Body: Ever seen one of those Survivor shows on TV? Over a series of weeks people are “voted off the island” until there are only a very few? Yeah, what’s happening to cryptocurrency exchanges appears to have approached that level of drama. Let’s start from the beginning.
I am confused. Who is the OG here?
Ok, let’s start by introducing the players. First, there is Gemeni, which is a cryptocurrency exchange and digital asset custodian. They offered their customers an opportunity to make up to 8% in their Gemini Earn program, the assets of which were propping up Genesis Global Capital (they seem to be acting as a normal hedge fund, but this one focuses upon digital assets.) Normally this is OK, but, Gemini did not register these loans with the SEC, which would’ve triggered many responsibilities to provide disclosures to the customers. Gemini is claiming that these are not securities, so the disclosure done was sufficient. As a result, the SEC is suing Gemini for supposedly violating investor-protection laws. Disclosure of the risks was not the only problem, for the honor of earning this amount of interest, Gemini collected a fee that climbed to over 4%. Now that much of the cryptocurrency world is tanking, there were many consumers asking for their money back (think of an olde-fashioned Bank run here.) Genesis stopped filling withdrawal requests on November 16th and is blaming this inabiliht to pay upon the fall of FTX.
At nearly the same time, the Commodity Futures Trading Commission has also sued Gemini. (In case you missed it like I did, suit was filed last week.) In June, the Commodity Futures Trading Commission filed a civil case against Gemini that claimed the crypto firm misled regulators in 2017 about its plans for a Bitcoin futures product. The CFTC said Gemini “made false or misleading” statements during the regulatory review process for the bitcoin futures product.
Is this really a big deal?
Yes. The loans being made to Genesis amounted to over $900 million. In its suit, the SEC is suing Gemini for the revenue earned illegally and for a variety of fines.
OK, but in the Court of Public opinion…
Eggs and rotten tomatoes are also being thrown. The famous Winklevoss twins are the co-founders of Gemini and they have written 2 open letters (shared on Twitter) to the CEO of the parent company that owns Genesis. They refer to his “bad faith stall tactics” and urge the removal of the current CEO, Mr. Barry Silbert. In return, Mr. Silbert referred to the tweets as a “deperate and unconstructive pubilicity stunt.” For its part, Genesis has laid off over 30% of its personnel and is considering filing for Bankruptcy.
At the same time, Gemini Earn customers who had their assets frozen are suing Gemini. For their part, Gemini is claiming that the customers have a valid claim against Genesis, aand DCG, not Gemini. The founder of Gemini issued a letter denying any responsibility for the outcomes of this deal. In an interview this week, Tyler Winklevoss said Gemini believed customers could be made whole. “There’s a path to getting a deal done that’s a resolution for Earn users,” he said. We shall see.
Wait a minute, didn’t we see this movie before?
The lawsuit against Genesis and Gemini resembles another case that the SEC and several states filed over BlockFi Lending LLC’s product, which allowed crypto traders to earn a yield for lending their digital assets. The SEC alleged that BlockFi’s interest-bearing accounts were securities and that the firm should have registered the product. BlockFi paid a $100 million fine to settle the allegations. The company didn’t admit or deny wrongdoing. I don’t forsee any materially different outcome in the cases against Gemini and Genesis.
In another recent legal blockbuster, Genesis itself had a starring role. Stay with me here. Genesis loaned money (a lot of money) to Three Arrows Capital (3AC) which, in turn, purchased shares in the Grayscale Bitcoin Trust, creating collateral for the loan, as the shares were trading at a premium to the Bitcoin they represent. However, in 2021, the bottom started to fall out from under cryptocurrency, and the collateral lost value. There were many margin calls from nervous investors, and Genesis itself lost at least $1.2 Billion, and 3AC went into Bankruptcy.
The Verdict
A spokesman for DCG added in a statement emailed to Forbes: “This is another desperate and unconstructive publicity stunt from Cameron Winklevoss to deflect blame from himself and Gemini, who are solely responsible for operating Gemini Earn and marketing the program to its customers. We are preserving all legal remedies in response to these malicious, false, and defamatory attacks.” This is the problem I have with cryptocurrency firms. There is a lack of leadership. Don’t be fooled, these executives have the business credentials, for sure. But, so few of them have the emotional intelligence needed to be a corporate leader over the long term. And this long-term scotoma in their vision is what makes me very leery of 99% of cryptocurrency projects. So, I guess the lesson here is this. When you read the whitepaper, by all means, feel free to diagram out the capital flows and understand all that. But, at the same time, please also understand that plans for the long term should also be visible. If this long-term planning is not in evidence, I think you must wonder about how they plan to stay in business.
REFERENCES
SEC Sues Crypto Firms Genesis and Gemini Over Lending Product – WSJ
SEC sues Gemini and Genesis over crypto asset-lending programme | Financial Times (ft.com)
SEC Charges Crypto Companies With Offering Unregistered Securities – The New York Times (nytimes.com)
As Gemini And Genesis Trade Barbs Over Failed Product, SEC Sues Them Both For Selling It (forbes.com)
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.