Gemini and Genesis’ legal troubles stand to shake up industry further

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With investor con­fi­dence seem­ing­ly at an all-time low thanks to the recent slew of insol­ven­cies, a new saga seems to be now unfold­ing in real time. This one involves cryp­to exchange Gemini’s Win­klevoss twins and Bar­ry Sil­bert, CEO of Dig­i­tal Cur­ren­cy Group (DCG) — the par­ent firm behind cryp­to mar­ket mak­er and lender Genesis.

On Jan. 2, Cameron Win­klevoss post­ed an open let­ter to Bar­ry Sil­bert remind­ing him of the fact that it had been “47 days since Gen­e­sis halt­ed with­drawals” while also pro­vid­ing a blunt, seem­ing­ly con­fronta­tion­al assess­ment of DCG’s exist­ing busi­ness practices:

“For the past six weeks, we have done every­thing we can to engage with you in a good faith and col­lab­o­ra­tive man­ner in order to reach a con­sen­su­al res­o­lu­tion for you to pay back the $900 mil­lion that you owe.”

The let­ter fur­ther indi­cat­ed that the afore­men­tioned sum was lent to Gen­e­sis as part of Gemini’s Earn pro­gram, an offer­ing enabling cus­tomers to earn up to 7.4% annu­al per­cent­age yield on cryp­tocur­ren­cies. Cameron then issued anoth­er tweet request­ing Sil­bert “pub­licly com­mit” to solv­ing the prob­lem by Jan. 8 — a request seem­ing­ly ignored by him, at least on Twitter.

Tensions have been mounting

Gen­e­sis’ ongo­ing woes stem from the fact that a sig­nif­i­cant por­tion of its funds (esti­mat­ed to be worth $175 mil­lion) have been locked in an FTX trad­ing account. Fol­low­ing the col­lapse of the once sec­ond-largest cryp­to exchange late last year, the com­pa­ny had to halt with­drawals on Nov. 16, even report­ed­ly hir­ing the con­sul­ta­tion ser­vices of invest­ment bank Moelis & Com­pa­ny just a week lat­er to get itself out of this pickle.

In a Dec. 7 let­ter, Der­ar Islim, the inter­im CEO of Gen­e­sis, told clients that “it will take addi­tion­al weeks rather than days for us to arrive at a path for­ward.” In response, Win­klevoss and com­pa­ny hired invest­ment bank Houli­han Lokey to devise a frame­work with which they could “resolve its liq­uid­i­ty issues” keep­ing them from repay­ing mem­bers of Gemini’s Earn program. 

Things then took an ugly turn on Dec. 27 when investors sued the twins over the blocked funds in the Earn pro­gram, accus­ing the two of fraud and sev­er­al infrac­tions of U.S. secu­ri­ties laws. 

Fur­ther­more, Sil­bert respond­ed to Cameron’s con­stant Twit­ter nudges on Jan. 2, not­ing that Gen­e­sis had already tak­en action regard­ing Gemini’s pro­pos­al while also claim­ing inno­cence for DCG, stat­ing unequiv­o­cal­ly that the com­pa­ny had not been over­due to its pay­ments to Gen­e­sis. In response, Cameron tweet­ed back:

Gemini terminates Earn program with Genesis

After weeks of tur­moil, on Jan. 10, the Win­klevoss twins sent out an email to users inform­ing them that Gem­i­ni had ter­mi­nat­ed its flag­ship Earn pro­gram with Gen­e­sis two days pri­or. The move was the lat­est of many shots fired between the firm and the cryp­to lender, with the email stating:

“We are writ­ing to let you know that Gem­i­ni — act­ing as an agent on your behalf — has ter­mi­nat­ed the Mas­ter Loan Agree­ment (MLA) between you and Gen­e­sis Glob­al Cap­i­tal, LLC (Gen­e­sis), effec­tive as of Jan­u­ary 8, 2023.”

The mes­sage then went on to add that effec­tive imme­di­ate­ly, Gen­e­sis was required to clear any out­stand­ing assets that it had in asso­ci­a­tion with the pro­gram, which until last month was offer­ing users up to 8% inter­est on their cryp­to holdings.

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At present, cus­tomers can view their Earn bal­ances under the “Pend­ing” col­umn as Gem­i­ni offi­cials con­tin­ue look­ing for a way to return cus­tomer mon­ey as soon as pos­si­ble. “The return of your assets remains our high­est pri­or­i­ty and we con­tin­ue to oper­ate with the utmost urgency,” the email stated.

Last­ly, in a claim filed in court on Jan. 8 in response to the class-action law­suit put for­ward by Gem­i­ni Earn’s cus­tomers, Gem­i­ni says that much like its clients, it too has been the vic­tim of Gen­e­sis and DCG Group’s con­duct, claim­ing that the company’s exec­u­tive brass had “mis­led defen­dants about Gen­e­sis, its finan­cial con­di­tion, and its abil­i­ty to act as a respon­si­ble bor­row­er in the Gem­i­ni Earn program.”

Gem­i­ni has denied all of the accu­sa­tions made against it by its clien­tele, say­ing it had all signed an agree­ment to “arbi­trate claims relat­ing to the Gem­i­ni Earn pro­gram” and that the var­i­ous claims and caus­es of action ini­ti­at­ed by the plain­tiffs’ should not be lit­i­gat­ed in any forum unless Gen­e­sis is also involved with the same.

SEC charges Genesis and Gemini 

On Jan. 12, the U.S. Secu­ri­ties and Exchange Com­mis­sion charged Gem­i­ni and Gen­e­sis with alleged­ly sell­ing unreg­is­tered secu­ri­ties as part of the Earn offer­ing. As per the reg­u­la­to­ry body, Gen­e­sis loaned the assets accrued off of Gemini’s users while send­ing a por­tion of the prof­its back to Gem­i­ni, with the lat­ter deduct­ing an agent fee of around 4% and return­ing the remain­ing prof­its to its customers.

Accord­ing to SEC offi­cials, Gen­e­sis was required to reg­is­ter the pro­gram as a secu­ri­ties offer­ing, with Chair Gary Gensler adding that the charges are designed to build on pre­vi­ous such actions to make it known to “cryp­to lend­ing plat­forms and oth­er inter­me­di­aries” that they need to adhere to the reg­u­la­to­ry agency’s time-test­ed secu­ri­ties laws.

Gensler tes­ti­fy­ing before a Con­gres­sion­al over­sight com­mit­tee. Source: Reuters/Evelyn Hockstein

The SEC said the Earn pro­gram had a direct impact on a whop­ping 340,000 investors, adding that between Jan­u­ary 2022 and March 2022 alone, Gem­i­ni raked in $2.7 mil­lion in agent fees, with the com­pa­ny using client assets to facil­i­tate var­i­ous lend­ing activ­i­ties as well as using it as col­lat­er­al for per­son­al bor­row­ing. Dur­ing the same three-month stretch, the agency claimed that Gen­e­sis gen­er­at­ed inter­est income of $169.8 mil­lion while pay­ing out $166.2 mil­lion to clients (includ­ing Gem­i­ni) as profits.

Some of Gen­e­sis’ key back­ers includ­ed cryp­to hedge fund Three Arrows Cap­i­tal and Sam Bankman-Fried’s Alame­da Research, two enti­ties that are now vir­tu­al­ly worthless.

Rocky road ahead

To get a bet­ter overview of the mat­ter, Coin­tele­graph reached out to Rachel Lin, co-founder and CEO of Syn­Fu­tures — a decen­tral­ized exchange for cryp­to deriv­a­tives. In her view, Gen­e­sis failed to prop­er­ly hedge its port­fo­lio risks and man­age its trea­sury, leav­ing its bal­ance sheets heav­i­ly affect­ed by the FTX con­ta­gion. She added:

“Sil­bert has yet to ful­ly own up to this fail­ure, with some view­ing his recent actions as a stall tac­tic while they search for emer­gency liq­uid­i­ty. Rather than call­ing out Gem­i­ni and its co-founder Cameron Win­klevoss’ demands as pub­lic­i­ty stunts, both par­ties should be putting user deposits first, as there are con­trac­tu­al oblig­a­tions on both sides.”

And while Gemini’s ter­mi­na­tion of its mas­ter loan agree­ment with Gen­e­sis may be a way to deflect blame and play the vic­tim, Lin believes that in the long run, the move may be a net pos­i­tive for Earn depos­i­tors, as it puts addi­tion­al pres­sure on Gen­e­sis to repay its debt to Gemini. 

Lin not­ed, “Gem­i­ni isn’t with­out blame in this inci­dent. Although the com­pa­ny claimed to have con­duct­ed prop­er due dili­gence on Gen­e­sis, it’s clear that it wasn’t enough. As a result, Gem­i­ni should bear at least part of the respon­si­bil­i­ty for its defunct Earn program.” 

Matthi­js de Vries, founder and chief tech­nol­o­gy offi­cer for blockchain tech­nol­o­gy firm Alliance­Block, told Coin­tele­graph that while it’s dif­fi­cult to know what exact­ly the truth is with this sit­u­a­tion, it doesn’t mat­ter because the issue once again high­lights the clear prob­lem with cen­tral­iza­tion. He added:

“Putting your trust in indi­vid­u­als instead of smart con­tracts means you place trust in peo­ple, not tech­nol­o­gy. All of the issues we’ve seen in 2022, and con­tin­ue to see, make the need for self-cus­tody more and more impor­tant. Own­ing your own assets and being able to man­age these assets as you wish is critical.”

He fur­ther stat­ed that the tac­tics being used by Sil­bert don’t present a good look for the com­pa­ny. Also, instead of sim­ply play­ing the blame game, the indus­try as a whole needs to learn from this, de Vries argued. “Blockchain was built to be decen­tral­ized, trust­ing your­self with your assets, not pow­er­ful indi­vid­u­als,” he concluded.

A sim­i­lar opin­ion is shared by Jere­my Epstein, chief mar­ket­ing offi­cer for Radix — a smart con­tract plat­form for decen­tral­ized finance (DeFi) — who told Coin­tele­graph that the episode fur­ther rein­forces the need for trans­par­ent ledgers and the vis­i­bil­i­ty that comes from a decen­tral­ized finan­cial sys­tem. In his view, when there are cen­tral­ized enti­ties that can hide their books behind walls, it makes trust very dif­fi­cult to fos­ter while fur­ther tar­nish­ing the industry’s reputation. 

Recent: Con­gress may be ‘ungovern­able,’ but US could see cryp­to leg­is­la­tion in 2023

Last­ly, Liu Sheng, lead devel­op­er for Opside — a mul­ti­chain three-lay­er archi­tec­ture for high-through­put Web3 appli­ca­tions — told Coin­tele­graph that such instances would nev­er see the light of day with DeFi and decen­tral­ized autonomous orga­ni­za­tions, as users nev­er have to give away own­er­ship of their assets when chas­ing yields. Sheng added:

“This implo­sion of cen­tral­ized ser­vice providers hope­ful­ly takes us one step clos­er to a decen­tral­ized econ­o­my where greed can be man­aged in a more trans­par­ent atmos­phere. If we put the prop­er infra­struc­ture in place, we can hope­ful­ly con­vince retail investors that it’s safer to deal with decen­tral­ized entities.”

The SEC’s lat­est actions seem to have changed the tra­jec­to­ry of the entire sto­ry, espe­cial­ly with Tyler Win­klevoss say­ing on Jan. 13 that Gem­i­ni was near­ing a solu­tion to its cus­tomers’ ongo­ing woes and that the SEC’s action was com­plete­ly unneed­ed. He tweeted:

As more details regard­ing the case con­tin­ue to emerge, it will be inter­est­ing to see how things con­tin­ue to play out for the two com­pa­nies as well as the dig­i­tal asset indus­try from here on out, espe­cial­ly with the mar­ket going through a major short­age of investor confidence.



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