Genesis and Gemini hit with SEC charges

Another combatant has entered the arena in the ongoing dispute between Digital Currency Group’s Genesis and the Winklevoss twins’ Gemini: the U.S. Securities and Exchange Commission (SEC) has formally charged Genesis Global Capital LLC and Gemini Trust Company LLC for the unregistered offer and sale of securities in connection with the Gemini Earn digital asset lending program.

“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” SEC Chair Gary Gensler 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. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”

Genesis, which is part of Barry Silbert’s Digital Currency Group (DCG), had entered into a deal with Gemini to offer Gemini’s customers—which included U.S.-based retail investors—the chance to lend their digital assets to Genesis in exchange for interest. Genesis then deployed the loaned assets to generate revenue, while Gemini took a fee of up to 4.29% from the returns.

The relationship eventually veered into the ditch: the Winklevoss twins have been locked in a bitter and public dispute with Silbert, Genesis, and DCG in the aftermath of November’s FTX collapse. As FTX was unraveling, Genesis halted all customer withdrawals, which essentially froze $900 million of Gemini Earn customer funds. This led to a heated back and forth between the Winklevoss twins and Barry Silbert on social media, with Cameron Winklevoss accusing Silbert of “conspiring to make false statements and misrepresentations to Gemini Earn users, other lenders and the public at large about the financial health of Genesis.”

According to the SEC complaint, Genesis offered the Gemini Earn program to obtain digital assets, which it could then use toward its institutional lending activities. Genesis advertised the program, which was their sole source of revenue, as an investment with interest rates that were “among the highest rates on the market.”

In Howey terms, the program amounted to an investment of money in a common enterprise (self-explanatory), with investors reasonably expecting to profit from the efforts of the defendant companies: investors ceded complete control of their assets, with Genesis having absolute discretion in how they were used, and it was Genesis that undertook the subsequent work of verifying the assets, identifying institutional counterparties and entering into the relevant agreements.

The action seeks disgorgement and civil penalties from the defendants.

Now that the SEC has entered the fray, the paths for a good outcome for either Genesis or Gemini are closing rapidly. However, more importantly, the action is a clear statement on the legal status of digital asset lending programs offering high yields: the Gemini Earn model is hardly unique, and it seems inevitable that similar programs now face similar action by the SEC.

“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,” Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said.

“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.”

This is further evidenced by the fact that the SEC seems to be trying to make a point with this particular action. Accompanying a tweet announcing the charges was a colorful video in which Gary Gensler breaks down how illegal securities offerings usually work, complete with kaleidoscopic graphics and the kind of sound effects you might hear on a morning radio show:

We @SECGov charged Genesis & Gemini for the unregistered offer & sale of crypto asset securities through Gemini Earn.

Crypto intermediaries need to comply with our securities laws. This protects investors. It promotes trust in markets. It’s not optional. It’s the law.

— Gary Gensler (@GaryGensler) January 12, 2023

Regardless of the method of delivery of this particular message, Gensler makes a clear and salient point:

“There’s no reason to treat crypto markets differently from the rest of the capital markets just because it uses a different technology. Compliance with our laws protect investors. Unfortunately, some platforms that offer crypto lending aren’t complying with the requirements.”

The track is running out for DCG

Things are going from bad to worse for Digital Currency Group and Barry Silbert, who faced calls for his resignation this week. In response, Silbert wrote to shareholders to bemoan that the industry had “been all but destroyed by a wave of unprecedented fraud and criminal behaviour.”

With each passing day, it is becoming more apparent that Silbert’s companies were engaged in the very kind of fraud he blamed on the rest of the industry.

It’s not just the SEC complaint, either. According to another report by Protos, a group of Genesis creditors is claiming they were misled by inaccurate financial documents provided by Genesis staff which hid the scale of the firm’s fiscal woes. This corroborates some of what Cameron Winklevoss said in his series of missives aimed at Silbert: according to him, the then-head of trading and lending at Genesis emailed Gemini staff “false and misleading” statements which indicated that losses incurred by Genesis from the 3AC collapse had been “predominantly absorbed by and netted against DCG balance sheet, leaving Genesis with adequate capitalization to continue.”

The Financial Times reported that Genesis owes its creditors over $3 billion. In addition to the $900 million owed to Gemini customers, it also owes €280 million ($304 million) to the Dutch exchange Bitvavo. Bitvavo released a statement earlier this week.

The staggering debt has led DCG to explore selling off chunks of its portfolio to raise money, according to the FT report. Allegedly included in the fire sale are 200 digital asset-related projects across 35 countries, said to be worth $500 million.

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