The Securities and Exchange Commission on Thursday charged crypto firms Genesis and Gemini with allegedly selling unregistered securities in connection with a high-yield product offered to depositors.
Gemini, a crypto exchange, and Genesis, a cryptocurrency lender, teamed up in February 2021 on a Gemini product called Earn, which promoted returns of up to 8% to clients.
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According to the SEC, Genesis lent Gemini users cryptocurrency and sent a portion of the profits back to Gemini, which then deducted agent fees, sometimes more than 4%, and returned the remaining profits to its users. Genesis should have registered this product as a securities offering, SEC officials said, in a complaint filed in the Southern District of New York.
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“Today’s fee builds on past actions to make it clear to the market and the investing public that cryptocurrency lending platforms and other intermediaries must comply with time-tested securities laws,” SEC Chairman Gary Gensler said in a statement.
Securities and Exchange Commission officials said Gemini’s Earn program, backed by Genesis’ lending activities, meets the SEC’s definition by including both an investment contract and a memorandum. These two features are part of how the SEC evaluates whether or not an offer is a security.
The SEC says the Earn program has made companies billions of dollars in crypto assets. The agency is seeking permanent injunctive relief, removal, and civil penalties against both Genesis and Gemini, and noted that “investigations into other securities law violations and into other entities and persons related to the alleged misconduct are ongoing.”
The two companies have been embroiled in a high-profile battle for more than $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program, which closed this week. Genesis has suspended withdrawals after the FTX failure in November caused a rush for exits across the crypto world, and the company has yet to allow earning customers to withdraw their funds.
“U.S. retail investors who participated in the Gemini Earn program have suffered significant harm,” the SEC’s complaint states. More than 340,000 investors were affected by the freeze.
In the first three months of 2022, Gemini made about $2.7 million in agent fees from Earn, the SEC complained. The agency said Genesis will use Gemini users’ assets for institutional lending or “as collateral for Genesis borrowing”.
Tyler Winklevoss and Cameron Winklevoss (LR), creators of cryptocurrency exchange Gemini Trust Co. On stage at Bitcoin 2021, a cryptocurrency conference held at the Mana Convention Center in Wynwood on June 4, 2021 in Miami, Florida.
Joe Riddle | Getty Images
Genesis’ institutional borrowers include Three Arrows Capital and Sam Bankman-Fried’s Alameda Research, both of which are now bankrupt.
Representatives for Gemini and parent cryptocurrency group Genesis declined to comment.
Gemini, founded in 2015 by bitcoin Advocates Cameron and Tyler Winklevoss, have an extensive exchange business that, although boxed in, can withstand law enforcement action.
In a tweet, Cameron Winklevoss said Gemini is “working hard to get the money back” and called the SEC’s action “completely counterproductive.”
But the future of Genesis is uncertain, as the business is heavily focused on lending cryptocurrency to clients and has already engaged advisors to restructure. The cryptocurrency lender is part of the DCG Group which is controlled by Barry Silbert.
SEC officials said the possibility of bankruptcy of DCG or Genesis had no bearing on deciding whether to pursue an indictment.
It is the latest in a series of recent crypto enforcement actions led by Gensler following the collapse of FTX, Bankman-Fred’s cryptocurrency exchange, late last year. Gensler has come under fire on social media and by lawmakers for the SEC’s failure to impose safeguards on the nascent crypto industry.
Gensler’s Securities and Exchange Commission and Commodity Futures Trading Commission, chaired by Rustin Benham, are the two regulators that oversee crypto activity in the US, and both agencies have filed complaints against Bankman-Fried, but the SEC has recently ramped up the pace and scope of enforcement action.
The Securities and Exchange Commission (SEC) took similar action against now-bankrupt crypto lender BlockFi and settled it last year. earlier this month, Coinbase I settled with regulators in New York State over their historically inadequate KYC protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the Securities and Exchange Commission (SEC) has filed five enforcement actions related to cryptocurrency.
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