On Thursday, the SEC accused crypto companies Genesis and Gemini of unlawfully offering unregistered securities through a high-return deposit product. However, in February 2021, Gemini, a cryptocurrency exchange, partnered with Genesis, a crypto lending platform, to launch a product called Earn, which offers customers the opportunity to earn yields of up to 8%.
According to the SEC, Genesis lent crypto to Gemini customers and split a portion of the profits with Gemini. Therefore, it then charged a fee, sometimes over 4%, and returned the remaining profit to its users. Per the Manhattan federal court complaint, SEC officials said that the product should have been registered as a securities offering.
Gary Gensler, SEC chair, Stated:
Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws.
Gemini’s Earn program, which is supported by Genesis’ lending activities, met the SEC’s definition of security. Because it included both an investment contract and a note. These two elements are part of how the SEC evaluates whether an offering is considered a security.
The SEC charges Genesis and Gemini for illegally obtaining billions of dollars in crypto assets through their Earn program and seeks penalties, recovery of profits, and injunctions against them. Additionally, the agency is trying to continue investigating other securities law violations and parties involved in the misconduct.
Genesis & Gemini Offered Unregistered Securities
The Gemini Earn program includes an offer and sale of securities and should have been registered with the agency. SEC Chair Gary Gensler said in a statement:
We claim that Genesis and Gemini sold unregistered securities to the public, circumventing disclosure rules meant to safeguard investors.
The accusations, as per Gensler, build on past efforts to make it plain to the marketplace. The investing public that crypto lending platforms and other intermediaries must comply with our time-tested securities laws.
We @SECGov charged Genesis & Gemini for the unregistered offer & sale of crypto asset securities through Gemini Earn.
Crypto intermediaries need to comply with our securities laws. This protects investors. It promotes trust in markets. It’s not optional. It’s the law.
— Gary Gensler (@GaryGensler) January 12, 2023
Genesis disclosed that it has around $175 million in money stranded on FTX due to the crypto exchange’s liquidity problem On Nov 10, 2022. On the same day, DCG gave Genesis $140 million to “strengthen its balance sheet.”It wasn’t enough, and Genesis suspended withdrawals on November 16 due to “extreme market volatility.”
Cameron Winklevoss, the co-founder of Gemini, has subsequently alleged that Genesis and DCG owe $900 million to Gemini’s clients. Winklevoss stated that more than 340,000 people participated in Gemini’s Earn program, which was formally shut down on January 8.
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As reported by the SEC, Genesis paid out $166.2 million in interest to clients, including Gemini, on $169.8 million in interest income over the same time.
Tyler Winklevoss tweeted that Gemini is “working hard to recover funds” and the SEC’s move is “absolutely unproductive.”
1/ It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.
— Tyler Winklevoss (@tyler) January 12, 2023
As per SEC prosecutors, the possibility of a DCG or Genesis bankruptcy had no bearing on the decision to prosecute a lawsuit.