Crypto meltdown leaves Winklevoss twins’ Gemini ‘severely tarnished’

The brothers, who turned their erstwhile Facebook millions into crypto billions, were bona fide believers who survived previous downturns. PHOTO: REUTERS

PORTLAND, Oregon – The signs of a full-blown crisis were everywhere. Bitcoin was in free fall, hedge fund Three Arrows was blowing up and the fates of several high-profile crypto lenders were suddenly in doubt.

Yet as panic spread like wildfire last June, the Winklevoss twins, founders of the Gemini crypto exchange, hit the road with their rock band, Mars Junction. With Tyler on vocals and Cameron on guitar, they belted out hits like Don’t Stop Believin’, appearing untroubled as other companies – propped up by easy money, rampant speculation and possibly even fraud – crumpled one after the next.

And why not? The brothers, who turned their erstwhile Facebook millions into crypto billions, were bona fide believers who survived previous downturns. With Gemini, they set out to prove to the world they were the ones investors could trust. Throughout the summer, they stood behind their own lending product, Gemini Earn – which raked in billions in deposits with interest rates up to 8 per cent – even as trouble began to engulf their sole Earn partner, Genesis Global.

Yet two months after Genesis suddenly halted withdrawals in the fallout from the collapse of the FTX exchange, and forced the twins to pause redemptions on Earn accounts, it is harder than ever to believe the 340,000 Gemini customers will recoup the US$900 million (S$1.2 billion) that is still stuck in limbo.

“The Winklevoss brand is severely tarnished,” said Mr Aaron Brown, a crypto investor who writes for Bloomberg Opinion.

On Tuesday, Mr Cameron Winklevoss accused Mr Barry Silbert, whose company owns Genesis, of defrauding Gemini Earn customers and called on his company’s board to remove him. In a separate notice to Earn customers, Gemini said it terminated their loan agreements with Genesis, a move that officially ends the Earn programme and requires Genesis to return all outstanding assets immediately.

‘Publicity stunt’

Digital Currency Group, the parent company that owns Genesis, responded to Tuesday’s letter by calling it “another desperate and unconstructive publicity stunt from Cameron Winklevoss to deflect blame” and that it is “preserving all legal remedies in response to these malicious, false, and defamatory attacks”.

The predicament is a humbling comedown for the 41-year-old crypto entrepreneurs, whose fortunes and reputations rested on the proposition they were the grown-ups who could tame the crypto frontier for the wider world. The episode has raised questions about whether their seemingly unwavering belief in crypto left Gemini, and their customers, unprepared for the worst.

Gemini launched its Earn product in February 2021, offering investors a way to earn interest that far exceeded rates on traditional bank accounts. It did this by letting depositors lend out their crypto to Genesis, which in turn lent those coins out at even higher rates to big crypto traders making leveraged bets.

Limited liability

Crucially, Gemini did not lend out the funds itself, instead acting solely as an agent between Earn customers and Genesis. In August 2021, Gemini announced that Earn accounts surpassed US$3 billion.

While troubles with Gemini Earn spilled into the open in November, inside the company, questions about its risk management arose much earlier.

Since early 2021, employees have urged the twins to find more counterparties to help insulate Gemini and its customers if Genesis ever ran into trouble, according to a person familiar with the matter. That never happened, partly because it proved to be difficult to find other counterparties that met Gemini’s risk and regulatory requirements, said the person.

Before taking the Earn product down from its website, Gemini said accredited borrowers in Earn (that is, Genesis) were “vetted through our risk management framework which reviews our partners’ collateralisation management process”. The company also said it reviewed its partners’ cash flow, balance sheet and financial statements “on a periodic basis”.

By September, two big crypto firms, Celsius and Voyager Digital, had gone bust; BlockFi, a lending outfit the Winklevosses invested in, was careening towards bankruptcy; and the once-booming industry seemed all but dead.

According to a report last week by the Information, the twins decided to formally end the Earn product that month, but it meant negotiating with Genesis and figuring out what likely would have been a time-consuming plan to unwind the accounts and return money to its customers.

In limbo

Publicly, Gemini still marketed Earn and stood behind the product. Then, in November, Sam Bankman-Fried’s FTX empire shocked the crypto world by filing for bankruptcy.

Gemini Earn customers have been left in limbo ever since.

At the outset, the Winklevoss twins counselled patience from Earn customers and pledged to work with Genesis to recoup their money. Now, the situation has devolved into an ugly spat.

What happens next is anyone’s guess. But in the midst of all the finger-pointing and recriminations, this much is clear: There is plenty of blame to go around.

The twins, by suggesting through Gemini’s marketing that Earn accounts were similar to US-insured savings accounts but with much higher rates. Genesis, by overextending itself making risky loans (to the now-bankrupt Three Arrows, for example) with other people’s money. And of course, Earn users themselves, by ignoring the very real possibility they could lose all their money.

For now, Earn customers are left to nurse their grievances on Reddit, Telegram and other online platforms. Some have have brought a class-action lawsuit against Gemini, while many others have sought arbitration.

As for the Winklevoss twins, it appears they have ample resources if they choose to backstop Gemini.

Backed by their early Bitcoin investments, they are currently worth nearly US$6 billion, according to Bloomberg. They own 70 per cent of Gemini, which is still expected to make several hundred million in revenue this year, said a person familiar with the matter.

“The Winkle-bros will need to weigh the tradeoff between how much they care about their future reputation versus their financial liabilities,” said finance professor John Griffin at the University of Texas at Austin. “Much of that may depend on how deep their pockets are outside of crypto.” BLOOMBERG

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