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, run 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.
In doing so, Genesis and Gemini circumvented “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 then froze the withdrawals. About 340,000 Earn customers are spending around $900 million on crypto assets, the SEC said.
Genesis did not immediately respond to a request for comment. in a cheepTyler Winklevoss said it was “disappointing” that the agency acted while Gemini and other creditors worked together to recover the funds.
The SEC’s action against Genesis and Gemini is part of the fallout from the collapse of the cryptocurrency markets last year. A crash in the prices of cryptocurrencies like Bitcoin last spring caused a ripple effect, with cryptocurrency hedge funds like Three Arrows Capital and other cryptocurrency firms filing for bankruptcy. In November, FTX, a major cryptocurrency exchange run by entrepreneur Sam Bankman-Fried, also crashed after the crypto equivalent of a bank run.
In the wake of these failures, regulatory scrutiny of cryptocurrency companies has intensified.
In its complaint Thursday, the SEC said Genesis partnered with Gemini on the program that allows clients to earn high interest on the assets they loan to Genesis. Gemini facilitated the transactions, the SEC said, pooling client assets and transferring them to Genesis. In return, Gemini deducted a broker fee of 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 effort, the SEC said. Genesis lent around $575 million worth of crypto, some belonging to Gemini Earn investors, to DCG, according to the complaint.
After the FTX implosion in November, Genesis froze withdrawals, stranding Gemini Earn clients, according to the complaint.
Recently, Gemini has been unsuccessfully negotiating with Genesis and DCG for the release of Earn client assets. Negotiations have stalled in recent weeks, with the Winklevoss publicly accusing DCG of stagnation to keep the funds that belong to their clients.
The Winklevosses said that DCG and Genesis misrepresented financial information and mischaracterized the value of the company’s assets to give the impression that Genesis was in better health than it was. DCG founder and CEO Barry Silbert disputed the allegations in a letter to shareholders this week.
Gemini Earn is not the first crypto lending program that the SEC has cracked down on. Last year, the agency reached a $100 million deal with BlockFi, the now-bankrupt cryptocurrency lender. In 2021, the agency also blocked cryptocurrency exchange Coinbase, which abandoned its plans to start a performance product.
In June, the Commodity Futures Trading Commission filed a civil case against Gemini claiming 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 for the bitcoin futures product.
Some Earn clients have filed arbitration cases against Gemini over their frozen assets, and others are lining up for a proposal class action lawsuit, which was filed in New York federal court last month. The lawsuit, like the SEC 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 introduced an answer to that demand, arguing that it should be directed at Genesis and DCG. Gemini also denied any responsibility for the frozen withdrawals, arguing that the clients technically made a deal with Genesis and not Gemini.
In an interview this week, Tyler Winklevoss said Gemini believed customers could bounce back. “There is a way to close a deal that is a resolution for Earn users,” he said.
matthew goldstein contributed reporting.
