Yesterday the Securities and Exchange Commission (SEC) filed a lawsuit (full text here) against Winklevoss-owned Gemini Trust and DCG-owned Genesis Capital over the Gemini Earn offer. Gemini Earn allowed consumers to deposit cryptocurrencies that were lent to Genesis Capital in return for interest. The product has been withdrawn, but almost $900 million relating to 340,000 accounts is locked with crypto lender Genesis Capital which stopped allowing withdrawals in November 2022 owing to loans extended to bankrupt Alameda.
The lawsuit alleges that both parties were involved in an unregistered securities offering that harmed hundreds of thousands of investors. “Gemini itself repeatedly described Gemini Earn as an investment on its website,” states the lawsuit.
“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,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
Gemini had a crypto lending product since 2018, but initially it only targeted accredited and institutional investors. That changed in February 2021 when the Gemini Earn product was opened to consumers after it entered into an agreement with Genesis Capital.
According to the complaint, Gemini earned an agent fee of between 0.06% and 4.29% depending on the crypto-asset involved, and received $2.7 million for the three months to March 2022.
The client agreements obligated Genesis to return crypto within three days if any investor requested.
Gemini’s Tyler Winklevoss pushes back
Tyler Winklevoss expressed disappointment because the lawsuit doesn’t help Gemini Earn users get their money returned.
He said on Twitter, “As a matter of background, the Earn program was regulated by the @NYDFS and we’ve been in discussions with the SEC about the Earn program for more than 17 months. They never raised the prospect of any enforcement action until AFTER Genesis paused withdrawals on November 16th.”
However, the lawsuit states, “although Gemini is registered with NYSDFS as a New York limited purpose trust company, NYSDFS did not have oversight over Genesis…Any capital reserve requirements applicable to Gemini did not apply to Genesis or to the crypto assets tendered to Genesis through Gemini Earn.”
Spat between Winklevoss twins and Barry Silbert of DCG
Understandably Gemini wants its customers to be repaid. Earlier this week, Cameron Winklevoss published an explosive letter on Twitter making allegations of fraud. Digital Currency Group responded.
Earlier this year, Digital Currency Group (DCG) bailed out Genesis following the collapse of Three Arrows Capital (3AC). DCG issued a $1.1 billion promissory note to fill the 3AC hole. In addition to the promissory note, DCG borrowed $527 million from Genesis Capital before May 2022, which is still outstanding.
However, one of the key issues is that Gemini continued with the Gemini Earn program even after the May crash and Genesis bailout. Another high profile company that was involved with Genesis Capital was Circle. However, it was in a more fortunate position of benefiting from rising interest rates, so it started to downplay the lending product. When the November withdrawal freeze happened, Circle’s clients were only exposed to the tune of $2.6 million, so it chose to cover the cost itself.
