SEC Sues Crypto Firms Gemini And Genesis For Offering Unregistered Securities To Customers
The U.S. financial regulator has charged crypto exchange Gemini and institutional lender Genesis for issuing and selling unregistered securities. The product in question is Gemini Earn.
The U.S Securities and Exchange Commission (SEC) has charged cryptocurrency service providers Gemini Trust Company LLC and Genesis Global Capital LLC for offering and selling unregistered securities through a crypto lending program called “Gemini Earn” which the duo started together in January 2021.
Gemini Earn has recently been the subject of a legal fight between both corporate partners.
The financial regulator said that Gemini, a crypto exchange founded by billionaire duo Cameron and Tyler Winklevoss, and Genesis, an investment bank under crypto conglomerate Digital Currency Group (DCG), entered into a partnership in December 2020 to release the crypto lending product which allowed Gemini customers to earn yield by lending out their digital assets. Genesis was the main lending partner of Gemini Earn.
In February 2021, Gemini and Genesis began offering the product to retail customers, earning them up to 8% in interest on crypto assets including Bitcoin (BTC) and Ether (ETH). The crypto exchange acted as the agent to facilitate trades between Gemini Earn investors and its partner. The SEC alleged that Gemini charged an agent fee for the service, sometimes deducting over 4% from the funds Genesis returned to Earn users. The company also exercised its discretion in how to use customers’ crypto assets to generate revenue and pay interest to them.
However, in November 2022, after the collapse of FTX crypto exchange where Genesis had $175 million locked in a trading account, the bank said it would not be able to follow through on payments to Gemini due to facing liquidity crunches. The future of the Earn program was in jeopardy after Genesis suspended all withdrawals, blocking customers from withdrawing funds deposited in their lending accounts. It is reported that Genesis Global Capital owes around $900 million to Gemini Earn customers.
After the program shut down last month, Gemini co-founder Cameron Winklevoss wrote an open letter on Twitter accusing Digital Currency Group, the parent company of Genesis, of acting in “bad faith” by defrauding thousands of Earn users and misleading them regarding the company’s financial troubles. Winklevoss even said DCG was not cooperating with Gemini to find a solution to pay back the losses incurred by customers and instead used the funds to finance its subsidiaries. However, Barry Silbert, the CEO of DCG, denied these claims stating that his company is indeed working on ways to pay off Genesis’ creditors.
According to reports, creditors have made claims upwards of $1.8 billion against the crypto lender. Genesis is currently in discussions with its shareholders to file for Chapter 11 bankruptcy protection. On January 5, the crypto investment bank laid off 30% of its workforce to “reduce costs and drive efficiencies in all business lines”. Genesis has been on the verge of insolvency ever since it had to write off a $2.3 billion loan issued to ex-crypto hedge fund Three Arrows Capital (3AC) in June 2022.
On January 8, federal prosecutors with the U.S. Department of Justice’s Eastern District of New York (EDNY) and the SEC launched an investigation into transactions between Genesis Global Capital and Digital Currency Group. Now the SEC has charged both Genesis and Gemini for being partners in Gemini Earn, an activity that constituted the offer and sale of unregistered securities.
“Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law,” said SEC Chairman Gary Gensler in a statement.
In response to allegations, Gemini co-founder Tyler Winklevoss said that he was disappointed in the SEC’s actions since the company and other creditors are working to recover funds from Genesis. He also added that Earn was regulated by New York state and Gemini had been in discussions with the securities regulator for over 17 months regarding the product.
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