The Securities and Exchange Commission on Thursday charged cryptocurrency lender Genesis Global Capital and cryptocurrency exchange Gemini Trust with offering unregistered securities through a program that promised investors high interest on deposits.
The SEC said Genesis, a subsidiary of Digital Currency Group, and Gemini, led by Tyler and Cameron Winklevoss, had raised billions of dollars in assets from hundreds of thousands of investors without registering the program, which was called Gemini Earn.
By doing so, Genesis and Gemini “evaded disclosure requirements designed to protect investors,” SEC chairman Gary Gensler said in a statement. He added that the charges should “make it clear to the market and the investing public that crypto lending platforms and other intermediaries must comply with our time-tested securities laws.”
Genesis later froze recordings. About 340,000 Earn clients have lost about $900 million in crypto assets, the SEC said.
Genesis did not immediately respond to a request for comment. In a tweetTyler Winklevoss said it was “disappointing” that the agency acted as Gemini and other creditors worked together to recover money.
The SEC’s action against Genesis and Gemini is part of the fallout from the meltdown of cryptocurrency markets last year. A crash in the prices of cryptocurrencies like Bitcoin last spring led to a domino effect, with crypto hedge funds like Three Arrows Capital and other crypto companies declared bankruptcy. In November, FTX, a major cryptocurrency exchange run by entrepreneur 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 increased.
In its complaint on Thursday, the SEC said Genesis was working with Gemini on the program that allows customers to earn high interest on assets they have loaned to Genesis. Gemini facilitated the transactions, the SEC said, by pooling and transferring clients’ assets to Genesis. In return, Gemini deducted a brokerage fee of as much as nearly 4.3 percent from the returns Genesis paid to Gemini Earn investors.
Both companies, along with Genesis’ parent company DCG, had a lot to gain from the venture, the SEC said. Genesis loaned approximately $575 million worth of crypto — some belonging to Gemini Earn investors — to DCG, according to the complaint.
After FTX imploded in November, Genesis recordings froze, leaving Gemini Earn customers stranded, according to the complaint.
Gemini recently unsuccessfully negotiated with Genesis and DCG for the release of Earn client assets. Negotiations with the Winklevosses have stalled in recent weeks publicly accuse DCG of garaging to maintain funds belonging to its customers.
The Winklevosses said DCG and Genesis misrepresented financial information and mischaracterized the value of company assets to create the impression that Genesis was in better health than it was. DCG’s founder and CEO, Barry Silbert, disputed the allegations in a letter to shareholders this week.
Gemini Earn is not the first cryptocurrency lending program that the SEC has cracked down on. Last year, the agency reached a $100 million settlement with now-bankrupt cryptocurrency lender BlockFi. In 2021, the agency also blocked crypto exchange Coinbase, which abandoned its plans to launch a yield product.
In June, the Commodity Futures Trading Commission filed a civil suit against Gemini alleging that the crypto company 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 for the bitcoin futures product.
Some Earn customers have filed arbitration cases against Gemini over their frozen assets, while others are lining up for a proposed class action lawsuit, filed last month in New York federal court. The lawsuit, like the SEC case, said Earn was an unregistered securities offering and investors owed more information about the risks associated with the accounts.
This week, Gemini filed a response to that lawsuit, arguing that it should target Genesis and DCG. Gemini also denied any responsibility for the frozen recordings, arguing that customers technically made a deal with Genesis and not Gemini.
In an interview this week, Tyler Winklevoss said Gemini believed clients could be made whole. “There is a way to get a deal done that is a solution for Earn users,” he said.
Matt Goldstein reporting contributed.
