SEC charges Gemini, Genesis over Earn program; Winklevoss responds

The U.S. Securities and Exchange Commission has charged Genesis and Gemini over their now-defunct Gemini Earn program, according to a Jan. 12 announcement.

SEC chair Gary Gensler said:

We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. Today’s charges build on previous actions to make clear … that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws.

The SEC said that the Earn program constituted both an unregistered offer and sale of securities. The regulator further alleged that Genesis and Gemini brought in billions of dollars worth of cryptocurrency from hundreds of thousands of users.

Genesis and Gemini entered an agreement in December 2020 that led to the launch of Gemini Earn in February 2021. The service allowed Gemini users, through a tri-party agreement, to lend assets to Genesis in exchange for interest on those deposits.

Genesis then forced a halt on Earn withdrawals in November 2022, citing a lack of liquidity resulting from market conditions at the time of FTX’s collapse. The SEC said that Genesis Earn held $900 million worth of crypto assets belonging to 340,000 Gemini Earn users at the time that withdrawals were paused. That issue has attracted plenty of controversy in recent months, and it made up part of the SEC’s complaint today.

However, the SEC additionally drew attention to questionable practices carried out by Gemini while the service was operational. The regulator said that Gemini collected an agent fee as high as 4.29%. It also alleged that Gemini pooled investors’ Earn funds with other funds and invested those funds at its discretion, as the Earn agreement did not clearly set state how investor assets could be used.

The SEC’s filed complaint also suggests that the Gemini Earn agreements were not registered with the SEC as required by federal securities laws. It additionally alleges that Gemini and Genesis made “selective and inadequate disclosures” and says that the two firms promoted Gemini Earn to the public as an investment.

The SEC seeks to enjoin the two companies from further violating specific securities regulations. It also aims to have the two companies disgorge or surrender their ill-gotten gains and pay interest and penalties on those gains. Today’s filing does not indicate exactly how much Genesis and Gemini might owe to the SEC. Nor does it indicate precisely which services — if any — the two firms might be prevented from offering.

Earn users have now been unable to withdraw their funds for two months, and the program was officially and permanently suspended on Tuesday. It is unclear whether the SEC’s actions will help users regain the funds in their accounts.

Tyler Winklevoss responds

Tyler Winklevoss responded on Twitter, saying the behavior of the SEC is seen as counterproductive, and they never raised the prospect of any enforcement action until after withdrawals were paused. He also mentioned

“Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. Super lame. It’s unfortunate that they’re optimizing for political points instead of helping us advance the cause of 340,000 Earn users and other creditors.”