David* constantly lies to his mother. When she asks about the savings he manages for her, he tells her not to worry. In reality, the $100,000 “nest egg” from the sale of his house is trapped in a crypto credit company.
“If I tell her, she’s going to have a heart attack,” says the 37-year-old New Yorker. “That was it for her.”
Keen to prevent rising inflation from eroding his mother’s savings, the television director placed the money last year with Geminithe crypto exchange founded by the Winklevoss twins.
Gemini, led by Cameron and Tyler Winklevoss, offered a product called Earn that seemed like an attractive haven for investors to leave their money behind. Investors could earn more than 7% a year from the program at a time when traditional bank rates were close to zero.
David is now one of 340,000 Gemini Earn customers whose funds have been blocked after the group’s lending partner was caught off guard by shock waves that rippled through the crypto market following the failure of Sam Bankman-Fried FTX Exchange in November. Their plight has exposed the patchwork of often confusing regulations governing crypto in the United States.
The Financial Times spoke to five users who said they thought it looked like a savings account; in reality, the product was a risky crypto lending strategy. “I thought I just parked the money in a high yield savings account and could withdraw it at any time,” David said.
In exchange for the high interest rates, the Earn product loaned cryptocurrencies to customers. Beginning in February 2021, Gemini took funds from retail investors and loaned them to crypto broker Genesis, which in turn loaned them to other players in the digital asset market.
When FTX imploded, nervous investors rushed to get their money out of Genesis. The broker was unable to meet withdrawal requests of $827 million from customers, forcing it to suspend withdrawals from its lending business. Friday, the loan unit of Genesis deposit for bankruptcy.
David was one of many people who entrusted their money to Gemini, persuaded by flashy advertisements plastered on New York’s billboards and subways, boasting that the company was regulated. “Finally, a regulated place to buy, sell and store crypto,” reads one announcement. “What could be better? read another.
Now Gemini and Genesis have been prosecuted by Wall Street’s top regulator, the Securities and Exchange Commission, which alleges that the Earn program was improperly registered as a securities offering and that ordinary investors “suffered material harm.”
Gemini co-founder Tyler Winklevoss said Earn was regulated by the New York Department of Financial Services and called the SEC’s enforcement action “counterproductive.” He added that the company “has always worked hard to comply with all relevant laws.” Genesis did not respond to multiple requests for comment on the lawsuit.
Adding to David’s concerns is a family member who he says needs surgery that will cost tens of thousands of dollars. “My mum tells me ‘use the money’ and I keep lying to her, saying I’m trying to get insurance,” he says, adding that the large amount trapped has been emotionally difficult. “I’m going to therapy now. I had very dark moments.
In a crypto industry where many major exchanges operate overseas or have no official headquarters, Gemini’s office in midtown Manhattan has been a source of solace for some clients.
“I knew they were regulated in New York. I had complete confidence that Gemini would do the work for us, manage the risk,” said Christine, who lives a few blocks from Gemini’s office and asked that her last name not be used. The mother-of-one placed $600,000 in Earn.
Different aspects of the crypto market are overseen by different regulators, which highlights the customer confusion.
Gemini is licensed by the New York State Department of Financial Services, which allows customers in the state to trade digital currencies on the exchange. However, because its Earn product lent crypto for investment in return for an expected profit, it should have been registered as a security, the SEC said in its lawsuit. Failure to do so meant Earn broke securities rules, the regulator alleged.
“The highly fragmented system of financial regulation in the United States does not help investors, does not help companies to create products and creates loopholes,” said Yuliya Guseva, professor of law and head of the fintech and blockchain program. at Rutgers University in New Jersey. She added that the SEC does “regulation by enforcement.”
Growing anxiety over the frozen funds prompted Christine to start taking medication and undergoing therapy, she said. “I trusted them…I never thought this could happen to me.”
After Genesis filed for bankruptcy on Friday, Cameron Winklevoss said“We will use all the tools at our disposal in bankruptcy court to maximize the recovery of Earn users,” adding that the recovery of customer funds “remains our top priority.” Genesis did not respond to a request for comment on blocked customer funds on its platform.
For many mainstream investors, the appeal of Gemini’s Earn program was that it offered a high income stream that eclipsed the returns offered by conventional banks. The SEC said Gemini’s website claimed investors could “‘receive more than 100 times the national average interest rate, among the highest rates in the market'”. Gemini took a fee, sometimes as high as 4.29%, from the returns Genesis paid to investors in Earn, the US securities regulator said.
“Seeing the interest accrue on a predictable schedule was nice,” said Viv, a stay-at-home mom of three who asked that her last name not be used, adding, “On a high performance, it was essentially zero at that time.”
The Midwest paid $130,000 into her Gemini Earn account, proceeds from the sale of her family home. “I’m not like a rich person. . . You hear about people losing everything, but you don’t think it could ever happen to you,” she said.
The bankruptcy of the Genesis loan unit gave some customers hope of getting their money back. Creditors, including Gemini’s Winklevoss twins, are working on a bankruptcy deal that would repay them in cash and equity in Genesis’ parent company, Digital Currency Group, a person familiar with the matter said.
For others, the glimmer of hope brings little comfort.
“Even if one day we get all our money back, mentally the damage is there,” Christine said. “I don’t know how to wake up from this nightmare.”
*His name has been changed to protect his identity.