Genesis and Gemini Facing SEC Charges

Genesis and Gemini Facing SEC Charges

Just last week, the story broke of Genesis being called out by Gemini founder Cameron Winklevoss for owing the exchange $900 million. This money, an open letter to Genesis’ founder said, was tied to the lender’s ongoing ‘Earn’ program. 

Now, barely a week later, the plot has thickened once again as both Genesis and Gemini are facing charges from the Securities and Exchange Commission in the United States. The charges, which were filed on January 12, 2023, accused the two firms of selling unregistered securities in the form of Gemini’s Earn program. 

Details About the Case

This saga began in late 2020 when Genesis and Gemini entered into a partnership to deliver a yield-earning program for users which formally launched in 2021. How this program worked is that users would give their cryptocurrency to Gemini and receive a certain amount of interest in return plus their principal. 

These sorts of programs are not unusual within the crypto industry but the SEC has determined that they constitute a security. And because the program was not duly registered with the SEC, both companies behind it are being charged. 

“Through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors. Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing,” a statement from the SEC says.

Besides the issue of the program’s lack of registration, the statement also notes some interesting behaviour on the part of the companies. For example, while these funds were given to Genesis, Gemini often acted as an agent, taking up to a 4.29% fee from the returns. Then, there was the announcement back in November where Genesis suspended users’ ability to withdraw their fees, citing a lack of liquidity. This is the $900 million from 340,000 users that Gemini’s management had called Genesis out for earlier this month. 

Now, the issue has gone from an intra-community feud to a matter being investigated by regulators. In the statement, the SEC stated that crypto lenders and yield-program managers need to comply with existing securities laws for the benefit of the financial sector and the customers within it.  

The statement also emphasized the need for better regulations in the crypto lending sector. 

“The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws. As we’ve seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. 

The Implications of the Case

Crypto lending, like many aspects of the crypto industry, has been underregulated for a while now but that might be coming to an end. From all indications, the SEC intends to pursue this case to completion and that could set precedents for other industry players.

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