The SEC has announced charges against Gemini Trust Company, LLC and Genesis Global Capital, LLC for their unapproved sale of securities through their Gemini Earn crypto asset lending program. 

According to the regulator's press release, the companies have earned billions of dollars' worth of crypto assets from a number of investors. The SEC is seeking permanent injunctions, disgorgement of profits, interest and civil penalties. 

The SEC has filed a complaint against Gemini Exchange and its parent company, alleging that their Gemini Earn program constituted an unregistered offering and sale of securities. Chairman Gary Gensler remarked that this action builds on prior cases to demonstrate that crypto lending platforms and other intermediaries must comply with the established securities laws.

The filing follows the partnership formed in December 2020 between Genesis and Gemini, owned by Barry Silbert's DCG and the Winklevoss twins, respectively. This collaboration enabled users to loan their digital assets on the exchange in exchange for interest payments.

In February 2021, Genesis and Gemini kicked off the Gemini Earn program for retail investors, resulting in an agent fee deduction from the returns Genesis paid out to investors. A press release stated that, based on claims from the complaint, 'Genesis had discretion over how to use the investors' crypto assets to bring in profits and give interest to Gemini Earn investors'.

However, by November 2022, Genesis prohibited Gemini Earn investors from withdrawing their crypto, stating that this was due to a lack of sufficient funds due to the volatile market. Allegedly, at this time Genesis had $900 million worth of assets from 340,000 Gemini Earn investors.

Despite the fact that Gemini ended their Earn program days ago, retail investors on the platform have still not been able to withdraw their digital assets, as of today, according to the U.S. Securities and Exchange Commission.

The Commission reported that the program, backed by Genesis’ lending, was classified as a security since it included an investment contract and a note, per CNBC. Within the first three months of 2022, Gemini was able to make around $2.7 million in agent fees, while Genesis paid out $166.2 million in interest to companies, including Gemini, on their $169.8 million of interest revenue.

Gemini Answers

Tyler Winklevoss expressed his displeasure with the SEC when they announced their lawsuit against the Earn program in a tweet. He continued by noting that Gemini had already been engaging the SEC with conversations surrounding Earn, yet they "chose to announce their lawsuit to the press before notifying" Gemini. Winklevoss called the SEC's actions "policy points" instead of attempting to help the more than 340,000 Earn users and others who are impacted by the program's changes. In conclusion, he wrote that he looks forward to defending themselves 'against this manufactured parking ticket'.

The SEC officials stated that whether to pursue a charge was independent of the chances of either DCG or Genesis filing for bankruptcy, as reported by CNBC.

What Lies Ahead?

In addition to the aforementioned difficulties, the SEC has stated that investigations are ongoing into other entities and individuals linked to the reported violations of securities law.

Gurbir S. Grewal, the head of the SEC's Division of Enforcement, has emphasized the necessity of platforms that offer securities to retail investors abiding by federal securities regulations in light of the crypto asset lending programs crashing and Genesis suspending their services. Additionally, Grewal confirmed that investigations in this area are still being conducted and any individual who has knowledge of these laws being broken can speak up and employ the Whistleblower Program.

Congress enacted the Securities and Exchange Commission's Whistleblower Program in order to offer compensation to individuals who report possible violations of federal securities laws. As per the program's regulations, these 'eligible whistleblowers' can be awarded a portion (10-30%) of the financial penalties collected from related SEC and other assigned government/law enforcement actions taken as a result of their information.




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