In a significant development in the cryptocurrency industry, the Digital Currency Group (DCG) has been prohibited from decreasing its ownership in its bankrupt subsidiary, Genesis. This decision, outlined in a court filing on December 18, stems from a ruling by Judge Sean Lane, emphasizing the importance of DCG’s ownership in Genesis for tax benefits under U.S. law.
Court ruling to preserve tax benefits
The ruling by Judge Lane is pivotal in ensuring that Genesis remains part of a tax-consolidated group under Section 1502 of the Tax Code alongside DCG. This legal structure is crucial for the company to benefit from specific tax advantages. According to the court document, DCG is restricted from actions that would alter its relationship with Genesis in a manner that affects their status under the tax-consolidated group. This includes any change that might lead to an “ownership change”, as defined in Section 382 of the Tax Code.
This decision underscores the complex interplay between bankruptcy proceedings and tax law. By maintaining the current ownership structure, Genesis is positioned to capitalize on certain tax benefits, which could be integral in its financial restructuring.
The prohibition on DCG’s ownership reduction comes amidst the ongoing bankruptcy proceedings of Genesis. The crypto lender declared bankruptcy following a tumultuous period in the digital currency market, with its parent company DCG playing a central role in the reorganization efforts. In late November, DCG agreed to settle an outstanding $324.5 million loan to Genesis by April 2024. This settlement is part of a broader strategy to address financial obligations and is expected to reduce litigation costs while providing funds to satisfy creditor claims.
Genesis’s reorganization plan, however, has not been without criticism. Particularly, users of the Gemini Earn program, which was previously associated with Genesis, may receive only 61% of the value of their crypto holdings as of January 19, 2023. This aspect of the plan has raised concerns among stakeholders and reflects the broader challenges facing the cryptocurrency industry.
Genesis and Gemini: A fractured relationship
The backdrop of these developments is the strained relationship between Genesis and Gemini. Once closely linked through the Gemini Earn product, the two companies have found themselves in conflict over the past year. This discord has extended to legal confrontations with U.S. regulatory authorities, further complicating the situation.
The legal challenges Genesis and Gemini face indicate the regulatory scrutiny the cryptocurrency sector is increasingly subjected to. As these entities navigate the complexities of bankruptcy and litigation, the outcomes of their cases could set precedents for the digital currency industry.
The court’s decision to bar DCG from reducing its stake in Genesis during the bankruptcy proceedings is a critical juncture in the saga of the cryptocurrency lender. It affects Genesis’s immediate financial restructuring and has broader implications for the digital currency market. As the industry continues to evolve amidst regulatory challenges and market fluctuations, the fate of companies like Genesis and their affiliates will be closely watched by investors, regulators, and cryptocurrency enthusiasts alike.
