The U.S. Securities and Exchange Commission (SEC) accused cryptocurrency companies Genesis and Gemini on January 12 of allegedly selling unregistered securities related to high-yield products offered to savers.
The cryptocurrency exchange Gemini and the cryptocurrency lender Genesis cooperated in February 2021 to launch a Gemini i product called “Earn”, which claims to provide customers with a rate of return of up to 8%.
According to the SEC, Genesis provides encrypted loans to Gemini users, and gives part of the profits to Gemini, and Gemini then deducts agency fees, sometimes these fees exceed 4%, and returns the remaining profits to users . In a complaint filed in Manhattan federal court, SEC officials said Genesis should have registered the offering as an “offer of securities.”
This incident is also the latest in a series of cryptocurrency enforcement actions launched by SEC Chairman Gary Gensler after the collapse of FTX . He said in a statement:
Today’s charges build on previous actions to demonstrate to the market and investing public that crypto lending platforms and other intermediaries must comply with our time-tested securities regulations .
SEC officials said that Gemini’s Earn product program is supported , which meets the SEC’s definition of being included in investment contracts and notes (Note), which is part of the SEC’s assessment of whether it is a securities offering.
The SEC said that Earn’s product scheme allowed the two companies to earn billions of dollars in encrypted assets. The agency is seeking permanent injunctions, confiscation and civil penalties against Genesis and Gemini, while stating:
Authorities are investigating additional violations of securities laws, as well as other institutional entities and individuals connected to the alleged misconduct .
In fact, the two companies, Gemini and Genesis, are embroiled in a high-profile dispute . Gemini entrusted Genesis with more than $900 million in client assets as part of the Earn program. However, after the collapse of the FTX crypto exchange last year, Genesis suspended Withdrawals, to date Earn clients have not been allowed to withdraw funds.
The SEC’s complaint states: “U.S. retail investors who participated in the Gemini Earn program suffered significant damage.” The assets of more than 340,000 investors were frozen.
The SEC stated that in the first quarter of 2022, Gemini earned about $2.7 million in agency fees from Earn, and Genesis will use the assets of Gemini users as institutional lending or as “collateral collateral when Genesis itself borrows funds.”
Genesis’ institutional lenders included two now-bankrupt businesses, Three Arrows Capital and SBF’s cryptocurrency trading arm, Alameda Research.
Representatives for Gemini and Genesis parent company Digital Currency Group (DCG) declined to comment.
Gemini, founded in 2015 by twin brothers Cameron and Tyler Winklevoss, bitcoin advocates , and its exchange business, while troubled by a number of factors, may still stand up to enforcement action.
Cameron Winklevoss said in a tweet that the company is working hard to recover the funds, describing the SEC’s actions as completely counterproductive.
In contrast, the future of Genesis adds more uncertainty, because the company’s business focus is on lending customers’ cryptocurrency, and it has also hired consultants to reorganize.
The possibility of DCG or Genesis going bankrupt has no bearing on the authorities’ decision to sue, SEC officials said.
