SEC accuses crypto firms of offering unregistered securities

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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.

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.

After FTX’s implosion in November, Genesis froze withdrawals, leaving Gemini Earn clients stranded, according to the complaint. Around 340,000 Earn Clients lost around $900 million in crypto assets, the SEC said.

Gemini recently unsuccessfully negotiated with Genesis and its parent company, DCG, for the release of Earn client assets. Those negotiations have stalled in recent weeks, with the Winklevosses publicly accusing DCG of delaying custody of funds belonging to its clients.

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.

Matthew Goldstein contributed reporting.

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