The Securities and Exchange Commission on Thursday accused cryptocurrency companies Genesis and Gemini of selling unregistered securities in connection with a high-yield product offered to depositors.
Gemini, a cryptocurrency exchange, and Genesis, a cryptocurrency issuer, partnered in February 2021 on a Gemini product called Earn, which offers up to 8% returns for customers.
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According to the SEC, Genesis gave Gemini users cryptocurrency and sent a portion of the profits back to Gemini, who then deducted an agent fee, sometimes more than 4%, and returned the remaining profits to their users. SEC officials said in the complaint filed in the Southern District of New York that Genesis should have registered the product as a securities offering.
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“Today’s charges build on previous actions to clarify to the market and investment community that crypto-lending platforms and other intermediaries must comply with our time-tested securities laws,” said SEC Chairman Gary Gensler.
SEC officials said Gemini’s Earnings program, backed by Genesis’ lending activities, responded to the SEC’s definition by including both an investment agreement and a note. These two characteristics are part of the SEC’s evaluation of whether an offering is a security.
The SEC reports that the Win program has earned companies billions of dollars in cryptocurrency. The agency is seeking permanent reprimands, revocations and civil penalties against both Genesis and Gemini, noting that “investigations of other entities and individuals related to securities law violations and alleged violations are ongoing.”
The two firms have been embroiled in a high-profile battle over the $900 million in customer assets that Gemini entrusted to Genesis as part of its Win program, which closed this week. After FTX’s debacle in November, Genesis halted its retreat after sparking a rush for exits in the cryptocurrency world, and the firm has yet to allow Earn customers to withdraw their funds.
“U.S. retail investors who participated in the Gemini Earnings program suffered substantial losses,” the SEC complaint said. More than 340,000 investors were affected by the freeze.
The SEC complaint alleges that in the first three months of 2022, the Twins earned approximately $2.7 million in agent fees from Earn. The agency said Genesis will use the assets of Gemini users as institutional lending or “collateral for Genesis’ own debt.”
Tyler Winklevoss and Cameron Winklevoss (L-R), founders of cryptocurrency exchange Gemini Trust Co., on stage at the Bitcoin 2021 Convention, a cryptocurrency conference held at the Mana Convention Center in Wynwood on June 04, 2021 in Miami, Florida.
Joe Raedle | Getty Images
Genesis’ institutional borrowers include Three Arrows Capital and Sam Bankman-Fried’s Alameda Research, both now bankrupt.
Representatives for Gemini and Genesis parent Digital Currency Group declined to comment.
Gemini, established in 2015 bitcoin attorneys Cameron and Tyler Winklevoss own a sprawling exchange business that, while under siege, could withstand enforcement action.
In a tweet, Cameron Winklevoss said the Twins were “working hard to recover the funds” and called the SEC’s action “totally counterproductive.”
But the future of Genesis is more uncertain as the business focuses on issuing client cryptocurrency and is already bringing in restructuring advisers. DCG is part of a conglomerate run by crypto lender Barry Silbert.
SEC officials said the possibility of DCG or Genesis going bankrupt had no bearing on whether to pursue the charge.
It’s the latest in a series of recent cryptocurrency deals Gensler has led since the collapse of Bankman-Fried’s cryptocurrency, FTX, late last year. Gensler has been criticized on social media and by lawmakers for the SEC’s lack of enforcement of safeguards against the fledgling cryptocurrency industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulatory bodies that oversee cryptocurrency activity in the United States. Both agencies filed complaints against Bankman-Fried, but the SEC has recently increased its pace and scope. enforcement actions.
The SEC took a similar action against now-bankrupt cryptocurrency lender BlockFi and settled it last year. Earlier this month Coinbase settled with New York state regulators over protocols that historically identified inadequate clients.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has opened five cryptocurrency enforcement actions.
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