The Securities and Exchange Commission filed a lawsuit claiming the Gemini Earn Program was an unregistered securities sale days after Gemini accused Genesis of fraud.
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The Securities and Exchange Commission has sued crypto exchange Gemini and crypto lender Genesis, accusing them of selling unregistered securities.
At issue is the Genesis Earn program, which offered Gemini clients up to 8% interest on deposits. The program was already suspended after an insolvent Genesis halted withdrawals on Nov. 16, leaving the $900 million it owed to 340,000 Gemini clients in limbo. Gemini threatened to sue Genesis earlier this week, accusing the company of fraud. Gemini clients have already done so.
"Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors," said SEC chairman Gary Gensler in a statement late Thursday. "Crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It's not optional. It's the law."
Beyond that, the agency suggested that Genesis' collapse may be in part responsible for the program being targeted. According to Gurbir Grewal, director of the SEC's enforcement division:
"The recent collapse of crypto asset lending programs and the suspension of Genesis' program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws. As we've seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions."
In February, the SEC and 32 state securities regulators reached a $100 million settlement with crypto lender BlockFi. It declared bankruptcy on Nov. 28 after the collapse of the FTX exchange left it with more than $1 billion in bad loans.
Infighting's Fallout
Crypto yield programs like Gemini Earn have offered exceptionally high returns to investors who park their crypto with crypto lending firms like Genesis. While Gemini offered as much as 8%, some have offered 20% or more on some cryptocurrencies.
But the risks are just as high. Many of the top crypto lenders went bankrupt in 2022, with Celsius and Voyager Digital having the highest profile. This has been both as a result of reckless lending and the fallout of the collapse of crypto hedge fund Three Arrows Capital earlier in the year.
Gemini and Genesis have been in an escalating battle of words since the beginning of the month — and on Jan. 10, furious Gemini co-founder Cameron Winklevoss terminated the program and accused Barry Silbert, CEO of Genesis parent Digital Currency Group, of fraud. He demanded DCG's board fire Silbert and has threatened to sue Genesis.
Like BlockFi, Genesis became insolvent after a client run sparked by the collapse of Sam Bankman-Fried's FTX exchange. But while its exposure was just $175 million, it had lost more than $1 billion to the 3AC collapse. It withstood that storm after DCG said it had given its division $1.1 billion, "absorbing" the loss.
But in his Jan. 10 open letter to the DCG board, Winklevoss of lying about the bailout, making it appear that Genesis' balance sheet was far stronger than it actually was. In doing so, Winklevoss said it "fraudulently [induced] lenders to continue making loans."
Federal prosecutors are also reported to be investigating DCG-Genesis funding.
Without Silbert's removal, Winklevoss said, "there is no path forward" other than a lawsuit.
As for the SEC, Grewal said the agency's "investigations in this space are very much active and ongoing."
He also made clear that the agency will be bringing more such cases, inviting "anyone with information about this matter or other possible securities law violations to come forward, including under our Whistleblower Program if applicable."
That offers whistleblowers as much as 30% of any fines collected.
