On Thursday, the Securities and Exchange Commission (SEC) filed a lawsuit against Genesis Global Capital, a digital asset financial service firm, as well as Gemini Trust Company. The lawsuit alleges that these two companies violated multiple sections of the Securities Act by engaging in the unregistered offer and sale of crypto asset securities through the Gemini Earn lending program.
Before partnering with Gemini, the lawsuit states that beginning in March 2018, “Genesis obtained crypto assets from its various investors for the use of its primary business – i.e., to lend crypto assets to Institutional Borrowers for interest – which generated revenue for Genesis and allowed it to pay interest to large institutional and other accredited investors. Genesis earned profit by lending the crypto assets to Institutional Borrowers at a higher rate than it paid to its investors.”
The SEC alleged that in December 2020, Genesis entered into an agreement with Gemini to offer Gemini customers, primarily their retail investors, an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. Genesis started receiving these loans beginning in February 2021. Gemini benefited from this arrangement in the form of an agent fee, which sometimes reached as high as 4.29%. Once the loan was complete, how those funds were used was up to the discretion of Genesis.
By November 2022, Genesis was allegedly notifying members of the Gemini Earn program that their investments could not be withdrawn, citing a lack of sufficient liquid funds to honor the requests. They attributed this to the volatility of the crypto market at the time. At the time of this announcement, it is believed that Genesis held $900 million in assets from 340,000 lenders. To this date, lenders have still not been able to withdraw their loan, according to the SEC.
“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” said SEC Chair 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.”
“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.”