• SEC charges Gemini and Genesis for offering unregistered securities through the Gemini Earn program. 
• The charges follow the collapse of the program along with approximately $900 million owed to 340,000 Gemini customers. 

The Securities and Exchange Commission (SEC) has charged crypto lending firm Genesis and crypto exchange Gemini with violations of securities laws.

In a Jan. 12 press release, the SEC alleged that Gemini’s Earn program constitutes an offer and sale of unregistered securities. The statement also notes that the two firms have cost hundreds of thousands of investors billions of dollars.

“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” SEC Chair Gary Gensler said.

The SEC explains the details of the case in its complaint. According to the regulator, Genesis entered into an agreement with Gemini in December 2020. In the agreement, the Digital Currency Group (DCG) subsidiary offered Gemini customers an opportunity to loan out their crypto assets in exchange for interest payments.

The arrangement kicked off in February 2021 when Genesis and Gemini began offering the Gemini Earn program to retail investors. Gemini acted as the agent to facilitate the transactions between Genesis and its customers.

The SEC also notes that Gemini deducted a fee, sometimes as high as 4.29%, from the returns Genesis paid to Gemini Earn investors. Meanwhile, Genesis exercised its discretion in how to generate revenue and pay interest to Gemini Earn investors.

This arrangement continued until November 2022 when crypto exchange FTX collapsed. Genesis announced that it had run into a liquidity shortage due to the market’s volatility and funds locked in FTX. Hence, it would not allow Gemini Earn investors to withdraw their crypto assets.

Gemini, who has now terminated the Earn program, has revealed that Genesis owes approximately $900 million to 340,000 of its customers. The SEC says the charges build on previous efforts to clarify to market participants that crypto firms must comply with securities laws.

Genesis and Gemini also embroiled in their own fight

The SEC’s focus on the two is coming after the crypto giants have also been fighting among themselves. In a Jan. 10 open letter, Gemini co-founder Cameron Winklevoss called for DCG’s Barry Silbert to step down as CEO.

He claimed that Silbert was unfit to run the DCG conglomerate and is behind Genesis defrauding Gemini’s customers. He also stated that there is no way forward in resolving Genesis’ debt to Gemini customers until Silbert steps down.

Notably, Cameron had given DCG a Jan. 8 ultimatum in which Silbert was to publicly commit to working with Gemini to resolve the crisis in a previous open letter.

The SEC’s complaint is filed in the U.S. District Court for the Southern District of New York. The SEC is seeking “permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.”