Crypto brokerage Genesis has warned of the risk of bankruptcy amid contagion from the rapid demise of Sam Bankman-Fried’s FTX empire.

The FTX exchange was on the radar of US federal prosecutors in Manhattan long before its collapse as its sprawling business operations disquieted officials.

The fall of Bankman-Fried’s businesses, including trading desk Alameda Research, is contributing to reduced liquidity in crypto markets.

Concerns about Genesis and other ailing crypto outfits, such as BlockFi, unnerved investors. Bitcoin is around the lowest level since November 2020.

Crypto markets continue to be under pressure on concern about the spreading fallout from the FTX crisis. Bitcoin held losses on Tuesday, trading below US$16 000 at around the lowest level since November 2020. A gauge of the top 100 digital assets has declined more than 70% over the past year.

Digital-asset brokerage Genesis is struggling to raise fresh cash for its lending unit, and it’s warning potential investors that it may need to file for bankruptcy if its efforts fail, according to people with knowledge of the matter.

Talks

Genesis, which has faced a liquidity crunch in the wake of crypto exchange FTX’s bankruptcy filing this month, has spent the past several days seeking at least $1-billion in fresh capital, the people said. That included talks over a potential investment from crypto exchange Binance, they said, but funding so far has failed to materialise.

Long before Sam Bankman-Fried’s FTX cryptocurrency empire collapsed this month, it already was on the radar of federal prosecutors in Manhattan.

The US attorney’s office for the southern district of New York, led by Damian Williams, spent several months working on a sweeping examination of cryptocurrency platforms with US and offshore arms and had started poking into FTX’s massive exchange operations, according to people familiar with the investigation.

Democratic senators Dick Durbin, Elizabeth Warren and Tina Smith are urging Fidelity Investments to reconsider allowing 401(k) plan sponsors to offer exposure to bitcoin.

“The recent implosion of FTX, a cryptocurrency exchange, has made it abundantly clear the digital asset industry has serious problems,” the senators said in a letter to Fidelity CEO Abigail Johnson.

Bain & Co was among consulting firms that helped conduct due diligence for Tiger Global Management’s investment in now-defunct crypto exchange FTX, according to people familiar with the matter.

Tiger Global, which pays Bain more than $100-million/year to research private companies, has now written down its $38-million FTX stake to zero, the people said. Sam Bankman-Fried’s oversight of a vast web of FTX-linked entities was one of the risks highlighted during the due diligence process, but the money manager still believed it was a sound investment at the time, one of the people said.

The wipeout of Sam Bankman-Fried’s crypto empire, including its crown jewel FTX exchange and sister trading desk Alameda Research, is helping to reduce liquidity across the crypto market.

The decline has been dubbed the “Alameda gap” by blockchain-data firm Kaiko, named for the trading group at the centre of the storm which is closing its books. Plunges in liquidity usually come during periods of volatility as trading shops pull bids and asks from their order books to better regulate risks, Kaiko noted in a 17 November newsletter.

Read: Vitalik Buterin says FTX saga offers lessons for crypto

US house and senate panels are planning hearings in December about FTX and Bankman-Fried amid renewed calls for congress to strengthen regulation and oversight for the industry.

The house financial services committee is seeking testimony from Bankman-Fried, his trading house Alameda Research, rival exchange Binance, as well as other FTX employees. US and Bahamian authorities are also discussing bringing Bankman-Fried to the US for questioning. — Sunil Jagtiani, (c) 2022 Bloomberg LP