SEC charges firms for unregistered crypto asset lending program

The Securities and Exchange Commission (SEC) levied charges against two companies for violations related to its crypto asset lending program.

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Specifically, the SEC charged Genesis Global Capital and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program. Through this unregistered platform, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors.

In December 2020, according to the complaint, Genesis, a subsidiary of Digital Currency Group, entered into an agreement with Gemini to offer Gemini customers an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest.

Starting in February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, whereby Gemini Earn investors tendered their crypto assets to Genesis, with Gemini facilitating the transaction. Gemini deducted an agent fee, sometimes as high as 4.29 percent, from the returns Genesis paid to Gemini Earn investors. Genesis then exercised its discretion in using investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors, the complaint said.

Further, in November 2022, Genesis said it would not allow its Gemini Earn investors to withdraw their crypto assets because Genesis lacked sufficient liquid assets to meet withdrawal requests. At the time, Genesis held roughly $900 million in investor assets from 340,000 Gemini Earn investors. Ultimately, Gemini terminated the Gemini Earn program this month, but Gemini Earn retail investors have not, as of today, been able to withdraw their crypto assets.

The SEC’s complaint alleges that the Gemini Earn program should have been registered with the commission.

“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” SEC Chair Gary Gensler said. “Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”

The SEC’s complaint was 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.

“The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said. “As we’ve seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions. Our investigations in this space are very much active and ongoing, and we encourage anyone with information about this matter or other possible securities law violations to come forward, including under our Whistleblower Program if applicable.”