Genesis Global Capital has agreed to pay $21 million in penalties to settle Securities and Exchange Commission charges that its interest-bearing accounts were actually unregistered securities sold through a crypto asset lending program known as the Gemini Earn program.
Without admitting to or denying the charges, Genesis also settled charges that the program breached disclosure requirements designed to safeguard investors.
The settlement stems from charges the SEC brought in January 2023 against Genesis and Gemini Trust Company, the crypto platform controlled by Tyler and Cameron Winkelvoss. According to the SEC's complaint, the Gemini Earn program “was a purported investment opportunity where Gemini customers, including retail investors in the U.S., loaned their crypto assets to Genesis in exchange for Genesis's promise to pay interest earned from Genesis's use of the loaned crypto assets.”
However, in November 2022, Genesis announced that it would not allow its Gemini Earn investors to withdraw their crypto assets “because Genesis lacked sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market.” At the time, Genesis held about $900 million in crypto assets from 340,000 Gemini Earn investors, the SEC said.
“We charged Genesis with failing to register its retail crypto lending product before offering it to the public, bypassing essential disclosure requirements designed to protect investors,” SEC Chair Gary Gensler said in a statement.
“Today’s settlement builds 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."
“The collapse of the Gemini Earn program underscores the unknown risks that investors are exposed to when market participants fail to comply with the federal securities laws,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.
“As this enforcement action makes clear, no amount of hype and advertising can substitute for the investor-protection disclosures required by the federal securities laws,” he said.
Genesis and two affiliates filed voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the Southern District of New York on January 19, 2023. As a result, investors have been unable to access or withdraw the crypto assets they invested with Genesis via Gemini Earn.
The SEC said it will not receive any penalty monies from Genesis until all other allowed claims are paid by the bankruptcy court, including claims by retail investors in the Gemini Earn program.
Genesis said in a statement today that if the Bankruptcy Court approves its settlement in principle, it will “result in all Earn users receiving 100% of their digital assets back in kind—approximately 97% in the near term and then the remainder as recoveries are received from Digital Currency Group (DCG)."
DCG is a venture capital group that owns Genesis, Grayscale Investments, Luno and formerly owned CoinDesk.
“As a reminder, this settlement means, for example, that if you had lent one bitcoin in the Earn program (as of November 16, 2022 — the date Genesis suspended redemptions), you will receive one bitcoin back. And it means that you will receive any and all appreciation of your assets since you lent them into the Earn program. If approved, we will be returning over $2 billion in value (at today’s prices) — $900 million more than when Genesis halted withdrawals,” Genesis said in its statement.
In February, Gemini settled with the New York Department of Financial Services (NYDFS) and agreed to pay Gemini Earn customers 100% of their locked-up holdings—potentially north of $1.1 billion, by the time Genesis wraps up its bankruptcy proceedings.