The US Securities and Exchange Commission has sued digital asset trading group Genesis and Gemini, the crypto exchange founded by the Winklevoss twins, claiming a crypto asset lending program was not properly registered as an offering of securities.
The SEC enforcement action announced Thursday focuses on the Gemini Earn crypto asset lending program, which as of October offered net interest rates to investors of up to 8.05%, depending on the regulator. Starting in February 2021, Gemini allowed its customers to lend their crypto tokens to Genesis in exchange for a generous interest rate.
Gemini facilitated the transaction, taking an agent fee as high as 4.29% that totaled about $2.7 million in the three months through March 2022, the SEC said. Genesis is a wholly owned subsidiary of Digital Currency Group, a conglomerate that controls crypto media outlet CoinDesk and investment manager Grayscale.
Genesis announced in November that investors in the program 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 about $900 million in assets from 340,000 investors participating in the scheme, the SEC said.
Gemini discontinued the program earlier this month, but participating retail investors are still unable to withdraw their crypto assets, according to the agency. They “suffered significant harm,” the SEC added.
“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. “It best protects investors. It promotes confidence in the markets. It’s not optional. It’s the law.”
Gemini co-founder Tyler Winklevoss called the SEC action “super lame” and “counterproductive.”
“This action does nothing to further our efforts and help Earn users recover their assets,” he wrote on Twitter. Winklevoss said the program is regulated by the New York State Department of Financial Services and the company has been in talks with the SEC for more than a year.
Genesis did not immediately respond to requests for comment.
According to the SEC, Genesis “had no other revenue-generating activities” aside from the interest income it earned by lending crypto assets to institutional borrowers. In the three months to March, Genesis received about $169.8 million in revenue and paid $166.2 million in interest to investors in programs such as Gemini Earn, the agency said.
The regulator is seeking civil penalties and restitution of ill-gotten gains, among other measures. Investigations into other violations as well as other individuals and entities linked to the alleged wrongdoing are ongoing, the SEC said.
Gemini and Genesis have been at odds for the past few months since Genesis suspended customer withdrawals. Gemini co-founder Cameron Winklevoss released an open letter on Tuesday calling for the firing of DCG chief executive Barry Silbert. Tyler and Cameron Winklevoss founded the Gemini Fellowship in 2014.
Genesis owes its creditors more than $3 billion, the Financial Times revealed on Thursdayforcing DCG to consider selling assets from its extensive venture capital portfolio to raise funds.
The action against the two companies marks another step in US authorities’ crackdown on interest-bearing crypto accounts. Crypto lender BlockFi, which is now bankrupt, agreed in February to pay $100 million to settle with the SEC and 32 states over alleged unregistered securities offerings. Celsius, another lender, was targeted by several state authorities with similar claims before filing for bankruptcy in July. The New York State Attorney General sued Celsius founder Alex Mashinsky last week for fraud and securities violations.
A Bulgarian office of crypto lender Nexo was raided by prosecutors earlier Thursday as part of an investigation into money laundering and other crimes.