The Securities and Exchange Commission has sued crypto brokerage firms Gemini Trust Co. and Genesis Global Capital for violating security rules.
The US regulators said the two firms had raised billions of dollars from thousands of customers through an illegal “Gemini Earn Program.” According to SEC, the program allows investors to loan their assets in return for interest income, which amounts to giving out unregistered securities.
Passive Income Against Digital Coins
In February 2021, Gemini offered customers to loan out their tokens in return for passive income. The program gave returns much higher than those offered by traditional banks. The assets in this program crossed $ 3 billion by August 2021.
However, customers could not withdraw their money from the Gemini Earn accounts from Mid-November. Gemini co-founder Cameron Winklevoss and Genesis parent Digital Group founder Barry Silbert were accused of stalling efforts to resolve the problem, and Silbert denied the allegation. The SEC authorities have been scrutinizing the Eran program for the past year.
The other co-founder of Gemini. In a series of tweets, Tyler Winklevoss said that the company would defend itself against the allegations of SEC, which he described as a “manufactured parking ticket.” Tyler noted that for the last 17 months, they had been discussing with SEC about the Earn program, and the regulators did not enforce any action till Gemini topped withdrawals from the program.
Gemini did not respond to comments on the matter.
SEC Chair Gary Gensler said that charges against the firms were built upon previous actions and made it clear to the investors and marketplace that cryptocurrency lending companies and their intermediaries should comply with SEC’s time-tested security laws. By doing that, investors remain protected. Gensler argued that crypto firms selling their products should register them with the agency first. SEC confirmed that the ongoing investigations would continue.
Risk Factors Issued for the Program Upfront
The Earn program service terms and conditions clearly warned the customers that they carried the risk of losing all their investments. However, the widespread view among investors was that the program followed a conservative approach, which allowed the program to benefit.
Cryptocurrency lending products were at the center of the massive turmoil that plagued the crypto market last year.
The sudden and spectacular collapse of FTX in November hit Genesis Global Capital hard. This resulted in a pause of new lendings and withdrawals to the Genesis customers, and the freeze continues to date.
The SEC filed cases against the firms in the US District Court, New York Southern District, seeking injunctive relief, refund of gains to the customers, and penalties for the firm.
Federal prosecutors and SEC are separately scrutinizing the internal financial transactions of DCG, Genesis Capital’s parent company.
The case is registered in the US District Court, Southern District of New York, as Securities and Exchange Commission vs. Gemini Trust Co., 23-cv-287.
