SEC Charges Both Gemini And DCG’s Genesis For Unregistered Securities Sale With Earn Program

Just like what we said and expected, the battle between Digital Currency Group (DCG) and Gemini will end up in a legal skirmish–we just didn’t anticipate they’d be on the same end of a regulatory gun. The Securities and Exchange Commission (SEC) charged both Gemini and DCG’s subsidiary, Genesis Global Capital, on Thursday for “the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program.”

READ: In A Nutshell: The Digital Currency Group-Gemini Battle

“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” said SEC Chair Gary Gensler. “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.

As we have covered before, the two companies were linked through Earn, a nearly two-year-old Gemini product that advertised returns of up to 8% on consumer deposits. With Earn, Gemini loaned client money to Genesis for placement across various crypto trading desks and borrowers.

As the digital coin markets skyrocketed in 2020 and 2021, Genesis’ capital produced large returns and easily paid Earn users their income, which was particularly appealing at a time when the Federal Reserve’s benchmark rate was near zero.

Fast forward to the tail-end of 2022 after a crippling crash in bitcoin prices and the crypto exchange FTX implosion, the Earn program also fell apart. Genesis announced in November 2022 that it would be halting redemptions and withdrawals on its lending products, which affected Gemini. The company reportedly has $175 million tied up in accounts at the now-bankrupt FTX.

Between Genesis and Gemini, the issue centers on the probability that the former wasn’t fully representing the status of its balance sheet health, giving the latter confidence to continue doing business with Genesis until redemptions were halted.

Gemini co-founder Tyler Winklevoss frowned upon the SEC’s move, saying the regulatory body’s behavior “is totally counterproductive.” The crypto executive reiterated that the Earn program was regulated by the New York State Department of Financial Services and the firm has been “in discussions with the SEC about the Earn program for more than 17 months.”

“Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. Super lame,” Winklevoss tweeted.

Winklevoss added that the Earn program has been shut down “for almost two months,” further asking “what is the point [for] urgency here?” According to a source, Gemini has also terminated the Master Loan Agreement (MLA) with Genesis, effectively stopping the Earn Program and “requires Genesis to return all assets outstanding in the program.”

Of course, Jim Cramer had to jump in with his signature tone deaf “humor”.

As Winklevoss, with his brother Cameron Winklevoss, has maintained, around $900 million of some 340,000 Earn clients is locked with Genesis after it halted its operations.

The complaint requests permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, and civil penalties.

Information for this briefing was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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