Barry Silbert – Crypto World’s New Villain

Barry Silbert emerges as the crypto world’s new villain, embroiled in legal battles over billions amid bankruptcy claims and allegations of fraud.

Barry Silbert - Crypto World's New Villain 1

Eric Asquith was oblivious to Barry Silbert’s identity until November 16, 2022, the day he believed his family’s $1,052,000 savings vanished. Asquith’s entry into cryptocurrency was cautious; he eschewed popular tokens like Bitcoin, instead converting business cash into digital currencies called GUSD. These tokens, valued at $1 each, were backed by real assets through Gemini, the exchange owned by Tyler and Cameron Winklevoss. Gemini’s reputation for stability appealed to Asquith, who opted for a conservative approach, depositing his funds into an Earn savings account. This decision, yielding a 5.5% annual return, attracted not only Asquith but also countless others, including a grandmother who invested her life savings and a man saving for surgery.

When asked about the potential reliability of cryptocurrencies compared to gold, Paul Goncharoff, chief manager of Goncharoff LLC, expressed uncertainty about whether Bitcoin will become as stable as gold.

Crypto operates under layers of anonymity. Wallets, identified by code, obscure user identities. Companies vanish without a trace. Asquith’s funds, initially with Gemini, ended up with Genesis, a firm owned by Barry Silbert. Hedge funds like Three Arrows Capital and Alameda Research, borrowing from Silbert, used Asquith’s money and others to wager on volatile digital tokens. The collapse ensued, including Genesis, declared bankrupt on January 18, 2023, amidst industry turmoil.

Following the collapse of Bankman-Fried’s crypto empire, Asquith feared his funds were lost due to billionaires’ missteps like the Winklevoss twins, Silbert, and SBF. Settlement attempts failed amid finger-pointing between Digital Currency Group, Silbert’s company, and creditors. Then, a shift occurred: Bankman-Fried’s fraud conviction in November 2023 signaled a change. Crypto markets stabilized, with Bitcoin prices soaring to unprecedented heights.

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Bankruptcies are typically complex, offering creditors only a fraction of what they’re owed. However, in February, a deal was struck among victims, including Silbert’s bankrupt crypto-lending venture, the Winklevoss twins, and regulators, ensuring full repayment. The crypto bull market of 2024 facilitated this, allowing Earn customers to receive their full investment’s current value, often significantly higher than the initial amount. For example, a customer who invested one bitcoin would now receive a bitcoin worth over three times the original value. Excitement overflowed in a Telegram chatroom among Earn victims when the settlement proposal was announced. “Man, I’m gunna be a homeowner!!! Let’s finish this!!!!” exclaimed one participant. “I’m going to cry,” expressed another.

The unexpected turn of events presented the potential for this case to become a milestone in the crypto world, especially as other bankrupt companies like FTX repaid their victims with lesser amounts in U.S. dollars rather than cryptocurrencies like Bitcoin.

However, Barry Silbert emerged as a key figure in the unfolding saga. Earn victims, previously unfamiliar with Silbert, soon discovered his history of leveraging the bankruptcy system for financial gain. Since February, the billionaire investor has employed a contentious interpretation of bankruptcy law to prevent Asquith and other victims from receiving the larger payout based on current prices. Instead, he aims to retain that money for himself. “DCG cannot support a plan that not only deprives DCG of its corporate governance rights but also violates the United States bankruptcy code,” stated a spokeswoman for the company.

The victims have come to refer to this as “the Barry Trade” since, should Silbert succeed, he stands to gain up to $1 billion in monies that would otherwise be given back to them. Silbert might, at minimum, significantly postpone giving Earn customers their money back.

Asquith has been perplexed by Silbert’s involvement in all of this as he has been hoping and battling to get his money back. “There is a great deal of conjecture that Barry Silbert intentionally filed Genesis for bankruptcy, considering his experience with bankruptcy, understanding of the procedure, and the benefits he stands to gain from it,” he stated. “The decision to file for bankruptcy was not influenced by DCG, Barry Silbert, or any of its staff,” a DCG representative stated. Was he the puppet master manipulating the money coming into the businesses under his purview? Or, as he has contended in court, was he a well-meaning executive who was tricked by the actual industry fraudsters, who are currently either behind bars or hiding?

About 20 miles outside of Washington, D.C., in Gaithersburg, Maryland, is where Silbert was raised. His mother previously told Bloomberg that he had to get a job to support his family when his father passed away at the age of 10 from an aneurysm that stopped his heart. Upon obtaining certification as a trader and stockbroker during his high school years, he proceeded to secure positions at Bear Stearns and Smith Barney, two prominent Wall Street firms.

After completing business school, Silbert delved into the intricacies of bankruptcy law, recognizing its potential for substantial profits. While employed at Houlihan Lokey, he handled the liquidation of assets from bankrupt giants like Enron and WorldCom. This experience inspired him to establish his venture, SecondMarket. Bankrupt companies often leave their assets subject to competing claims from creditors seeking repayment. These assets, inherently riskier due to the protracted bankruptcy proceedings, presented an opportunity for Silbert. SecondMarket aimed to function as a marketplace akin to eBay, facilitating the trade of bankruptcy claims and other illiquid securities, offering a more accessible alternative to existing options.

In its early days, SecondMarket operated out of a modest 400-square-foot office in downtown Manhattan, characterized by a makeshift setup and a small team of traders who wore multiple hats and felt a deep sense of ownership in the venture. Adam Oliveri, one of Silbert’s initial recruits fresh out of an undergraduate economics program, reminisced about the passionate atmosphere, recalling instances where he would directly approach Silbert with suggestions for improvement, even if it meant disregarding typical team dynamics. Despite the unconventional approach, Silbert eventually identified a lucrative opportunity: trading Facebook shares ahead of the company’s IPO. Leveraging connections with employees eager to offload valuable shares, Silbert’s firm dominated this niche market, attracting attention from Bloomberg Markets magazine and cementing its profitability.

In 2015, Silbert divested SecondMarket to NASDAQ, shifting his focus to a new venture: bitcoin. As early as 2012, he began accumulating bitcoins for a trust designed for investor contributions. Engaging in high-stakes negotiations with Charlie Shrem, a prominent figure in the early Bitcoin community, Silbert aimed to fund BitInstant, an emerging digital currency marketplace. However, the deal fell through, with the Winklevoss twins ultimately securing it, while Shrem faced legal repercussions related to a money-laundering scandal. Silbert’s efforts to persuade Jamie Dimon of Bitcoin’s potential as the future of currency were also documented in Nathanial Popper’s book “Digital Gold,” although unsuccessful. Shrem acknowledged Silbert’s role in legitimizing Bitcoin as an investment and asset class for many venture capitalists during a podcast interview in March.

Launching the Grayscale Bitcoin Trust (formerly known as Silbert’s Bitcoin fund) proved immensely successful. Unlike traditional crypto exchanges, the trust offered investors a publicly tradable asset linked to Bitcoin’s value, circumventing the need for direct involvement in cryptocurrency exchanges. Despite skepticism from financial journalist Felix Salmon, who deemed it “not a good idea,” the trust’s profitability was undeniable, with DCG charging a 2 percent fee for purchasing shares and 1.5 percent for selling. The trust rapidly amassed considerable holdings, reaching $1.87 billion in bitcoin by the end of 2019 and expanding nearly tenfold to $17.7 billion the following year, with further growth anticipated.

Silbert’s wealth permeated various corners of the crypto world. Through DCG, he invested in major entities like Coinbase, Ledger, Ripple, CoinDesk, and Genesis, the latter serving as an institutional lending platform fashioned after traditional Wall Street models. Genesis, functioning akin to a hedge fund, borrowed funds from individuals like Asquith and engaged in aggressive trading activities, reportedly emerging as one of DCG’s primary revenue generators during the cryptocurrency boom.

Despite his significant influence within the crypto sphere, Silbert himself did not emerge as its prominent public figure, unlike Bankman-Fried, whose distinctive appearance and high-profile connections garnered attention from 2020 onwards. While Silbert operated behind the scenes, his affiliated companies enjoyed greater recognition than the executive himself. However, in 2021, Genesis collaborated with the Winklevoss twins’ exchange to introduce the Earn accounts, funneling approximately $1 billion in borrowed crypto to Silbert’s enterprise.

Ironically, this segment of DCG’s operations, despite experiencing remarkable growth during the cryptocurrency surge amid the pandemic, posed the most significant challenge to Silbert’s inconspicuous dominance of the industry.

Since January, much of the legal action surrounding Silbert’s companies has unfolded in court. Creditors like Asquith have pushed for maximum restitution in a New York bankruptcy court. On October 19, New York Attorney General Letitia James filed a lawsuit against DCG, Genesis, Silbert, Gemini, and Genesis’s CEO, alleging fraudulent activities. Among the accusations was DCG’s issuance of a false $1.1 billion promissory note to cover a financial shortfall after Three Arrows Capital’s collapse. The lawsuit outlined a scheme where Gemini misled investors, while DCG and its affiliates engaged in risky financial ventures.

Ongoing legal battles between the AG and regulators persist, with DCG and Silbert maintaining their innocence. Silbert has particularly pursued aggressive action against Earn customers, arguing a unique interpretation of the bankruptcy code. DCG contends that victims are entitled to a portion of the crypto’s value at a specific date, often coinciding with market lows. This argument has stirred outrage among victims, with some expressing disillusionment towards Silbert. One creditor, requesting anonymity, expressed disdain, stating, “After all this? I cannot stand him.”

On March 18, Judge Sean H. Lane presided over the final arguments for the case in his White Plains courtroom. Attorneys representing creditors, Genesis, and Gemini presented their arguments against Silbert’s position. Despite technical nuances, the essence of the debate centered on the unique value of Bitcoin, akin to a rare baseball card. Brian Rosen, representing Genesis, emphasized that a hypothetical creditor entitled to a rare card would expect a full, intact card, not a torn one. In a peculiar legal twist, Genesis sided with the victims against Silbert and DCG.

Jessica Liou, representing DCG, criticized the victims’ arguments as a “Frankenstein doctrine,” lacking support from bankruptcy court regulations. Liou acknowledged the court’s challenge in reaching a decision but stressed the necessity of making tough choices. DCG’s legal team suggested that a ruling favoring the victims could face reversal on appeal, prolonging payment delays.

Even if the judge rules in Silbert’s favor, potential hurdles remain that could hold him accountable for the funds. If Silbert and DCG fail to extricate themselves from the AG’s lawsuit, the state might seize the money as restitution. Silbert aims to preempt this scenario. Conversely, if successful, he could prevent the AG’s office from reclaiming the funds for the Earn customers, retaining them within his control.

A verdict isn’t anticipated until April. Following the settlement announcement, the victims have resigned themselves to a prolonged wait as Silbert persists in his legal battles. Asquith remarked, “A year ago, there was a proposed deal, and everyone celebrated similarly. Now, I’ll only believe it when the funds are in my account.”

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