On 12 January 2023, the United States Securities and Exchange Commission (SEC) charged leading cryptocurrency firm Genesis Global Capital along with the crypto exchange Gemini Trust Company for allegedly engaging in the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto-asset lending program. Gary Gensler, the SEC Chair, said:
We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors
The SEC alleges that this unregistered offering facilitated the raising of billions’ worth of crypto-assets from hundreds of investors. In December 2020, Genesis entered into an agreement with Gemini to offer US customers an opportunity to loan their crypto-assets to Genesis in exchange for interest paid by Genesis. Gary Gensler noted that:
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. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.
In February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, who had the opportunity to tender their crypto-assets to Genesis with Gemini acting as an agent to facilitate the transaction. The SEC alleges that Gemini would acquire an agent fee, from the returns Genesis paid to Gemini Earn investors, which was at times as high as 4.29 percent. Genesis would then use its discretion in how to use investor’s crypto-assts to generate revenue and interest to investors in the Gemini Earn program. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said:
The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities law
In November 2022, Genesis informed Gemini Earn investors that it would not allow them to withdrawn their crypto-assets due to Genesis lacking sufficient liquidity to meet withdraw requests due to volatility in the crypto-asset market. At this time, it is alleged that Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors. In early January 2023, Gemini terminated the Gemini Earn program.
The SEC alleges that there are further investigations into other securities law violations and alleged misconduct which is ongoing. To date, the Gemini Earn investors still have not been able to withdraw their crypto-assets.