SEC files charges
The Securities and Exchange Commission (SEC) has filed charges against both Genesis and Gemini for alleged securities law violations in their Gemini Earn program. The SEC claims that the companies “raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors” in the program, describing it as an unregistered offering that qualifies as the sale of securities to retail investors.
Today we charged Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program.— U.S. Securities and Exchange Commission (@SECGov) January 12, 2023
In a statement, SEC Chair Gary Gensler said, “We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws.” He added, “Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”
The charges have generated mixed reactions in the crypto community. Some have questioned the timing of the SEC’s announcement and why it took so long to investigate and call out the Earn program as unregistered securities. Others have criticized SEC Chairman Gary Gensler for what they see as a lack of consistency in his approach to crypto regulation, with some accusing him of “regulation by enforcement” and targeting some crypto companies while becoming “cozy” with others.
Tyler Winklevoss replies
In a prepared statement, Tyler Winklevoss, the co-founder of Gemini, said, “It’s disappointing that the [SEC] chose to file an action today as [Gemini] and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.”
2/ As a matter of background, the Earn program was regulated by the @NYDFS and we’ve been in discussions with the SEC about the Earn program for more than 17 months. They never raised the prospect of any enforcement action until AFTER Genesis paused withdrawals on November 16th.— Tyler Winklevoss (@tyler) January 12, 2023
Interesting that the Gemini Earn program was running for 2 years and the SEC shows up shortly after it collapses.— Jameson Lopp (@lopp) January 12, 2023
The Gemini Earn program, which was launched in 2019, allowed users to earn interest on their crypto holdings by lending them out to institutional borrowers. However, the program came under scrutiny in 2020 when the parent company of Genesis Trading, Digital Currency Group (DCG), filed a lawsuit against Gemini for allegedly misusing its proprietary trading technology. The lawsuit led to a public spat between the two companies and eventually led to the shutdown of the Gemini Earn program.
I've said it throughout-100% of these 'earn' type programs are debt securities. They are fully trustful & exactly why securities laws exist–it's not even reasonably debatable imo.— _gabrielShapir0 (@lex_node) January 12, 2023
I have 0 problem with this SEC enforcement action. https://t.co/UeF9m0efg9
The charges filed by the SEC now add another layer to the ongoing dispute between Genesis, DCG, and Gemini. The SEC claims that the companies violated securities laws by offering unregistered securities to retail investors through the Gemini Earn program. The charges, if proven, could lead to significant fines and penalties for both Genesis and Gemini.
The news of the charges also led to a significant drop in the stock price of Silvergate, a crypto-ddd bank that had previously announced plans to launch a stablecoin using assets acquired from the Diem project (formerly known as Libra). Silvergate had taken a $196 million impairment charge in its final fiscal quarter of last year, writing down the value of intellectual property and technology it acquired from Diem Group.
Overall, the charges filed by the SEC against Genesis and Gemini serve as a reminder that compliance with securities laws is not optional in the crypto industry. The SEC’s actions also highlight the need for crypto companies to carefully review their business models and ensure that they are in compliance with all relevant regulations. As the industry continues to evolve, it is likely that regulatory scrutiny will only increase, and companies that fail to comply with securities laws risk facing significant penalties and reputational damage.