SEC Crackdown on Crypto Continues With Charges Filed Against Gemini and Genesis

SEC Crackdown on Crypto Continues With Charges Filed Against Gemini and Genesis
A file image of co-founders at Winklevoss Capital, Tyler Winklevoss (L) and Cameron Winklevoss speak onstage during TechCrunch Disrupt N.Y. 2015 at The Manhattan Center New York City. (Noam Galai/Getty Images for TechCrunch)
Bryan Jung

The Securities and Exchange Commission (SEC) is going after some of the largest crypto companies, by filing charges against Gemini and Genesis.

The federal government’s legal crackdown on crypto is expanding, as the SEC charged some of the biggest names in the industry of operating illegal lending services on Jan. 12.

The SEC and the Commodity Futures Trading Commission have each brought complaints against FTX co-founder and former CEO Sam Bankman-Fried with the same intent in mind.

Genesis, which was founded by the crypto magnate Barry Silbert, is a subsidiary of Digital Currency Group. Gemini is run by the famous billionaire twins, Tyler and Cameron Winklevoss.

The securities regulator alleged that the crypto exchange, Gemini, and crypto lender, Genesis, caused its customers to suffer major financial losses.
Genesis and Gemini were charged for partnering up to sell unregistered securities through a high-yield financial product called Gemini Earn.

Crypto Giants Accused of Running a Scam

The two crypto firms promised customers an 8 percent return on their investments, after leveraging the popular financial product, to raise billions.

Gemini Earn was supposed to hand out high-interest payments on the crypto deposits—which were as high as 4.29 percent—and allow the partnering firms to then lend out cryptocurrencies to other investors.

However, it was alleged “that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” said SEC Chairman Gary Gensler.

“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,” Gensler added.

The SEC said that 340,000 Gemini Earn customers faced massive losses of up to $900 million in the scheme.

The federal complaint seeks civil penalties, injunctive relief, and payback “of ill-gotten gains,” against the executives of both companies.

“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,” said Tyler Winklevoss in a Jan. 12 post on Twitter.

Winklevoss said that Earn was regulated by the New York Department of Financial Services and Gemini had complied with all of the regulations.

He added that the SEC’s charges were “counterproductive,” since both firms were working to recover customer funds.

“We look forward to defending ourselves against this manufactured parking ticket. And we will make sure this doesn’t distract us from the important recovery work we are doing,” added Winklevoss.

The two crypto firms have been feuding over the Earn funds in recent months.

After Genesis froze withdrawals in the wake of FTX implosion in November, Earn customers were left in limbo, causing talks between the Winklevoss twins and Silbert, to angrily break down.

SEC Chief Faces Scrutiny

Meanwhile, the new GOP-led House has said that they have questions for the man in charge of the SEC.

Ironically, Gensler had met with the former CEO of the now-bankrupt FTX, Sam Bankman-Fried, months before the crypto exchange’s collapse and who was a prolific fundraiser for Democratic politicians, including President Joe Biden.

“Reports to my office alleged [Gensler] was helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly. We’re looking into this,” wrote Rep. Tom Emmer (R-Minn.), a member of the House Financial Service Committee, in a post on Twitter.

FTX Scandal

The FTX scandal has pressed the SEC to lead more crackdowns on the crypto sector, after massive public criticism of the regulator.

Voyager Digital, Celsius, and FTX were all platforms that did various forms of deposit-and-lending operations.

The cryptocurrency sector’s lobbyists and friends in Congress have pushed back hard on the SEC and have been greatly pushing for the smaller Commodity Futures Trading Commission to oversee the industry.

The federal agency has been taking a particular interest in crypto lending, when last year it reached a $100 million settlement, with the now failed crypto lender BlockFi.

Coinbase was blocked in 2021 in its attempt to launch a yield-generating product after the SEC labeled it a security.

“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 laws,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

“As we’ve seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions. Our investigations in this space are very much active and ongoing and we encourage anyone with information about this matter or other possible securities law violations to come forward, including under our Whistleblower Program if applicable,” Grewal said.

In the meantime, the founder of FTX is facing criminal fraud charges by federal prosecutors, while he awaits trial under house arrest at his parents’ Palo Alto home.

Earlier this week, Bankman-Fried posted a defensive narrative on Substack, which he used to explain his actions, but which government authorities and industry experts have already rejected.

He posted, “I didn’t steal funds,” while pointing a finger at the law firm Sullivan & Cromwell, accusing them of botching FTX’s bankruptcy filings and saying that they should no longer be involved in the company’s business.

The Associated Press contributed to this report.
Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.
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