The US Securities and Exchange Commission has sued digital asset-trading group Genesis and Gemini, the crypto exchange founded by the Winklevoss twins, saying its crypto asset-lending programme was not properly registered as a securities offering.
The SEC enforcement action announced on Thursday focuses on the Gemini Earn crypto asset-lending scheme, which as of October offered net interest rates to investors of up to 8.05 per cent, according to the regulator. Starting in February 2021, Gemini allowed its customers to loan their crypto tokens to Genesis in exchange for a generous interest rate.
Gemini facilitated the transaction, taking agent fees as high as 4.29 per cent that totalled approximately $2.7mn in the three months to March 2022, the SEC said. Genesis is a wholly owned subsidiary of Digital Currency Group, a conglomerate that controls crypto media outlet CoinDesk and investment manager Grayscale.
Genesis in November announced the programme’s investors would not be able to withdraw their assets because of insufficient liquidity amid turmoil in the cryptocurrency market. The trading group at the time held about $900mn in assets from 340,000 investors participating in the scheme, the SEC said.
Gemini discontinued the programme earlier this month, but participating retail investors are still unable to withdraw their crypto assets, according to the agency. They “have suffered significant harm”, the SEC added.
“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,” SEC chair Gary Gensler said in a statement. “Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”
Gemini and Genesis, both based in New York, did not immediately respond to requests for comment.
Genesis “did not have any other revenue-generating activities” besides the interest income it collected from lending crypto assets to institutional borrowers, according to the SEC. In the three months to March, Genesis received approximately $169.8mn in such income and paid $166.2mn in interest to investors in programmes including Gemini Earn, the agency said.
The regulator is seeking civil penalties and disgorgement of ill-gotten gains, among other measures. Investigations into other violations as well as other individuals and entities linked to the alleged wrongdoing are ongoing, the SEC said.
Gemini and Genesis have been at odds in recent months since Genesis suspended customer withdrawals. Gemini co-founder Cameron Winklevoss on Tuesday published an open letter calling for the firing of Barry Silbert, chief executive of DCG. Winklevoss and his twin brother, Tyler, founded the Gemini exchange in 2014.
Genesis owes its creditors more than $3bn, the Financial Times revealed on Thursday, forcing DCG to examine selling assets from its large venture portfolio to raise cash.
The action against the two companies marks another step in a crackdown by US authorities on crypto interest-bearing accounts. Crypto lender BlockFi, which is now bankrupt, in February agreed to pay $100mn to settle with the SEC and 32 states over claims of offering unregistered securities. Celsius, another lender, was targeted by several state authorities with similar claims before it filed for bankruptcy in July. The New York state attorney-general sued Celsius founder Alex Mashinsky last week for fraud and securities violations.
A Bulgarian office of crypto lender Nexo was raided by prosecutors earlier on Thursday as part of an investigation into money laundering and other offences.