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SEC Charges Genesis and Gemini, Alleges Genesis Loaned Customer Assets to DCG

Published Jan 13, 2023 05:05AM ET Updated Jan 13, 2023 06:30AM ET
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SEC Charges Genesis and Gemini, Alleges Genesis Loaned Customer Assets to DCG

  • The U.S. Securities and Exchange Commission (SEC) charged Genesis and Gemini for unlawfully offering unregistered securities to hundreds of thousands of worldwide investors.
  • The SEC said that Genesis and Gemini made billions of dollars in profit through their relationship.
  • Genesis would lend Gemini Earn customer assets to institutional investors or use them as collateral for its borrowing.
  • The SEC alleged that Genesis lent $575 million to its parent conglomerate Digital Currency Group (DCG). The lent-out funds included Gemini Earn customer assets and were used by DCG to invest in other companies and repurchase DCG stock.
  • Investigations into Genesis and Gemini are ongoing.

The U.S. Securities and Exchange Commission (SEC) has charged crypto exchange Gemini and crypto lender Genesis for unlawfully selling unregistered securities.

The SEC alleged that Genesis and Gemini offered unregistered securities to hundreds of thousands of investors, including Americans, through Gemini’s Earn program and made billions in profit.

Gemini made massive profits by deducting a service fee, sometimes as high as 4.29%, from the returns paid to its investors. Gemini’s yield program offered an up to 8% yield on customer deposits.

Genesis, in turn, would lend customer assets to institutional borrowers or use them as collateral for borrowing.

According to the SEC, Genesis lent $575 million at one point, which included Gemini customers’ assets, to its parent company Digital Currency Group (DCG). DCG used the money to fund investment opportunities and repurchase DCG stock from non-employee shareholders in secondary transactions.

According to SEC Chairman Gary Gensler, this could’ve been prevented if Gemini had registered its product with the agency.

“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. 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. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law,” said Gensler. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, added that the agency is actively investigating crypto companies.

“Our investigations in this space are very much active and ongoing and we encourage anyone with information about this matter or other possible securities law violations to come forward, including under our Whistleblower Program if applicable,” he said.

Genesis and Gemini’s Troubled Relationship

The SEC charges against Genesis and Gemini come amid the public drama surrounding the two companies.

Genesis and Gemini’s relationship started to break down in late November of last year when Genesis decided to halt withdrawals after the fallout of FTX. Since then, more than 340,000 Gemini Earn investors haven’t been able to retrieve more than $900 million stuck with Genesis.

Then, after a couple of months of silence, Gemini co-founder Cameron Winklevoss published an open letter to DCG CEO Barry Silbert, accusing him of consciously stalling retrieving customer assets from Genesis. He asked Silbert to commit publicly to solving the liquidity issues by January 8.

However, Silbert denied Winklevoss’ allegations and didn’t respond to its deadline ultimatum. A few days later, Winklevoss published another open letter to the board of DCG. He accused Silbert of accounting fraud and asked the board to “immediately” remove him from the company.

DCG responded by saying that Winklevoss’ accusations are “fake.” A day later, Gemini terminated the loan agreement with Genesis and ended its Earn program.

Genesis’ Massive Debt to Creditors

It seems that Genesis’ financial problems are much deeper than previously thought. On the same day the SEC charged the crypto lender, Forbes reported that Genesis owes over $3 billion to its creditors.

That’s a figure much larger than previously reported. Forbes also said that DCG is considering partially liquidating its venture capital portfolio to bail out Genesis. DCG’s portfolio comprises over 200 crypto-related companies, including exchanges, lenders, banks, custodians, and other projects.

DCG’s portfolio is worth at least $500 million. While this comes short of the owed $3 billion, liquidating part of it might help Genesis repay some of its customers and buy more time to raise more liquidity.

On the Flipside

  • The SEC said that investigations into Genesis and Gemini are still ongoing.
  • There have been reports that the U.S. Department of Justice is also investigating the two companies. There has yet to be any public information about the results of the investigation or whether it’s even real.
  • Some are criticizing the SEC for taking action after the harm has already been done.

Why You Should Care

Gemini and Genesis are two big players in the crypto industry. If the SEC can bring securities violation charges against them, they may go after the biggest ones as well. Investors should consider following this story and keep an eye on the exchanges or other service providers they use.

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SEC Charges Genesis and Gemini, Alleges Genesis Loaned Customer Assets to DCG

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