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 rates on deposits.
The SEC said that Genesis, a subsidiary of Digital Currency Group, and Gemini, which is run by Tyler and Cameron Winklevosshad raised billions of dollars in assets from hundreds of thousands of investors without registering the program called Gemini Earn.
In doing so, Genesis and Gemini circumvented “disclosure requirements to protect investors.” Gary Gensler, the SEC chairman, said in a statement. He added that the fees “should make it clear to the market and the investing public that crypto lending platforms and other intermediaries must comply with our well-established securities laws.”
Genesis later froze payouts. About 340,000 Earn customers hold about $900 million worth of crypto assets, the SEC said.
Genesis did not immediately respond to a request for comment. in one tweetTyler Winklevoss said it was “disappointing” that the agency acted while Gemini and other creditors worked together to recover funds.
The SEC’s action against Genesis and Gemini is part of the aftermath of the cryptocurrency markets collapse last year. A fall in the price of cryptocurrencies like Bitcoin last spring created a domino effect, with crypto hedge funds like Three Arrows Capital and other crypto companies filing for bankruptcy. Also in November, FTX, a major cryptocurrency exchange owned by entrepreneur Sam Bankman-Fried, collapsed after the crypto equivalent of a bank run.
In the wake of these mistakes, regulatory scrutiny of crypto companies has tightened.
In its Thursday complaint, the SEC said Genesis had partnered with Gemini on the program that allowed customers to earn high interest on assets they lent to Genesis. Gemini facilitated transactions, the SEC said, pooling client assets and transferring them to Genesis. In return, Gemini deducted a brokerage fee of nearly 4.3 percent from the returns Genesis paid to Gemini Earn investors.
Both companies, along with Genesis’ parent company DCG, have much to gain from this venture, the SEC said. Genesis has loaned DCG about $575 million in crypto — some owned by Gemini Earn investors — according to the complaint.
After FTX imploded in November, Genesis froze withdrawals, abandoning Gemini Earn customers, according to the complaint.
Gemini recently unsuccessfully negotiated with Genesis and DCG for the release of Earn client funds. Negotiations with the Winklevosses have stalled in recent weeks publicly accusing DCG from keeping funds belonging to its clients.
The Winklevosses said DCG and Genesis misrepresented financial information and mischaracterized the value of company assets to make it appear that Genesis was in better health than it was. DCG founder and CEO Barry Silbert denied the allegations in a letter to shareholders this week.
Gemini Earn isn’t the first crypto lending program the SEC has cracked down on. Last year the agency achieved a $100 million settlement with the now-bankrupt crypto 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 lawsuit against Gemini, alleging that the crypto firm misled regulators about its plans for a Bitcoin futures product in 2017. The CFTC said twins made “false or misleading” statements during the regulatory review process for the bitcoin futures product.
Some Earn clients have filed arbitration against Gemini over their frozen assets, while others are lining up for a proposal class action Lawsuit filed in New York federal court last month. The lawsuit, like the SEC’s case, said Earn was an unregistered securities offering and that investors owed more information about the risks associated with the accounts.
Gemini submitted this week an answer on this lawsuit, arguing that it should be directed against Genesis and DCG. Gemini also denied any responsibility for the frozen payouts, arguing that customers are technically making a deal with Genesis and not Gemini.
In an interview this week, Tyler Winklevoss said Gemini believed clients could heal. “There’s a way to close a deal that’s a solution for Earn users,” he said.
Matthew Goldstein contributed reporting.
