February 21, 2024

The U.S. Securities and Exchange Commission on Thursday charged cryptocurrency lender Genesis Global Capital and cryptocurrency exchange Gemini Trust with offering unregistered securities through a scheme that promised investors high interest rates on deposits.

Genesis, a subsidiary of Digital Currency Group, and Gemini, run by Tyler and Cameron Winklevoss, raised billions of dollars in assets from hundreds of thousands of investors without registering a program called Gemini Earn, the SEC said.

In doing so, SEC Chairman Gary Gensler said in a statement that Genesis and Gemini circumvented “disclosure requirements designed to protect investors.” He added that the charges should “show the market and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws.”

The SEC’s actions against Genesis and Gemini are part of last year’s cryptocurrency market meltdown. The collapse in the price of cryptocurrencies such as bitcoin last spring triggered a domino effect, with crypto hedge funds such as Three Arrows Capital and other crypto firms declaring bankruptcy. In November, major cryptocurrency exchange FTX, run by entrepreneur Sam Bankman-Fried, also collapsed after the cryptocurrency equivalent of a bank run.

In the wake of these failures, regulatory scrutiny of crypto firms has intensified.

In Thursday’s complaint, the SEC said Genesis partnered with Gemini on a scheme that allowed customers to earn high interest on assets lent to Genesis. Gemini facilitated the transaction, pooling client assets and transferring them to Genesis, the SEC said. In return, Gemini deducted an agency fee of nearly 4.3% from the returns Genesis paid Gemini Earn investors.

After FTX crashed in November, Genesis froze withdrawals, leaving Gemini Earn customers stranded, according to the complaint. About 340,000 Earn customers lost about $900 million in crypto assets, the SEC said.

Gemini has recently been in unsuccessful talks with Genesis and its parent company, DCG, to release Earn’s client assets. Those talks have stalled in recent weeks, with the Winklevosses publicly accusing DCG of delays in preserving funds belonging to its clients.

Winklevosses said DCG and Genesis misrepresented financial information and misrepresented the value of the company’s assets, giving the impression that Genesis was in better health than it actually was. DCG’s founder and chief executive, Barry Silbert, disputed the allegations in a letter to shareholders this week.

Gemini Earn is not the first crypto lending project to be cracked down by the SEC. Last year, the agency reached a $100 million settlement with now-bankrupt cryptocurrency lender BlockFi. In 2021, the agency also blocked cryptocurrency exchange Coinbase, which dropped plans to launch a yield product.

In June, the CFTC filed a civil lawsuit against Gemini, alleging that the cryptocurrency firm misled regulators in 2017 about its plans for a bitcoin futures product.Commodity Futures Trading Commission Gemini says “Making false or misleading” statements during a regulatory review of bitcoin futures products.

Matthew Goldstein Contribution report.

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