relationship between DCG and FTX ?

In July 2021, DCG made a small equity investment of $250,000 in FTX's Series B round as part of our ongoing strategy to invest in exchanges globally - DCG has invested in nearly 24 deals. DCG holds a trading account with FTX, but the trading volume on the platform accounts for less than 1% of all trading volume of DCG.

Barry has no personal or professional relationship with Sam Bankman-Fried. Aside from a conversation in the summer of 2022 and a few emails at the time, Barry does not recall ever meeting, speaking or otherwise communicating privately with him.

11. What is the relationship between DCG and Alameda?

DCG never had a relationship with Alameda. Genesis has a trading and lending relationship with Alameda.

12. Has Sam Bankman-Fried served on the Genesis Board of Directors?

No.

13. What is the relationship between DCG and Three Arrows Capital?

DCG has never had any relationship with Three Arrows Capital. Aside from an introductory call with one of the co-founders in 2020, Barry does not recall ever meeting, speaking or otherwise communicating privately with the head of Three Arrows. DCG has never coordinated with Three Arrows Capital to buy or sell GBTC or any other investment.

Genesis has a transaction and loan relationship with Three Arrows Capital, and Three Arrows Capital defaulted on Genesis' loan. In addition, Three Arrows Capital is an investor in various Grayscale products.

14. Why did DCG take over the bankruptcy claim against Three Arrows Capital, and in return for DCG's $1.1 billion promissory note from Genesis Capital?

Until the summer of 2022, Genesis Capital is the world's premier crypto lending company. When Three Arrows Capital defaulted on loans to Genesis Capital and many other lenders in June 2022, there was palpable fear in the market of contagion and destruction of the entire crypto industry, which was also a consideration in DCG's shift to support Genesis Capital.

Furthermore, DCG firmly believes that once the cryptocurrency market stabilizes, there will continue to be a significant demand for institutional prime brokerage services. Genesis has unparalleled expertise and the best institutional client base in the world, having built the first institutional cryptocurrency trading platform back in 2013 and launching Genesis Capital in 2018. Therefore, DCG believes that Genesis (including the trading desk and the lending desk) is worth protecting.

DCG and its Board of Directors believe that it is in the best interests of Genesis, its lenders and DCG to work to help support Genesis. The mechanism for DCG's financial and legal advisors, based on the accountant's opinion and advice, was for DCG to assume Three Arrows' claims and replace them with Genesis promissory notes as they matured.

The $1.1 billion promissory note, due in 2032, represents DCG's assumption of Three Arrows' obligations arising from Genesis' default in June 2022. DCG agreed to transfer and exchange the $1.1 billion unsecured loan receivable by Genesis from Three Arrows Capital, with the caveat that Three Arrows Capital used DCG promissory notes, the recovery of which is highly uncertain. DCG has not received any cash, cryptocurrency or other form of payment by promissory note. This means that DCG effectively assumes Genesis' loss risk on the Three Arrows Capital loan, but we are under no obligation to do so.

Importantly, the $1.1 billion promissory note is non-callable and does not contain any other similar features of a callable bond. In addition, Genesis assigned its claim against Three Arrows Capital to DCG and, as part of the transaction, agreed that any recovery received by DCG in connection with the liquidation of Three Arrows Capital would be applied directly against the $1.1 billion promissory note.

Notably, in the period following Three Arrows' default, DCG invested approximately $340 million in new equity in the Genesis entity, providing it with additional capital.

15. What role will DCG play in the restructuring of Genesis Capital?

Genesis is an independent and distinct operating subsidiary with its own board of directors and management team. The Genesis Board of Directors established a special committee consisting of two independent directors with decades of financial, legal and restructuring expertise to oversee the restructuring process of Genesis Capital and any other matters involving related parties. Genesis Capital also hired independent external advisors to lead the restructuring process, including Cleary Gottlieb, Moelis and Alvarez & Marsal.

DCG and its independent external advisors, along with firms such as Goodwin Procter, Weil Gotshal and Ducera Partners, have engaged in fruitful engagement with Genesis and its advisors, as well as an interim panel of certain Genesis creditors and its advisors, in relation to the restructuring.

However, due to DCG's outstanding loans and promissory notes owed to Genesis Capital, DCG executives, including members of the Genesis board of directors, have no decision-making authority related to any restructuring of Genesis Capital.

16. Is DCG the subject of a loan investigation in the Eastern District of New York?

DCG did not know and had no reason to believe that the Eastern District of New York investigated DCG.

DCG communicates with regulators on a regular basis as part of our daily business operations. As always, we will remain openly engaged, answering questions and providing any requested information should any regulator or investigator contact us.

17. Is there any relationship between DCG and Terra Luna?

DCG does not buy, sell, short sell or otherwise trade Terra stablecoins and has no relationship with the issuers of these tokens .

DCG purchased approximately 60,000 LUNA tokens in late 2021/early 2022 to assist wholly-owned subsidiary Foundry in creating a staking node. DCG does not buy, sell, short sell or trade Luna Tokens as part of its investment strategy.

18. What is the relationship between DCG and Celsius ?

DCG does not buy, sell, short or otherwise trade Celsius Tokens. DCG has no relationship with Celsius.

19. Does DCG issue its own tokens?

DCG has never issued its own tokens.