The Securities and Exchange Commission on Thursday charged crypto companies Genesis and Gemini with allegedly selling unregistered securities related to a high-yield product offered to depositors.
Gemini, a cryptocurrency exchange, and Genesis, a crypto-lending company, partnered in February 2021 on a Gemini product called Earn, which has touted yields of up to 8% for customers.
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According to the SEC, Genesis lent Gemini users cryptocurrency and sent a portion of the profits back to Gemini, after which they deducted the agency fees, sometimes more than 4%, and returned the rest of the profits to the users. SEC officials said Genesis should have registered the product as a securities offering.
SEC Chairman Gary Gensler said in a statement: “Today’s fees build on previous actions intended to make it clear to the market and the investing public that cryptocurrency lending platforms and other intermediaries need to comply with our time-tested securities laws.”
SEC officials said the Gemini Earn program, which is backed by Genesis’ lending operations, met the SEC’s definition by including investment contracts and notes. These two features are part of how the SEC evaluates whether an offer is a security.
Regulators are seeking permanent sanctions, repeal and civil penalties against both Genesis and Gemini.
Two companies have participated in a climax battle over $900 million in customer assets Gemini entrusted to Genesis as part of the Earn program, which was closed this week.
Gemini, founded in 2015 by bitcoin backers of Cameron and Tyler Winklevoss, have an extensive barter business that, while under siege, may be able to pass an enforcement action.
But Genesis’ future is more uncertain, because the business is heavily focused on lending to crypto customers and has hired restructuring advisors. Cryptocurrency Lenders are a unit of Barry Silbert’s Digital Currency Team.
SEC officials said the possibility of DCG or Genesis bankruptcy did not affect the decision whether to prosecute.
This is the latest in a series of recent crypto enforcement actions led by Gensler following the collapse of Sam Bankman-Fried’s FTX in November. Gensler was heavily criticized on social media and by legislators as the SEC failed to impose safeguards on the nascent crypto industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are two regulatory bodies that oversee cryptocurrency activity in the United States. Both agencies filed complaints against Bankman-Fried, but the SEC has recently increased the speed and scope of its enforcement actions.
The SEC has launched a similar action against now-bankrupt crypto lender BlockFi and settled last year. In the first day of this month, Coinbase settled with New York State regulators about historically inadequate understanding of your customer protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has filed five crypto-related enforcement actions.
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