The Securities and Exchange Commission this week filed a civil complaint against crypto lender Genesis Global Capital and crypto exchange Gemini, accusing them of selling unregistered securities through a high-yield financial product called Gemini Earn. Genesis is a subsidiary of Digital Currency Group, founded by Barry Silbert; Gemini is run by twin brothers Tyler and Cameron Winklevoss.
“Through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors,” the SEC said. “Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.”
Crypto exchange Gemini is owed over $900 million from Genesis. Genesis acted as Gemini‘s broker for its crypto lending platform before being caught up in the FTX collapse and pausing withdrawals.
“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,” SEC Chair Gary Gensler said. “Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”
The SEC’s complaint alleges that the Gemini Earn program constitutes an offer and sale of securities under applicable law and should have been registered with the Commission.
According to the SEC, in December 2020, Genesis entered into an agreement with Gemini to offer Gemini customers, including U.S. retail investors, an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest.
Beginning in February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, whereby Gemini Earn investors tendered their crypto assets to Genesis, with Gemini acting as the agent to facilitate the transaction. Gemini deducted an agent fee, sometimes as high as 4.29%, from the returns Genesis paid to Gemini Earn investors. As alleged in the complaint, Genesis then exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.
The complaint further alleges that, in November 2022, Genesis announced that it would not allow its Gemini Earn investors to withdraw their crypto assets because Genesis lacked sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market. Gemini terminated the Gemini Earn program earlier this month. As of today, the Gemini Earn retail investors have still not been able to withdraw their crypto assets.
“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,” the SEC said. “Our investigations in this space are very much active and ongoing and we encourage anyone with information about this matter or other possible securities law violations to come forward, including under our Whistleblower Program if applicable.”
