The US Securities and Exchange Commission has sued Genesis and Gemini, the cryptocurrency exchange founded by the Winklevoss twins, digital asset trading group Genesis and Gemini, saying the crypto-asset lending program was not properly registered as a securities offering.
The SEC’s enforcement actions announced Thursday focus on the Gemini Earn crypto-asset lending program, which as of October offered investors net interest rates of up to 8.05 percent, according to the regulator. Starting in February 2021, Gemini has allowed its customers to lend their crypto tokens to Genesis for a generous interest rate.
Gemini facilitated the transaction, collecting agent fees of 4.29 percent totaling about $2.7 million in the three months through March 2022, the SEC said. Genesis is a wholly owned subsidiary of Digital Currency Group, the conglomerate that controls crypto media outlet CoinDesk and investment manager Grayscale.
Genesis announced in November that investors of the program would not be able to withdraw their assets due to a lack of liquidity amid the turmoil in the cryptocurrency market. At the time, the trading group had about $900 million in assets from the 340,000 investors participating in the plan, the SEC said.
Gemini halted the program earlier this month, but participating retail investors are still unable to withdraw their crypto assets, according to the agency. The SEC added that they “suffered significant damage.”
“Today’s fee builds on past actions to make it clear to the market and the investing public that cryptocurrency lending platforms and other intermediaries must comply with time-tested securities laws,” SEC Chairman Gary Gensler said in a statement. “Doing this better protects investors. It boosts confidence in the markets. It’s not optional. It’s the law.”
Gemini co-founder Tyler Winklevoss called the SEC’s action “extremely lame” and “counterproductive.”
“This action does nothing to further our efforts and help asset-earning users recover their assets,” he wrote on Twitter. Winklevoss said the program is regulated by the New York State Department of Financial Services, and that the company has been in talks with the Securities and Exchange Commission for more than a year.
Genesis did not immediately respond to requests for comment.
According to the SEC, Genesis had no other revenue-generating activities besides the interest income it collected from lending crypto assets to institutional borrowers. In the three months to March, Genesis received approximately $169.8 million of that income and paid $166.2 million in interest to investors in programs including Gemini Earn, the agency said.
The regulator seeks civil penalties and the revocation of ill-gotten gains, among other measures. The SEC said investigations are ongoing into other violations as well as other individuals and entities linked to the alleged wrongdoing.
Gemini and Genesis have been at odds in recent months since Genesis suspended customer withdrawals. Gemini founder Cameron Winklevoss on Tuesday published an open letter calling for Barry Silbert, CEO of DCG, to be fired. Gemini Exchange was founded by Tyler and Cameron Winklevoss in 2014.
Genesis owes its creditors more than $3 billion The Financial Times revealed on Thursdayforcing DCG to consider selling assets from its large investment portfolio to raise cash.
The action against the two companies marks another step in a crackdown by US authorities on interest-bearing cryptocurrency accounts. Now-bankrupt crypto lender BlockFi agreed in February to pay $100 million to settle with the Securities and Exchange Commission and 32 states over claims of offering unregistered securities. Celsius, another lender, was targeted by several state authorities with a similar lawsuit before it filed for bankruptcy in July. The New York State Attorney General sued Celsius founder Alex Mashinsky last week for fraud and securities violations.
Prosecutors raided the Bulgarian office of Nexo earlier Thursday as part of an investigation into money laundering and other crimes.