The US Securities and Exchange Commission has sued digital asset trading group Genesis and Gemini, a crypto exchange founded by the Winklevoss twins, saying the crypto asset lending program was not properly registered as a securities offering.
The SEC’s enforcement action announced on Thursday focused on the crypto asset lending scheme Gemini Earn, which in October offered investors a net interest rate of up to 8.05 percent, according to the regulator. Starting in February 2021, Gemini will allow customers to lend crypto tokens to Genesis in exchange for low interest rates.
Gemini facilitated the transaction, taking an agent fee of up to 4.29 percent totaling about $2.7 million for the three months through March 2022, the SEC said. Genesis is a subsidiary of Digital Currency Group, the conglomerate that controls crypto media outlet CoinDesk and investment manager Grayscale.
Genesis in November announced that the program’s investors would not be able to withdraw their assets due to insufficient liquidity amid turmoil in the cryptocurrency market. The trading group at the time held $900 million in assets from 340,000 investors who participated in the scheme, the SEC said.
Gemini ended the program earlier this month, but participating retail investors still cannot withdraw their crypto assets, according to the agency. He “has suffered significant harm”, the SEC added.
“Today’s charges build on previous actions to clarify to the market and the investing public that crypto lending platforms and other intermediaries must comply with time-tested securities laws,” SEC chairman Gary Gensler said in a statement. “Do your best to protect investors. It promotes confidence in the market. It’s not optional. It’s the law.”
Gemini founder Tyler Winklevoss called the SEC’s actions “super lame” and “counterproductive.”
“This action does nothing to further our efforts and help Earn users get their assets back,” he wrote on Twitter. Winklevoss said that the program is regulated by the New York State Department of Financial Services, and the company has been in negotiations with the SEC for more than a year.
Genesis did not immediately respond to a request for comment.
Genesis “does not have any other revenue-generating activities” other than the interest income it collects from lending crypto assets to institutional borrowers, according to the SEC. In the three months to March, Genesis received about $169.8m in those earnings and paid out $166.2m to investors in programs including Gemini Earn, the agency said.
Regulators are seeking civil penalties and disgorgement of adverse earnings, among other measures. Investigations into other violations as well as other individuals and entities linked to alleged wrongdoing are underway, the SEC said.
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 the firing of Barry Silbert, DCG’s chief executive. Tyler and Cameron Winklevoss founded the Gemini exchange in 2014.
Genesis has more than $3bn in debt, the Financial Times revealed, forcing DCG to consider selling assets from its large venture portfolio to raise cash.
The action against the two companies marks another step in the crackdown by US authorities on interest-bearing crypto accounts. Crypto lender BlockFi, which is now bankrupt, in February agreed to pay $100 million to settle with the SEC and 32 states over claims of unregistered securities offerings. Celsius, another creditor, was targeted by several state authorities with similar claims before it filed for bankruptcy in July. The New York state attorney general indicted Celsius founder Alex Mashinsky last week for fraud and securities violations.
The Bulgarian office of crypto lender Nexo was raided by prosecutors earlier Thursday as part of an investigation into money laundering and other violations.