The U.S. Securities and Exchange Commission (SEC) has charged crypto firms Genesis and Gemini for allegedly selling unregistered securities concerning a high-yield product offered to depositors, according to a Thursday press release.
It happened that crypto exchange Gemini and crypto lender Genesis got into a collaboration in February 2021. The deal entailed a Gemini product called Earn, which advertised yields to customers as high as 8%.
According to the SEC press release, Genesis loaned crypto belonging to Gemini users, with some profits ploughed back from the loans sent to Gemini. In turn, Gemini would deduct an agent fee, which would often times go higher than 4%, before returning the remaining profit to its customers.
According to a complaint filed by SEC officials at the Manhattan Federal Court, Genesis should have registered that product as a securities offering. In a statement, SEC Chair Gary Gensler said:
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.
Gemini Earn Product Meets SEC Definition of A Security
According to SEC officials, Gemini’s Earn Program satisfies the SEC’s definition of security, a pass further supported by Genesis’s lending activities. This comes as Earn Program qualifies as an investment contract and a note, features used by the SEC to determine whether an offering is a security.
The SEC says the Earn program bagged billions of dollars worth of crypto assets for the two companies, adding that the agency was seeking permanent directive relief, expulsion, and civil penalties against Genesis and Gemini. Further, the SEC highlighted that “Investigations into other securities law violations and other entities and persons relating to the alleged misconduct are ongoing.”
Gemini and Genesis High Profile Battle
Noteworthy, Genesis and Gemini are currently engaging in an executive battle concerning more than $900 million in customer assets, which Gemini had entrusted to Genesis as part of the Earn program, which was recently shuttered.
Genesis suspended withdrawals following the November collapse of crypto exchange FTX, resulting in a bank run across the crypto sphere. The company has yet to allow Earn customers to withdraw their funds. Over 340,000 investors have been affected by the freeze, with an excerpt from the SEC complaint saying:
The U.S. retail investors who participated in the Gemini Earn program have suffered significant harm.
Based on allegations from the SEC complaint, during the first three months of 2022, Gemini made almost $2.7 million in agent fees from Earn. This happened as Genesis would use assets belonging to Gemini users for institutional lending or, in the agency’s words, “collateral for Genesis’ borrowing.”
The agency also said that within the same period, Genesis paid out $166.2 million in interest to clients, including Gemini, on $169.8 million of interest income. Among Genesis’ other institutional borrowers include Three Arrows Capital (3AC) and the hedge fund founded by Sam Bankman-Fried, Alameda Research, which is notably both bankrupt.
Bitcoin proponents, the Winklevoss brothers Cameron and Tyler, established Gemini in 2015, with the company having an extensive exchange business that could easily survive an enforcement action when it was still sound. In a Twitter post by Tyler Winklevoss, the Gemini executive said that his company was “working hard to recover funds,” calling the SEC’s action “totally counterproductive.”
1/ It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.
— Tyler Winklevoss (@tyler) January 12, 2023
Nevertheless, the future of Genesis now stands on the balance as the business is hugely focused on lending out crypto. Genesis has already reached out to restructuring advisers and is part of Barry Silbert’s conglomerate, Digital Currency Group (DCG).
According to the SEC, the possibility of the DCG of Genesis going bankrupt had no effect on determining whether to pursue a charge.
Gemini and Genesis add to the list of enforcement actions
The Gemini-Genesis case is the latest addition to the recent streak of enforcement actions spearheaded by Gary Gensler following the implosion of Bankman-Fried’s crypto empire in 2022. Resultantly, lawmakers and crypto Twitter criticized Gensler, blaming him for not imposing safeguards on the budding crypto sector.
Gensler’s SEC, in collaboration with the Commodity Futures Trading Commission (CFTC) led by Rostin Benham, is the two regulators overseeing crypto activity in the U.S. The two departments file complaints against Bankman-Fried, although since recently, the SEC has expedited enforcement actions in both pace and scope.
The SEC brought the same action against the now-bankrupt crypto lender BlockFi, which was settled in 2022. In early January, Coinbase settled with New York state regulators concerning historically insufficient KYC protocols. Since the indictment of Bankman-Fried on federal fraud charges in December, the Securities and Exchange Commission has filed five crypto-related enforcement actions.
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