SEC goes after Gemini and Genesis amid ugly battle to retrieve customer funds

“The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws. As we’ve seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions.”

Gemini’s ongoing battle to retrieve customer funds from Genesis, the crypto lender subsidiary of Digital Currency Group, is not going well, but to make things worse the Securities and Exchange Commission has charged both firms for “the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program”.

The US regulator states that the “unregistered offering” allowed both firms to raise billions of dollars worth of crypto assets from hundreds of thousands of investors.

Gemini’s fee as high as 4.29%. Genesis would generate revenue at its discretion

Gemini Earn began in February 2021. Gemini investors tendered their crypto assets to Genesis, with Gemini acting as the agent to facilitate the transaction and deducting an agent fee, sometimes as high as 4.29 percent.

According to the SEC, Genesis then exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.

The SEC’s complaint also mentions how Genesis decided to suspend withdrawals starting in November 2022 because of a lack of sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market. At the time, Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors.

Earlier this month, Gemini sent an email to customers announcing the end of the Earn program and taking the opportunity to accuse Barry Silbert, CEO of Digital Currency Group, of fraud.

Crypto industry needs “to comply with our time-tested securities laws”

SEC Chair Gary Gensler, said: “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.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, commented: “The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws. As we’ve seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions. 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.”

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