SEC accuses crypto firms of offering unregistered securities

The Securities and Exchange Commission on Thursday accused cryptocurrency lender Genesis Global Capital and cryptocurrency exchange Gemini Trust of offering unregistered securities through a program that promised investors high interest on deposits.

The SEC said Genesis, a subsidiary of Digital Currency Group, and Gemini, which is run by Tyler and Cameron Winklevoss, had raised billions of dollars in assets from hundreds of thousands of investors without registering the program, which s called Gemini Earn.

In doing so, Genesis and Gemini circumvented “disclosure requirements designed to protect investors,” SEC Chairman Gary Gensler said in a statement. He added that the charges should “make it clear to the market and the investing public that crypto lending platforms and other intermediaries must comply with our proven securities laws.”

Genesis then froze withdrawals. Around 340,000 Earn Clients lost around $900 million in crypto assets, the SEC said.

Genesis did not immediately respond to a request for comment. In a TweeterTyler Winklevoss said it was “disappointing” the agency acted as Gemini and other creditors worked together to recover funds.

The SEC’s action against Genesis and Gemini is part of the fallout from the collapse of cryptocurrency markets last year. A crash in the prices of cryptocurrencies like Bitcoin last spring led to a domino effect, with crypto hedge funds such as Three Arrows Capital and other crypto firms declaring bankruptcy. In November, FTX, a major cryptocurrency exchange run by entrepreneur Sam Bankman-Fried, also collapsed after the crypto equivalent of a bank run.

As a result of these failures, regulatory scrutiny of crypto companies has intensified.

In its Thursday complaint, the SEC said Genesis partnered with Gemini on the program that allowed customers to earn high interest on assets they loaned to Genesis. Gemini facilitated the transactions, the SEC said, by consolidating client assets and transferring them to Genesis. In return, Gemini deducted an agent fee of up to nearly 4.3% from the returns Genesis paid out to Gemini Earn investors.

Both companies, as well as Genesis’ parent company, DCG, had a lot to gain from this venture, the SEC said. Genesis loaned around $575 million in crypto — some of which belongs to Gemini Earn investors — to DCG, according to the complaint.

After FTX’s implosion in November, Genesis froze withdrawals, leaving Gemini Earn clients stranded, according to the complaint.

Gemini recently negotiated unsuccessfully with Genesis and DCG for the release of Earn client assets. Negotiations have stalled in recent weeks, with the Winklevosses publicly accusing DCG stall to keep funds that belong to its customers.

The Winklevosses said DCG and Genesis misrepresented financial information and misrepresented the value of company assets to make Genesis appear healthier than it was. DCG founder and chief executive Barry Silbert disputed the allegations in a letter to shareholders this week.

Gemini Earn is not the first crypto lending program the SEC has cracked down on. Last year, the agency reached a $100 million settlement with now bankrupt crypto lender BlockFi. In 2021, the agency also blocked crypto exchange Coinbase, which abandoned plans to launch a yield product.

In June, the Commodity Futures Trading Commission filed a civil suit against Gemini that claimed the crypto company misled regulators in 2017 about its plans for a Bitcoin futures product. The CFTC said Gemini “made false or misleading statements” during the bitcoin futures product’s regulatory review process.

Some Earn clients have filed arbitration suits against Gemini over their frozen assets, with others lining up for a proposed class action lawsuit, which was filed in federal court in New York last month. The lawsuit, like the SEC case, said Earn was an unregistered securities offering and investors needed more information about the risks associated with the accounts.

This week, Gemini filed a response to that lawsuit, arguing that it should target Genesis and DCG. Gemini also disavowed any liability for frozen withdrawals, arguing that customers technically made a deal with Genesis and not Gemini.

In an interview this week, Tyler Winklevoss said Gemini believes customers can be cured. “There is a way to make a deal that is a resolution for Earn users,” he said.

Matthew Goldstein contributed report.