Bitcoin Billionaires Charged with the SEC

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As depicted in the movie “The Social Network,” Cameron and Tyler Winklevoss, who co-founded Facebook and were duped by Mark Zuckerberg, became early adopters of cryptocurrency and “Bitcoin billionaires.” The United States Securities and Exchange Commission has now charged your company (SEC).

Because of their Gemini Earn program, which guaranteed a return to consumers who deposited their cryptocurrency, the SEC on Thursday filed charges of securities violations against the brothers-run cryptocurrency exchange. Also, along with Gemini was commissioned Genesis, its lending partner in the program and a division of Digital Currency Group (DCG).

Following the collapse of cryptocurrency exchange FTX in November, which resulted in a new wave of industry contagion as assets held on FTX were locked up or lost, the allegations came after several weeks of increasingly public conflict between Gemini and the leadership of DCG. Genesis is reportedly responsible for more than $900 million in funds belonging to Gemini clients.

How did this happen? Here’s a look at the meteoric rise of the Winklevoss brothers in the cryptocurrency space and recent decisions that have resulted in a public spat between Gemini and DCG, SEC charges, and what appears to be a sizeable financial gap for Gemini.

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Approximately $65 million in cash and shares of Facebook were awarded to the Winklevoss twins as part of the 2008 settlement related to the founding of the social media giant.

In 2012, the brothers founded Winklevoss Capital, a family business, and began accumulating significant amounts of Bitcoin. According to the Washington Post, the twins owned up to 1% of the market capitalization of the most popular cryptocurrency in November 2013.

They went from storing Bitcoin to managing a funding round for BitInstant, a pioneering Bitcoin exchange whose creator, Charlie Shrem, was eventually arrested on money laundering charges linked to the Silk Road trade. The SEC rejected the twins’ proposal to introduce the first Bitcoin ETF (or exchange-traded fund) in the same year.

The Winklevoss brothers launched Gemini, a cryptocurrency exchange licensed by the state of New York, in 2015. Prior to the anticipated explosion of the NFT market in 2021, the platform developed over time and acquired NFT marketplace Nifty Gateway in 2019. Gemini Space Station, the parent company, had a November 2021 market value of $7.1 billion.

When the price of Bitcoin skyrocketed to nearly $20,000 in 2017, Cameron and Tyler were officially recognized as “Bitcoin Billionaires” for the first time (as detailed in Ben Mezrich’s book of the same name). As of this writing, Forbes pegs each sibling’s net worth at $1.1 billion.

However, with the cryptocurrency sector in disarray over the past few months, Gemini and its creators have encountered new difficulties. While seeking authorization for its Bitcoin futures product in June 2022, the US Commodity Futures Trading Commission accused Gemini of “making materially false or misleading statements.” When the cryptocurrency market crashed, Gemini laid off 10% of its workers.

Genesis vs. Gemini

Gemini’s recent woes were caused by a new wave of unrest in the cryptocurrency market, precipitated by the early November collapse of cryptocurrency exchange FTX and its sister trading firm Alameda Research.

After that, Genesis stated that it would stop allowing customers to withdraw money from its lending arm due to the “FTX shock”, citing “extraordinary market instability” as the reason it was unable to continue business as usual. Gemini stated that it would have to freeze customer funds as a result of Genesis being its partner for its interest-bearing Earn program.

The Financial Times reported in December that Genesis was in possession of consumer assets from the Gemini Earn program totaling nearly $900 million. According to Cameron Winklevoss, the company that owns Genesis, Grayscale Investments and other cryptocurrency businesses, Digital Currency Group, is experiencing liquidity problems. However, founder and CEO Barry Silbert has assured investors that this is not the case.

The secret talks between Gemini and Genesis were opened in early 2023 when Winklevoss wrote an open letter to Silbert. In the letter, he accused Silbert of using “bad faith covert tactics” to avoid resolving the fund dispute, implying deception on the part of the DCG director. Silbert disputed the charges.

On January 10, Cameron Winklevoss demanded Silbert’s resignation and alleged misrepresentation and accounting fraud at DCG, furthering the allegations. In response, the firm referred to Winklevoss’s claims as “yet another desperate and unproductive publicity ploy” by the Gemini founders, who claimed they were “solely responsible for operating Gemini Earn and promoting the program to their clients.”

Gemini then declared that it had formally ended the Earn program, forcing Genesis to return the money it claimed to have in the amount of nearly $900 million. The Gemini and Genesis cooperation had been running the program for almost two years.

The SEC accuses

As of this writing, the matter has yet to be resolved, but the SEC allegations with Gemini Earn present a new challenge for both Gemini and Genesis. According to the agency, the companies solicited hundreds of thousands of users to contribute billions of dollars in cryptocurrency in exchange for selling unregistered securities to customers.

SEC Chairman Gary Gensler stated:

We allege that Genesis and Gemini sold unregistered securities to the public, circumventing disclosure requirements designed to protect investors. Today’s charges build on previous efforts to demonstrate to the investing public and the market that crypto-lending platforms and other intermediaries must comply with our tried-and-true securities regulations.

Tyler Winklevoss responded to the charges by questioning his opportunity, claiming that Gemini had been in talks with the SEC for 17 months and that the program was overseen by the New York Department of Financial Services.

1/ It is disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard to recover the funds. This action does nothing to further our efforts and help Earn users get their assets back. His behavior is totally counterproductive.

—Tyler Winklevoss (@tyler) January 12, 2023

“Despite our continued discussions, the SEC decided to alert the media first instead of us before announcing their complaint.” He tweeted: “Super pathetic. It is unfortunate that they are prioritizing political points instead of helping us advance the interests of Earn’s 340,000 users and other creditors.”

Gemini has always strived to comply with all relevant rules and regulations, he continued. Genesis and DCG have yet to respond to the SEC’s allegations.

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