Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which offered customers returns of up to 8%.
According to the SEC, Genesis lent out Gemini users’ crypto and sent a portion of the profits back to Gemini, which then deducted an agency fee, sometimes over 4%, and returned the remaining profits to its users. Genesis should have registered that product as a securities offering, SEC officials said in a complaint filed in Manhattan federal court.
“Today’s charges build on previous actions to make clear to the market and investors that crypto-lending platforms and other intermediaries need to comply with our proven securities laws,” SEC Chairman Gary Gensler said in a statement.
Gemini’s Earn program, backed by Genesis’ lending business, met the SEC’s definition by including both an investment contract and a note, SEC officials said. These two features are part of how the SEC assesses whether an offering is a security.
The SEC says the Earn program gave the companies billions of dollars in crypto assets. The agency is seeking permanent injunctions, disgorgement and civil penalties against both Genesis and Gemini, noting that “investigations of other violations of securities laws and of other entities and persons related to the alleged misconduct are ongoing.”
The two companies have been engaged in a high-profile battle over $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program, which ended this week. Genesis halted withdrawals after the failure of FTX in November caused a rush for exits across the crypto universe, and the company has yet to allow Earn customers to withdraw their funds.
“The US retail investors who participated in the Gemini Earn program have suffered substantial harm,” the SEC complaint read. More than 340,000 investors have been affected by the freeze.
During the first three months In 2022, Gemini earned approximately $2.7 million in agency fees from Earn, the SEC complaint alleges. Genesis would use Gemini users’ assets for institutional lending or as “collateral for Genesis’ own borrowing,” the agency said.
During the same period, Genesis paid out $166.2 million in interest to customers, including Gemini, on $169.8 million in interest income, the SEC said.
Tyler Winklevoss and Cameron Winklevoss (LR), creators of the Gemini Trust Co. crypto exchange. on stage at the Bitcoin 2021 Convention, a cryptocurrency conference held at the Mana Convention Center in Wynwood on June 4, 2021 in Miami, Florida.
Joe Raedle | Getty Images
Genesis’ institutional borrowers included Three Arrows Capital and Sam Bankman-Fried’s Alameda Research, both now bankrupt.
Representatives from Gemini and Genesis parent Digital Currency Group declined to comment.
Gemini, which was founded in 2015 by bitcoin proponents Cameron and Tyler Winklevoss, have an extensive exchange business that, even if under siege, could possibly survive an enforcement action.
In a tweet, Tyler Winklevoss said Gemini is “working hard to recover money” and called the SEC’s action “completely counterproductive.”
But Genesis’ future is more uncertain, as the business is heavily focused on lending customer crypto and already has hired restructuring advisors. The crypto lender is part of DCG, the conglomerate controlled by Barry Silbert.
SEC officials said the possibility of a DCG or Genesis bankruptcy had no bearing on whether to file charges.
It’s the latest in a series of recent crypto enforcement actions led by Gensler following the collapse of FTX, Bankman-Fried’s crypto exchange, late last year. Gensler received harsh criticism on social media and by legislators for the SEC’s failure to impose safeguards against the nascent crypto industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulatory agencies overseeing crypto activity in the United States. Both agencies filed complaints against Bankman-Fried, but the SEC has recently increased the pace and scope of enforcement actions.
The SEC filed a similar suit against now-bankrupt crypto lender BlockFi and fixed last year. Earlier this month, Coin base fixed with New York state regulators over historically inadequate know-your-customer protocols.
Since Bankman-Fried was charged with federal fraud as of December, the SEC has filed five crypto-related enforcement actions.
Correction: This story was updated to correct which Gemini founder posted the company’s response to the SEC charges.
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