The Securities and Exchange Commission (SEC) has charged Genesis Global Capital and Gemini Trust Company, two cryptocurrency companies, of selling investors a crypto loan product that was an unregistered security.
According to the SEC, Genesis and Gemini used an investment vehicle called Gemini Earn to raise "billions of dollars' worth of crypto assets from hundreds of thousands of investors." Although the program violated federal securities laws by constituting an offering and sale of securities without being registered with the SEC. Digital Currency Group owns Genesis, while Cameron and Tyler Winklevoss, billionaire twins, own Gemini.
The SEC requests civil fines, prejudgment interest, disgorgement of ill-gotten gains, and permanent injunctive relief in its complaint filed in U.S. District Court for the Southern District of New York.
The SEC complaint claims that Genesis and Gemini reached an agreement in December 2020 to establish the Gemini Earn program, which would enable Gemini investors to lend their digital assets to Genesis in exchange for interest payments from Genesis and agent commissions of up to 4.29 percent from Gemini. Gemini Earn funds were to be kept by Genesis, and Genesis would be in charge of generating the revenue required to pay the interest on the loans, according to the SEC.
Due to a lack of liquidity brought on by the market volatility of crypto assets, Genesis declared it would not permit investors in Gemini Earn to withdraw their crypto assets following the fall and bankruptcy of cryptocurrency trading platform FTX in November. At that time, 340,000 Gemini Earn investors owned cryptocurrency assets worth $900 million. According to the SEC, Genesis canceled the Gemini Earn program earlier this month, but investors are still not able to receive their money.
In a news release on Thursday, SEC Chair Gary Gensler stated, "We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. 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. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law."
After fining cryptocurrency business BlockFi $50 million (with additional fines of another $50 million from states) in February for failing to register its crypto lending product, BlockFi Interest Accounts, as a security, the SEC has turned its attention to these products. When Coinbase, a company that trades digital assets, requested approval to start Lend, a cryptocurrency lending product, the regulator sent Coinbase with a Wells Notice, threatening legal action. Coinbase subsequently gave up on the endeavor while lamenting the fact that its rivals were providing comparable goods.
The enforcement actions demonstrate that the SEC views crypto lending products as securities, but they do not resolve the more general regulatory issue of whether cryptocurrencies should be treated as securities or as currencies. Some think that the industry needs stricter regulation regardless of the final decision (the SEC and Gensler claim that the majority of crypto assets are securities).
On an update blog, Gemini has been regularly updating users of Gemini Earn about its legal fight with Genesis. In a string of tweets posted on Thursday, Tyler Winklevoss referred to the SEC's decision as "disappointing."
"This move does not further our goals or assist Earn users in reclaiming their funds in any way. Their actions are wholly ineffective, he remarked.
An inquiry for comment from Genesis was not answered.
By fLEXI tEAM