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The U.S. Securities and Exchange Commission (SEC) has accused crypto companies Genesis and Gemini of selling unregistered securities related to high-yield products offered to savers, according to a press release published Thursday .
Cryptocurrency exchange Gemini and cryptocurrency lender Genesis merged in February 2021. The deal involved a Gemini product called Earn that advertised up to 8% profit for customers.
According to the SEC press release, Genesis borrowed the cryptocurrency held by Gemini users, with a portion of the profits reinvested in loans sent by Gemini. In turn, Gemini takes an agent commission, often in excess of 4%, before returning the remaining profits to its customers.
According to a complaint filed by SEC officials in Manhattan federal court, Genesis was required to register this product as a security. This is stated in a statement by SEC Chairman Gary Gensler.
Today's indictment builds on past actions to demonstrate to the market and investors that cryptocurrency lending platforms and other brokers must comply with time-tested securities laws.
Gemini Earnings products meet the SEC definition of a security.
Gemini's Earn program meets the SEC's definition of a security that is properly collateralized by Genesis' lending business, according to SEC officials. In fact, Earn is an investment contract and a rating that the SEC uses to determine whether an offer is a security or not.
The SEC said the Earn program has generated billions of dollars in crypto assets for both companies, adding that the agency is seeking permanent injunctions, injunctions, and civil sanctions against Genesis and Gemini. In addition, the SEC noted that "violations of other securities laws and alleged misconduct by others and individuals are under investigation."
Loud duel between Gemini and Genesis
Notably, Genesis and Gemini are currently battling over more than $900 million in customer assets that Gemini entrusted to Genesis under the recently closed Earn program.
Genesis suspended withdrawals in November following the collapse of the FTX cryptocurrency exchange, sending crypto banking into a tailspin. The company has yet to allow Earn customers to withdraw their funds. According to an excerpt from the SEC complaint, the freeze affected more than 340,000 investors.
US retail investors participating in the Gemini Earn program suffered significant losses.
The Twins received approximately $2.7 million in agency fees from Earn in the first three months of 2022, according to the SEC complaint. This was because Genesis was using assets owned by Gemini users to secure institutional loans, or, in the agency's words, "collateral" for Genesis loans.
The agency also noted that during the same period, Genesis paid out $166.2 million in benefits to customers, including Gemini, and generated $169.8 million in interest income. Genesis' other institutional lenders are Three Arrows Capital (3AC) and hedge fund Sam Bankman-Fried's Alameda Research, both of which are known to have gone bankrupt.
Bitcoin Backed by The Winklevoss Brothers, Cameron and Tyler, founded Gemini in 2015, a large-scale exchange that could easily avoid lawsuits while remaining healthy. In a tweet by Tyler Winklevoss, Gemini's CEO said his company is "working hard to recover funds" and called the SEC's actions "completely counterproductive."
1/ It's disappointing that @SECGov decided to take action today as Gemini and other lenders work hard to get the funds back. This action does not contribute to our efforts and helps users recover their assets. Their behavior is completely counterproductive.
— Tyler Winklevoss (@tyler) January 12, 2023
However, the future of Genesis now hangs in the balance as the company focuses heavily on cryptocurrency lending. Genesis has already reached out to restructuring advisors and is part of Barry Silbert's conglomerate Digital Currency Group (DCG).
The potential bankruptcy of Genesis DCG did not affect whether an indictment would be filed, according to the SEC.
Gemini and Genesis added to enforcer roster
The Gemini-Genesis case is the latest addition to a series of recent enforcement actions by Gary Gensler following the collapse of the Bankman-Freed cryptocurrency empire in 2022. As a result, lawmakers and crypto twitter have criticized Gensler, accusing him of failing to do so. He. He. Carrying out preventive measures against germination. encryption area.
Gensler's SEC, along with the Commodity Futures Trading Commission (CFTC), chaired by Rustin Benham, are the two regulators that oversee cryptocurrency activity in the United States. Both divisions are filing complaints against Bankman-Fried, although the Securities and Exchange Commission has recently stepped up enforcement action on speed and scale.
The Securities and Exchange Commission (SEC) filed a similar lawsuit against now-bankrupt cryptocurrency lender BlockFi, which went into liquidation in 2022. In early January, Coinbase reached an agreement with New York state regulators about its historically inappropriate KYC protocols. Since Bankman-Fried was charged with federal fraud in December, the SEC has filed five cryptocurrency-related enforcement actions.
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