Gemini and Genesis charged in US over crypto lending programme

Washington – The United States Securities and Exchange Commission (SEC) on Thursday charged cryptocurrency lender Genesis Global Capital and crypto exchange Gemini Trust with offering unregistered securities through a programme that promised investors high interest on deposits.

The SEC said that Genesis, a subsidiary of Digital Currency Group (DCG), and Gemini, which is run by crypto entrepreneur twins Tyler and Cameron Winklevoss, had raised billions of dollars of assets from hundreds of thousands of investors without registering the programme called Gemini Earn.

By doing so, Genesis and Gemini bypassed “disclosure requirements designed to protect investors”, SEC chair Gary Gensler said in a statement. He added that the charges should “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”.

Genesis later froze withdrawals. About 340,000 Earn customers are out about US$900 million (S$1.2 billion) in crypto assets, the SEC said.

The SEC’s action against Genesis and Gemini is part of the fallout of cryptocurrency markets melting down last year. A crash in the prices of cryptocurrencies like Bitcoin last spring led to a domino effect, with crypto hedge funds such as Three Arrows Capital and other crypto companies declaring bankruptcy. In November, FTX, a major cryptocurrency exchange run by Sam Bankman-Fried, also collapsed after the crypto equivalent of a bank run.

In the wake of these failures, regulatory scrutiny of crypto companies has heightened.

In its complaint on Thursday, the SEC said that Genesis partnered with Gemini on the programme, which let customers earn high interest on assets they lent to Genesis. Gemini facilitated the transactions, the SEC said, pooling customer assets and transferring them to Genesis. In return, Gemini deducted an agent fee of as high as nearly 4.3 per cent from the returns that Genesis paid to Gemini Earn investors.

Both companies, along with Genesis’ parent company, DCG, had much to gain from the endeavour, the SEC said. Genesis lent about US$575 million in crypto – some belonging to Gemini Earn investors – to DCG, according to the complaint.

After FTX imploded in November, Genesis froze withdrawals, leaving Gemini Earn customers stranded, according to the complaint.

Gemini has recently been unsuccessfully negotiating with Genesis and DCG for the release of Earn customer assets. The negotiations have come to a standstill in recent weeks, with the Winklevosses publicly accusing DCG of stalling to keep funds that belong to its customers.

The Winklevosses said DCG and Genesis have misrepresented financial information and mischaracterised the value of company assets to give the impression that Genesis was in better health than it was. DCG founder and chief executive Barry Silbert disputed the allegations in a letter to shareholders this week.

DCG raised US$700 million in November 2021 from prominent investors, including Singapore’s GIC.

Gemini Earn is not the first crypto lending programme that the SEC has cracked down on. Last year, the agency reached a US$100 million settlement with now-bankrupt crypto lender BlockFi. In 2021, the agency also blocked crypto exchange Coinbase, which abandoned its plans to start a yield product.

In June, the Commodity Futures Trading Commission (CFTC) filed a civil case against Gemini that claimed the crypto firm misled regulators in 2017 about its plans for a Bitcoin futures product. The CFTC said Gemini “made false or misleading” statements during the regulatory review process.

Some Earn customers have filed arbitration cases against Gemini over their frozen assets, with others lining up for a proposed class action suit, which was filed last month. The lawsuit, like the SEC’s case, said Earn was an unregistered securities offering and that investors were owed more information about the risks associated with the accounts.

This week, Gemini filed an answer to that lawsuit, arguing that it should be aimed at Genesis and DCG. Gemini also disavowed any responsibility for the frozen withdrawals, arguing that customers technically cut a deal with Genesis and not Gemini. NYTIMES