Here’s How Genesis and Gemini May Have Violated The Crypto Securities Laws

The U.S. Securities and Exchange Commission (SEC) has filed charges against Genesis Global Capital LLC and Gemini Trust Company LLC for unlawfully offering securities to a large number of investors through their cryptocurrency lending program.

Genesis and Gemini In Trouble With The SEC

According to the SEC, in December 2020, Genesis (a subsidiary of Digital Currency Group) and Gemini entered into an agreement to offer Gemini clients the opportunity to lend their cryptocurrency assets to Genesis in return for interest. 

Starting in February 2021, Genesis and Gemini started providing the Gemini Earn program to individual investors, in which investors would transfer their cryptocurrency assets to Genesis, with Gemini acting as a facilitator for the transaction. Gemini deducted a fee, at times as high as 4.29 percent, from the returns Genesis paid to Gemini Earn investors.

The SEC’s complaint states that the Gemini Earn program is viewed as an offering and sale of securities under relevant laws and it should have been registered with the Commission, therefore Gemini and Genesis broke securities laws by offering and selling cryptocurrency assets through the Gemini Earn program bypassing disclosure regulations established to safeguard investors.

In November 2022, Genesis informed its investors that due to market volatility, they were facing a liquidity crunch, and as a result, investors were unable to withdraw their crypto assets. At the time, the company had around $900 million worth of assets from 340,000 Gemini Earn investors. The SEC also stated that investigations into additional potential violations are ongoing.

SEC Chairman Gary Gensler stated that these charges serve as a reminder that crypto lending platforms and other intermediaries must comply with established securities laws to protect investors and promote trust in markets, he emphasized that compliance is mandatory and not optional.

Gemini Responds To Accusations

According to a statement from Gemini Co-Founder Tyler Winklevoss, the exchange and its founders are disappointed with the SEC’s decision to file charges, as they have been working with other creditors to recover funds for users affected by the shutdown of the exchange’s “Earn” program. They claim that the SEC’s behavior is counterproductive and that the regulator never raised the prospect of an enforcement action until after the Earn program was paused on November 16th.

Gemini states that the Earn program was regulated by the New York Department of Financial Services (NYDFS) and that the company has been in discussions with the SEC about the program for more than 17 months. They also claim that the SEC chose to announce the lawsuit to the press before notifying them and that the regulator is more focused on scoring political points than helping users and creditors.

The Winklevoss brothers have stated that they will defend themselves against the SEC’s accusations, which they consider to be a “manufactured parking ticket.” They also assure that this legal battle will not distract them from their ongoing efforts to recover funds for users and other creditors.

Gemini asserts that the company has always worked hard to comply with all relevant laws and regulations and denies any suggestion of wrongdoing. They also express that they will fight back on this lawsuit and work with the SEC to resolve the issue.

Genesis did not give any immediate response to the request for a statement.