Crypto firms face charges over securities offerings

SEC says they bypassed ‘requirements’ meant to shield investors

The Securities and Exchange Commission has charged cryptocurrency lender Genesis Global Capital and cryptocurrency exchange Gemini Trust with offering unregistered securities through a program that promised investors high interest on deposits.

In announcing the charges Thursday, the SEC said that Genesis, a subsidiary of Digital Currency Group, and Gemini, which is run by twin brothers Tyler and Cameron Winklevoss, had raised billions of dollars of assets from hundreds of thousands of investors without registering the program, which was called Gemini Earn.

By doing so, Genesis and Gemini bypassed “disclosure requirements designed to protect investors,” SEC Chair Gary Gensler said in a statement. He added that the charges should “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.”

Genesis later froze withdrawals. About 340,000 Gemini Earn customers are out about $900 million in crypto assets, the SEC said.

Genesis did not immediately respond to a request for comment. In a tweet, Tyler Winklevoss said it was “disappointing” that the agency acted while Gemini and other creditors were working together to recover funds.

A crash in the prices of cryptocurrencies like bitcoin last spring led to a domino effect, with crypto hedge funds such as Three

Arrows Capital and other crypto companies declaring bankruptcy. In November, FTX, a major cryptocurrency exchange run by entrepreneur Sam Bankman-Fried, also collapsed after the crypto equivalent of a bank run.

In the wake of these failures, regulatory scrutiny of crypto companies has heightened.

In its complaint Thursday, the SEC said that Genesis partnered with Gemini on the program that let customers earn high interest on assets they lent to Genesis. Gemini facilitated the transactions, the SEC said, pooling customer assets and transferring them to Genesis. In return, Gemini deducted an agent fee of as high as nearly 4.3% from the returns that Genesis paid to Gemini Earn investors.

Both companies, along with Genesis’s parent company, DCG, had much to gain from the endeavor, the SEC said. Genesis lent about $575 million in crypto — some belonging to Gemini Earn investors — to DCG, according to the complaint.

After FTX imploded in November, Genesis froze withdrawals, leaving Gemini Earn customers stranded, according to the complaint.

Gemini has recently been unsuccessfully negotiating with Genesis and DCG for the release of Earn customer assets. The negotiations have come to a standstill in recent weeks, with the Winklevosses publicly accusing DCG of stalling to keep funds that belong to its customers. DCG founder and CEO Barry Silbert disputed the allegations in a letter to shareholders this week.