Viewing cryptocurrency lending services as a problem
The U.S. Securities and Exchange Commission (SEC) announced on the 12th that it has filed a lawsuit against major cryptocurrency exchange Gemini and lender Genesis for violating securities laws.
Alleging that Gemini Earn, a yield service provided by Genesis, constitutes the offering and sale of unregistered securities. The SEC filed a complaint in New York district court, seeking fines and return of unjustified gains.
What is SEC
An abbreviation for “Securities and Exchange Commission,” a US government agency that supervises securities such as stocks and bonds. Its purpose is to ensure fair trading and investor protection, and to prevent insider trading, corporate fraudulent accounting, and market manipulation.
The relationship between the two companies related to Gemini Earn, involving Genesis’ parent company Digital Currency Group (DCG), has attracted a lot of attention recently. Affected by the FTX bankruptcy, Genesis suspended withdrawals and redemptions in November last year. Along with that, Gemini has also suspended the redemption of Gemini Earn.
Relation: Genesis Capital suspends reimbursement and loan origination services
According to the SEC, Gemini and Genesis entered into an agreement in December 2020 to provide yield services to Gemini’s customers. It points out that the target of the provision of services also included individual investors in the United States.
After that, Gemini Earn will be available in February 2021. Gemini Earn was a service that allowed customers to lend cryptocurrencies to Genesis through Gemini and earn interest. Gemini acts as a facilitator for transactions and collects up to 4.29% commission. It is said that Genesis decided how to operate the customer’s virtual currency.
The SEC also points out that at the time of the suspension of withdrawals and redemptions in November, Genesis had assets worth about ¥116 billion ($900 million) entrusted to it by 340,000 Gemini Earn customers. The SEC investigation is still ongoing.
Relation: Genesis and DCG, debt of over 100 billion yen to Gemini = report
In this way, Gemini Earn was expected to collect funds from investors, who are its customers, and earn profits from joint ventures involving Gemini and Genesis. Earning revenue depends on the efforts of Gemini and Genesis. The SEC argued that Gemini Earn’s service constitutes an offering and sale of securities and should have been registered with the SEC in advance.
Relation: What is the Howey test that determines whether a virtual currency is a “securities”?
SEC Chairman Gerry Gensler said:
Gemini and Genesis made public offerings of unregistered securities without making investor protection disclosures.
We have made clear to the market and public investors the need for cryptocurrency lending platforms and intermediaries to comply with long-held securities laws.
Comments from the Gemini side
Gemini co-founder Tyler Winklevoss issued a statement this morning regarding the SEC’s response.
Tyler said Gemini Earn was regulated by the New York State Department of Financial Services (NYDFS). He explained that despite having been in talks with the SEC about Gemini Earn for more than 17 months, the SEC did not mention any potential lawsuits until Genesis suspended withdrawals and other transactions last November.
He argued that Gemini has always endeavored to comply with relevant laws and regulations. He said he regretted that the SEC filed lawsuits instead of protecting investors without prior notice.
He also explained that the lawsuit would not affect his ability to get his assets back.
1/ It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back.
— Tyler Winklevoss (@tyler) January 12, 2023
Redemption of Gemini Earn
Redemption of Gemini Earn has not yet resumed, with Gemini co-founder Cameron Winklevoss leading the charge, calling on Genesis and DCG to respond. On the 10th, Cameron sent a letter to DCG’s board of directors. In it, he also demanded that DCG’s Barry Silbert be removed as CEO in order to move forward with resolving the issue.
— Cameron Winklevoss (@cameron) January 10, 2023
Yesterday it was reported that Genesis owes creditors a total of over ¥388 billion ($3 billion). DCG could sell some assets in its portfolio to secure funding for Genesis.
Relation: Virtual currency giant DCG sells part of assets or subsidiary Genesis has debt of 388 billion yen = report