SEC Charges Gemini and Genesis for Trading Unregistered Securities
The U.S. Securities and Exchange Commission (SEC) filed a lawsuit on January 12 alleging Gemini Trust Company LLC and Genesis Global Capital for offering Earn products despite being unregistered security.
The securities and investment watchdog targets Gemini Earn, a yield-bearing product that attracted investors in the hundreds of thousands. SEC filings before the Manhattan Federal Court Gemini crypto exchange partnered with Genesis crypto lender to establish a product identified as Earn in February 2021, allowing customers to earn 8% interest.
Earn Program Mirrors Investment Securities
SEC complaint alleges that Gemini loaned the users’ crypto deposits to Genesis Global Capital. The crypto lender would later lend the cryptos and send a portion of the earnings to Gemini. The Winklevoss-led crypto exchange would deduct agency fees hovering around 4%, and the rest of the profits returned to the users.
SEC officials submitted that the design of Gemini’s Earn program backed by Genesis lending services satisfied the regulator’s definition of investment contract and note. The filing emphasized that the two features constitute a critical requirement on how SEC ascertains the offering as security.
In support of the January 12 charges, SEC chairperson Gary Gensler revealed the lawsuit builds upon previous actions implemented to ensure that crypto lending and intermediacy services comply with the time-tested securities laws.
Genesis and Gemini Derived Millions of Earnings
Gensler-led securities watchdog disclosed that the Earn product netted both defendants’ cryptos worth millions of dollars. As such, SEC seeks to enforce permanent injunctive relief, civil penalties and disgorgement. SEC officials disclosed the existence of subsequent investigations on other violations that would include other persons and entities involved in perpetrating the alleged misconduct.
SEC complaint emphasizes that the Gemini Earn product inflicted significant harm to over 340,000 investors when Genesis froze withdrawals. It alleges that the suspension of withdrawals following the sudden FTX collapse denied the Earn customers the right to access the funds. The complaint cites the high-profile battle pitting Gemini against Genesis and DCG over the $900 million of users’ cryptos.
SEC alleges that while Gemini earned $2.7 million in agency fees, Genesis used the cryptos as collateral for borrowing. It observed that Genesis paid $166.2 million in interest to the users, with Gemini earning $169.8 million.
Crypto-Related Enforcement Actions
Gemini’s founders Cameron and Tyler Winklevoss, decried the charges as likely to become counterproductive to its fund recovery efforts. While Genesis’ future is doubtful, SEC indicated that the crypto lender’s bankruptcy and its parent firm DCG would have no bearing on the charges.
SEC restated its devotion to replicate crypto-related enforcement actions brought against bankrupt BlockFi. Early this January, Coinbase confessed to a $100 million settlement with New York regulators over similar violations.
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