The financial watchdog has charged crypto exchange Gemini and institutional lender Genesis for securities violation with relation to Gemini Earn. The product which allowed Gemini customers in the U.S to lend their crypto assets to Genesis in return for interest was shut down after the company faced a liquidity crisis in November.
The U.S Securities and Exchange Commission (SEC) has charged Genesis Global Capital LLC and Gemini Trust Company LLC for the offer and sale of unregistered securities through a crypto asset lending program that raised billions of dollars for the companies from retail investors.
The product in question is Gemini Earn, which was launched by crypto exchange Gemini in partnership with Genesis, a subsidiary of Digital Currency Group (DCG), in February 2021. The Earn program gave Gemini customers and retail investors in the United States the opportunity to loan their crypto assets to institutional lender Genesis in exchange for interest that was promised to be paid out to them by Gemini. The company founded by billionaire entrepreneurs Tyler and Cameron Winklevoss acted as an intermediary and agent to facilitate transactions between Earn customers and Genesis. For the service, Gemini charged an agent fee that was sometimes as high as 4.29% from the funds paid out by the crypto investment bank to Gemini Earn investors.
According to the complaint filed by the financial regulator, Gemini then exercised its power in how to use Earn investors’ crypto assets to generate revenue and pay interest.
However in November 2022, Genesis suspended all transactions on its platform announcing that Earn customers will not be able to withdraw their funds. The crypto investment bank cited lack of liquidity to meet withdrawal requests following extreme volatility in the crypto market as the reason for its actions. At the time, Genesis held $900 million worth of crypto assets from 340,000 Gemini Earn customers, which to this date investors have not been able to withdraw.
Last week, Bloomberg reported that federal prosecutors with the U.S Department of Justice (DOJ) and the SEC were investigating financial transactions between Genesis and its parent company Digital Currency Group with relation to its dealings involving FTX and Gemini. Now the SEC has filed charges against Gemini and Genesis at the U.S District Court for the Southern District of New York for violations of the Securities Act of 1933. The complaint seeks “permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.” The financial watchdog alleges that both companies should have registered the Gemini Earn program as a securities offering.
“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 press statement released by the agency.
Earlier this month Gemini terminated the Earn program and is in the process of recovering customers’ assets from the institutional crypto lender. On January 2, Gemini co-founder Cameron Winklevoss wrote an open letter accusing DCG and its CEO Barry Silbert of engaging in “bad faith stall tactics”. Winklevoss claimed that Gemini had been waiting for over six-weeks to receive a word from Genesis on the repayment of $900 million it owed to Gemini Earn investors.
The letter also alleged that Digital Currency Group borrowed $1.6 billion from Genesis, including funds owed to Gemini, and instead of paying back creditors, the crypto conglomerate used the funds to finance other operations. Barry Silbert responded to the letter on Twitter denying claims that DCG borrowed the said amount from its subsidiary. Apart from a $1.1 billion promissory note that the company has on Genesis, of which $575 million is due this May, DCG is current on all outstanding loans to its sister firm.
Gemini Earn investors have already filed lawsuits against the Winklevoss twins and their company for fraud and securities law violations which the SEC has taken into account in its charges. Meanwhile, Genesis is in talks with its stakeholders to file for Chapter 11 bankruptcy protection and is working with restructuring lawyers to pay back its creditors.
In response to the charges, Tyler Winklevoss tweeted that the SEC’s behaviour was “totally counterproductive”, adding that the Earn program was regulated by New York state and the crypto firm has been in discussions with the SEC about the offering for more than 17 months. The co-founder said that the securities regulator did not notify Gemini before publicly announcing the lawsuit.