In a significant legal development, Genesis, a crypto lender facing bankruptcy, has secured a court order preventing its parent company, Digital Currency Group (DCG), from selling or reducing its ownership stake until the completion of Chapter 11 bankruptcy proceedings. This strategic move by Genesis is designed to protect crucial tax benefits, contingent upon its continued status within the tax-consolidated group overseen by DCG.

The bankruptcy filing by Genesis in January, amid challenges in the crypto industry, prompted the company to seek approximately $700 million in federal net operating loss carryforwards. These carryforwards play a pivotal role for Genesis, offering the potential to offset federal income tax liability in both present and future years. The anticipated tax savings from these carryforwards are considered essential to bolster Genesis's cash position, serve the interests of all stakeholders, and contribute to the successful reorganization of the company.

The court order, issued on Monday, enforces restrictions on ownership modifications to safeguard specific tax advantages crucial to Genesis. These benefits are contingent on Genesis remaining a part of the tax-consolidated group governed by DCG. The court's ruling prevents any reduction in DCG's stake in Genesis below the 80% threshold, ensuring that Genesis maintains the ownership structure necessary to access tax benefits tied to its operating losses.

The motion highlights that Genesis's net operating loss carryforwards can be traced back to the 2022 collapse of the crypto hedge fund Three Arrows Capital (3AC). The fallout from 3AC's failure had widespread repercussions in the crypto industry, causing substantial losses for various lenders. Genesis, which had extended loans supported by crypto assets to 3AC, faced the liquidation of these assets due to the fund's collapse. The subsequent financial difficulties, triggered by the defaulted loans and failure to meet margin calls from 3AC, affected companies like Genesis and Voyager, leading to their exposure to financial challenges and, ultimately, Genesis's bankruptcy filing in January. The court's decision to restrict the sale or reduction of DCG's ownership stake ensures Genesis's continued eligibility for tax benefits linked to its operating losses.