The Securities and Exchange Commission on Thursday indicted crypto firms Genesis and Gemini for allegedly selling unregistered securities in connection with a high-yield product being offered to depositors.
Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which offered returns of up to 8% for clients.
According to the SEC, Genesis borrowed Gemini users’ crypto and sent a portion of the profits back to Gemini, which then deducted a brokerage fee, sometimes exceeding 4%, and returned the remaining profits to its users. Genesis should have registered this product as a securities offering, SEC officials said.
“Today’s indictments build on previous actions to make clear to the market and the investing public that crypto lending platforms and other intermediaries must comply with our well-established securities laws,” SEC Chairman Gary Gensler said in a statement.
Gemini’s earn program, supported by Genesis’ lending activities, met the SEC’s definition by including both an investment treaty and a memorandum, SEC officials said. Both of these characteristics are part of the SEC’s assessment of whether an offering is a security.
Regulators are seeking permanent injunctive relief, disgorgement and civil penalties against both Genesis and Gemini.
The two companies were locked in a high-profile battle over $900 million in client assets entrusted to Gemini Genesis under the Earn program, which shut down this week.
Founded in 2015 by Bitcoin proponents Cameron and Tyler Winklevoss, Gemini has a sizable exchange business that, while under siege, could potentially survive an enforcement action.
However, Genesis’ future is more uncertain as the company is heavily focused on lending crypto to clients and has already hired restructuring consultants. The crypto lender is a unit of Barry Silbert’s Digital Currency Group.
SEC officials said the possibility of DCG or Genesis bankruptcy will not affect the decision on whether to file charges.
It is the latest in a series of recent crypto enforcement actions spearheaded by Gensler following the collapse of Sam Bankman-Frieds FTX in November. Gensler has faced harsh criticism on social media and by lawmakers for the SEC’s failure to impose protections on the burgeoning crypto industry.
The Gensler SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulators overseeing crypto activities in the United States. Both agencies filed complaints against Bankman-Fried, but the SEC has recently increased the pace and scope of enforcement actions.
The SEC filed a similar lawsuit against now-bankrupt crypto lender BlockFi and settled it last year. Earlier this month, Coinbase reached a settlement with New York state regulators over historically inadequate know-your-customer protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has filed five crypto-related enforcement lawsuits.
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