The Securities and Exchange Commission charged crypto investment firm Genesis Global Capital and crypto exchange Gemini Trust Company on Thursday with illegally selling securities to investors through their joint Gemini Earn crypto lending program.
Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors, the SEC said. In February 2021, Genesis and Gemini began offering Gemini customers the opportunity to loan their crypto assets to Genesis in exchange for interest through its Gemini Earn program.
The agreement between the firms, which was made in December 2020, allowed Gemini Earn investors to tender their crypto assets to Genesis. Acting as a facilitation agent, Gemini then deducted an agent fee from the returns Genesis paid Gemini Earn investors, which at times was as high as 4.29%, according to the SEC complaint.
The crypto world was going gangbusters when the program launched, with Bitcoin on the way up: In February 2021, Bitcoin was worth approximately $47,000. It hit its historical high point above $67,000 nine months later. However, the market fell into a slump last March, and became more volatile following the collapse of crypto exchange FTX in November.
Amid market volatility, Genesis paused withdrawals for Gemini Earn investors because it lacked sufficient liquid funds in November. The Gemini Earn program has since been terminated.
When withdrawals were paused, Genesis held approximately $900 million in assets from 340,000 Gemini Earn investors. Those investors haven’t been able to withdraw their assets.
“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” said SEC Chair Gary Gensler.
“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. Doing so best protects investors,” Gensler said. “It promotes trust in markets. It’s not optional. It’s the law.”
Gemini co-founder and CEO Tyler Winklevoss called the complaint “disappointing” and said the action “does nothing to further our efforts and help Earn users get their assets back.”
“Their behavior is totally counterproductive,” he tweeted Thursday.
Winklevoss said that Gemini Earn was regulated by the New York State Department of Financial Services and that his firm has been in discussions with the SEC for more than 17 months.
“They never raised the prospect of any enforcement action until AFTER Genesis paused withdrawals on November 16th,” he tweeted. “Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. Super lame. It’s unfortunate that they’re optimizing for political points instead of helping us advance the cause of 340,000 Earn users and other creditors.”
The SEC’s complaint was filed in the U.S. District Court for the Southern District of New York and charges Genesis and Gemini with violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint “seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.”
Investigations into other securities law violations are ongoing, the SEC said.
