The United States Securities and Exchange Commission (SEC) on Thursday charged cryptocurrency firms Genesis and Gemini for allegedly selling unregistered securities. The charges relate directly to ‘Earn’- a high-yield product offered to depositors that the two firms offered in partnership.
SEC Claims ‘Earn’ is a Securities Offering
In February 2021, Gemini, a cryptocurrency exchange founded in 2015 by Silicon Valley brothers Cameron and Tyler Winkelvoss, and Genesis, a crypto lender, and a subsidiary of Digital Currency Group (DCG), partnered on a Gemini product called Earn, which promised customers yields of up to 8%. According to reports by CNBC, the SEC claims that Genesis loaned Gemini users’ cryptocurrencies and sent a portion of the profits back to Gemini, which then deducted an agent fee, sometimes over 4%, and returned the remaining profits to its users. The SEC’s filing is an attempt to hold the respective companies accountable and may generate damages that could repay investors. In its complaints filed in Manhattan federal court, SEC officials said Genesis should have registered Earn as a securities offering.
We @SECGov charged Genesis & Gemini for the unregistered offer & sale of crypto asset securities through Gemini Earn.
Crypto intermediaries need to comply with our securities laws. This protects investors. It promotes trust in markets. It’s not optional. It’s the law.
— Gary Gensler (@GaryGensler) January 12, 2023
The SEC issued a statement in which chairman Gary Gensler said:
Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws.
The SEC alleges that Gemini’s Earn program, supported by Genesis’ lending activities met the SEC’s definition of security by including both an investment contract and a note. The SEC assesses a product or offering as a security through this two-part definition.
In its filing, the SEC takes aims at Gemini Earn which promised high-interest returns to customers and has brought the same charges against Genesis.
When announcing the charges, Gensler said, “We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors.” He added that registering is:
Not optional. It’s the law.
Gemini and Genesis Netted Billions in Crypto Assets
The SEC maintains that the Eran program netted the companies billions of dollars in crypto assets. In its filing, the regulator is “seeking permanent injunctive relief, disgorgements, and civil penalties against both Genesis and Gemini,” per CNBC. The agency further noted that “investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.”
Gemini and Genesis are Involved in a Massive Battle
The two firms already find themselves in deep waters and are involved in a high-profile battle over $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program. Gemini Earn was forced to halt withdrawals after the collapse of FTX and remains unavailable for users and million are reportedly stuck on Genesis. The SEC complaint reads:
The U.S. retail investors who participated in the Gemini Earn program have suffered significant harm.
More than 340,000 investors are said to have been affected by the freeze.
The SEC further alleges that in the first three months of 2022, Gemini made somewhere in the region of $2.7 million in agent fees off Earn. The agency also said that Genesis would use Gemini users’ assets for institutional lending or as “collateral for Genesis’ own borrowing.
Neither representatives from Gemini nor Genesis’s parent company DCG have commented on the charges.
The prospects do not look promising as Genesis’ institutional borrowers include bankrupt firms Three Arrows Capital, and Sam Bankman-Fried’s Alameda Research.
Gemini, while in a very difficult position, may well survive the enforcement action. Genesis’ future however is more uncertain. Genesis is heavily focused on lending out customer crypto and is part of crypto conglomerate DCG, which is controlled by Barry Silbert. DCG is reportedly under investigation by the Department of Justice and the SEC for matters specifically relating to internal transfers from DCG to Genesis.
Co-founder of Gemini, Cameron Winkelvoss, recently called out Barry Silbert, claiming that the DCG CEO was unfit to run the company.
Tyler Winkelvoss Slams the SEC
In response to the SEC charging Gemini, Tyler Winkelvoss hit back at the regulator calling the charges “totally counterproductive.” In a series of Tweets, Winkelvoss called the allegations “super lame” and a “manufactured parking ticket.”
1/ It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.
— Tyler Winklevoss (@tyler) January 12, 2023
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.