The Securities and Exchange Commission on Thursday accused crypto firms Genesis and Gemini of allegedly selling unregistered securities as part of a high-yield product offered to depositors.
Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which boasted returns of up to 8% for clients.
According to the SEC, Genesis lent crypto from Gemini users and returned a portion of the profits to Gemini, which then deducted an agent fee, sometimes over 4%, and returned the remaining profit to its users. Genesis should have registered that product as a securities offering, SEC officials said.
“Today’s charges build on prior actions to send a clear signal to the market and the investing public that crypto lending platforms and other intermediaries must comply with our time-tested securities laws,” the statement said. SEC Chairman Gary Gensler in a statement.
Gemini’s Earn program, backed by Genesis’ lending business, met the SEC’s definition of including both an investment contract and a rating, SEC officials said. These two characteristics are part of how the SEC assesses whether an offering is a security.
Regulators are seeking a permanent injunction, refund and civil penalties against Genesis and Gemini.
The two companies are engaged in a high level battle over $900 million in client assets that Gemini has entrusted to Genesis under the Earn program, which closed this week.
Gemini, which was founded in 2015 by bitcoins Defenders Cameron and Tyler Winklevoss, has extensive trade activity which, while under siege, could eventually resist legal action.
But Genesis’ future is more uncertain, as the company is heavily focused on lending crypto customers and has already hired restructuring advisers. The crypto lender is a unit of Barry Silbert’s Digital Currency Group.
SEC officials said the possibility of DCG or Genesis going bankrupt has no bearing on whether or not to pursue a charge.
This is the latest in a series of recent crypto enforcement actions taken by Gensler following the collapse of Sam Bankman-Fried’s FTX in November. Gensler has been heavily criticized on social media and by lawmakers for the SEC’s failure to impose safeguards on the nascent crypto industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulators that oversee crypto activity in the United States. Both agencies have filed lawsuits against Bankman-Fried, but the SEC has recently accelerated the pace and scope of enforcement action.
The SEC has filed a similar lawsuit against now-bankrupt crypto lender BlockFi and installed Last year. Earlier this month, Coinbase installed with New York State regulators over historically inadequate know-your-customer protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has filed five crypto-related enforcement actions.