Full text of the letter from the DCG founder to shareholders: 19 questions addressing everything

Author: Barry Silbert, Founder and CEO of DCG

Compiled by: Moni, Odaily Planet Daily

In response to recent questions regarding DCG, its founder and CEO Barry Silbert published a "Letter to Shareholders" today, addressing key issues one by one. Odaily Planet Daily has compiled the full text as follows:

Happy New Year. I have been reflecting on the past year, the state of the crypto industry, and the direction for the future.

First and foremost, I am incredibly proud of the role DCG has played as a pioneer and builder over the past 10 years. Since DCG was founded, we have invested in over 200 companies, continuously developing and shaping the crypto industry. We helped establish the first publicly traded BTC fund, the largest asset management company in the crypto space (Grayscale), the most influential crypto media platform (Coindesk), the world's largest Bitcoin mining pool, leading crypto brokerage firms, and dominant crypto wallets/exchanges in emerging markets. DCG has also supported numerous emerging fund companies, crypto protocols, and leading blockchain projects.

I have many fond memories of the early days of the crypto industry, working hard to educate and fighting alongside other entrepreneurs and investors for legitimacy. Whether it was attending meetings with a handful of people or being mocked on CNBC and dismissed by most legitimate investors, all of this filled me with strength and motivation.

In contrast, the past year has been the most challenging of my life—both personally and professionally. The bad actors in the crypto space and the recurring events have caused severe damage to the industry, triggering widespread ripple effects. Although DCG, its subsidiaries, and many portfolio companies have not been immune to the current turmoil, my integrity and goodwill have been called into question after spending a decade pouring everything into this company and this field, while I have remained focused on doing things the right way.

In the previous shareholder letter published in November, I shared the following perspective: DCG is committed to working towards building a better financial system and hopes to maintain its industry leadership. With the arrival of the new year, we are rooted in a mindset of "striving for excellence," and we are making meaningful changes to ensure the company's long-term success. In recent months, we have been actively cutting costs to respond to the current market conditions, including reducing operating expenses, layoffs, and making the difficult decision to close HQ, the wealth management subsidiary that DCG incubated in 2020. While we still believe in the HQ concept and its outstanding leadership team, the current downturn is not conducive to the short-term sustainability of that business.

Looking ahead to 2023 and beyond, the crypto industry needs to do more hard work to rebuild its credibility and reputation. For all of us, 2023 will be a challenging year, but I remain optimistic. I hope this letter and the accompanying Q&A can clarify other developments and address some of the speculation about DCG—some of which is reasonable, and some completely unfounded and erroneous—helping to clarify our position.

To my colleagues in the trenches, it is time to collaborate, cheer for each other's success, and collectively elevate the crypto industry to a new level. Let us grow together, respect one another, rediscover the joy, and make a difference. I can assure you that DCG is certainly committed to doing so, and I have no doubt that DCG will be a stronger company this year than ever before.

1. What is the structure of DCG's business model?

Founded in 2015, DCG is a holding company that provides purchasing and investment business services in the digital asset space, with some portfolio companies being wholly owned, while in most businesses, DCG only holds a small minority stake. Today, DCG has a portfolio of over 200 companies across more than 35 countries and has invested in over 50 cryptocurrency funds as well as numerous digital currency and blockchain projects.

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

Since DCG's inception, subsidiaries have been launched and operated as independent companies with their own management teams, financial and risk management protocols, and legal and compliance oversight. Each subsidiary has its own culture, operational structure, and incentive mechanisms. Every aspect of the daily operations of each subsidiary is guided by its respective leadership team.

DCG has a team of about 50 people responsible for investing, supporting portfolio companies, and providing strategic guidance and general oversight to subsidiaries. Specifically, DCG does not provide any trading, lending, or borrowing guidance for Genesis's business.

3. Does DCG or any of its wholly-owned subsidiaries commingle cash?

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

4. How does DCG interact with other portfolio companies?

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

5. Where is DCG headquartered?

DCG is a U.S. company headquartered in Stamford, Connecticut.

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

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

7. How much does DCG currently owe Genesis Capital?

Like hundreds of other institutional investors, DCG borrowed funds from Genesis's lending division, Genesis Capital. However, these loans have always been structured on fair terms and priced at current market rates. Aside from the promissory note discussed in question 14 below, DCG currently owes Genesis Capital:

• $447.5 million

• 4,550 BTC (approximately $78 million)

These amounts are due in May 2023.

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

DCG's investment entity borrowed BTC at a weighted average interest rate of 3.85% during 2021 and 2022, which includes amounts previously borrowed but repaid to Genesis Capital, with the current loan balance being 4,550 BTC.

When these loans were issued in early 2022, DCG's equity value was approximately $10 billion, and DCG's EBITDA over the past twelve months exceeded $1 billion, while the total loan book of Genesis Capital was between $12 billion and $15 billion. During this period, Bitcoin prices ranged approximately between $30,000 and $47,000.

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

Since May 2022, DCG has not borrowed any money from Genesis Capital, has never defaulted on interest, and all outstanding loans are current.

Note*: The above figures represent amounts that have been offset.

8. How does DCG generate returns using the dollar loans borrowed from Genesis Capital?

The amounts borrowed by DCG were initially held as cash in the treasury for use when opportunities arose. Ultimately, we determined to repurchase DCG stock from one of the earliest venture capitalists and to invest in liquid tokens and public equities.

9. How does DCG's investment entity use the BTC borrowed from Genesis Capital?

DCG's investment entity uses the BTC borrowed from Genesis Capital to hedge GBTC long positions to maintain market neutrality on such positions. DCG purchases GBTC on the open market when there is a significant discount to NAV, and like all other investments, these decisions are based on an assessment of risk-weighted potential returns. Our purchases of GBTC on the open market comply with Rule 10b-18 of the U.S. Securities Exchange Act and are 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 funding round as part of our ongoing strategy to invest in exchanges globally—DCG has invested in nearly 24 such transactions. DCG holds a trading account at FTX, but the trading volume on that platform is less than 1% of DCG's total trading volume.

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 that time, Barry does not recall meeting, speaking with, or otherwise privately communicating with him.

11. What is the relationship between DCG and Alameda?

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

12. Did Sam Bankman-Fried ever serve on the board of Genesis?

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 phone call with one of the co-founders in 2020, Barry does not recall meeting, speaking with, or otherwise privately communicating with the heads of Three Arrows Capital. DCG has never coordinated the purchase or sale of GBTC or any other investment with Three Arrows Capital.

Genesis has a trading and lending relationship with Three Arrows Capital, which owes Genesis loans. Additionally, Three Arrows Capital is an investor in various Grayscale products.

14. Why did DCG take over the bankruptcy claims against Three Arrows Capital, and what was the return of the $1.1 billion promissory note received from Genesis Capital?

Until the summer of 2022, Genesis Capital was the world's leading crypto lending company. When Three Arrows Capital defaulted on loans from Genesis Capital and many other lenders in June 2022, there were clear market concerns about contagion and the potential destruction of the entire crypto industry, which was one of the considerations for DCG to support Genesis Capital.

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

DCG and its board believe that efforts to help support Genesis align with the best interests of Genesis, its lenders, and DCG. DCG's financial and legal advisors, based on the advice and recommendations of accountants, mechanismed for DCG to assume the claims against Three Arrows Capital and replace them with the promissory note due from Genesis.

This $1.1 billion promissory note is due in 2032 and represents DCG's assumption of the debt incurred by Three Arrows Capital due to Genesis's default in June 2022. DCG agreed to transfer and exchange the $1.1 billion unsecured loan that Genesis was owed from Three Arrows Capital, but it is important to note that Three Arrows Capital used DCG's promissory note, which has a highly uncertain recovery. DCG has not received any cash, cryptocurrency, or other forms of payment on the promissory note. This means that DCG has effectively assumed the loss risk on Genesis's loans to Three Arrows Capital, but we are under no obligation to do so.

Importantly, this $1.1 billion promissory note is non-redeemable and does not contain any other similar features of redeemable bonds. Additionally, Genesis assigned its claims against Three Arrows Capital to DCG, and as part of the transaction, agreed that any recoveries received by DCG from the liquidation of Three Arrows Capital would be directly applied to pay the $1.1 billion promissory note.

Notably, during the period following Three Arrows Capital's default, DCG invested approximately $340 million in new equity into Genesis entities to provide them with additional capital.

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

As an independent and uniquely operated subsidiary, Genesis has its own board and management team. The Genesis board established a special committee composed 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 engaged independent external advisors to lead the restructuring process, including Cleary Gottlieb, Moelis, and Alvarez & Marsal.

DCG and its independent external advisors, as well as firms like Goodwin Procter, Weil Gotshal, and Ducera Partners, have had productive engagements regarding restructuring matters with Genesis and its advisors, as well as a temporary group composed of certain Genesis creditors and their advisors.

However, due to DCG's outstanding loans and promissory notes owed to Genesis Capital, DCG executives, including members of the Genesis board, do not have decision-making authority related to any restructuring matters involving Genesis Capital.

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

DCG is not aware of and has no reason to believe that the Eastern District of New York Court is investigating DCG.

As part of our regular business operations, DCG regularly communicates with regulators. If any regulatory agency or investigators contact us, we will continue to engage openly, answer questions, and provide any requested information.

17. Does DCG have any relationship with Terra Luna?

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

DCG purchased approximately 60,000 LUNA tokens at the end of 2021/beginning of 2022 to assist its wholly-owned subsidiary Foundry in creating a staking node. DCG does not consider the purchase, sale, shorting, or trading of 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.