The Block: SEC charges Gemini and Genesis with unregistered securities offering

The Securities and Exchange Commission charged Genesis Global Capital LLC and Gemini Trust Company LLC for the unregistered offer and sale of securities to retail investors through a Gemini crypto lending program.

The program has been the subject of a public fight between the two erstwhile corporate partners.

The U.S. regulator said Genesis, which is part of Digital Currency Group, entered into an agreement in December 2020 with Cameron Winklevoss-led Gemini to offer Gemini customers an opportunity to loan their crypto to Genesis in exchange for Genesis’ promise to pay interest.

In February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, whereby Gemini Earn investors tendered their crypto to Genesis, with Gemini acting as the agent to facilitate the transaction, the SEC alleged. Gemini also deducted an agent fee, sometimes as high as 4.29%, from the returns Genesis paid to Gemini Earn investors. As alleged in the complaint, Genesis then exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.

In November 2022, Genesis said it would not allow its Gemini Earn investors to withdraw their crypto because Genesis lacked sufficient liquid assets to meet withdrawal requests. At that time, Genesis held about $900 million in investor assets. Gemini ended the Gemini Earn program earlier this month. Retail investors in Gemini Earn have not be able to withdraw their crypto, the SEC said.

When the Gemini Earn program shut down, Gemini President Cameron Winklevoss blasted Genesis parent company Digital Currency Group, accusing Gemini’s former lending partner of defrauding thousands of Earn users and misleading them regarding DCG’s solvency. Winklevoss also called for the ouster of DCG CEO Barry Silbert . Silbert denied that funds were commingled among DCG subsidiaries as Winklevoss claimed.

An SEC official said Genesis and Gemini were partners engaged in activity that constituted the offer and sale of securities without registering. Apart from the fact that Genesis was the issuer, both are liable, the official said.

“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,” said SEC Chair Gary Gensler in a statement. “Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”

Tyler Winklevoss, co-founder of Gemini, said he was disappointed in the SEC’s action since Gemini and other creditors are working to recover funds.

“This action does nothing to further our efforts and help Earn users get their assets back,” Tyler Winklevoss tweeted. “Their behavior is totally counterproductive.” He added that the Earn program was regulated by New York state and had been in discussions with the SEC about the Earn program for more than 17 months.

“Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. Super lame,” Tyler Winklevoss said.

DCG declined to comment on this story.

Updated with Tyler Winklevoss' tweets and DCG's declining to comment.

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