SEC Charges Gemini and Genesis With Selling Unregistered Securities

The U.S. Securities and Exchange Commission on Thursday accused Genesis, the embattled digital assets broker, and Gemini, a centralized crypto exchange, with the sale of unregistered securities.

In a 22-page lawsuit filed in federal court in Manhattan, the SEC focused on Gemini’s Earn product, which promised users a yield on deposited crypto assets. Gemini deployed those assets with Genesis, which is under financial stress after FTX’s collapse left it with a $3B hole in its balance sheet.

Retail Investors

The agency said that between February 2021 and November 2022 Gemini and Genesis sold unregistered securities to investors in violation of federal law. The complaint said the two companies raised “billions of dollars” in crypto assets primarily from U.S. retail investors.

“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,” Gary Gensler, the SEC’s chair, said in a statement.

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The Defiant

The lawsuit hit just as Cameron Winklevoss, a co-founder of Gemini alongside his twin brother Tyler, has been embroiled in a public spat with Barry Silbert, the CEO of Genesis’ parent company, Digital Currency Group (DCG), over the fate of $900M in Gemini assets stuck in Earn at Genesis. Cameron Winklevoss accused Silbert and DCG of fraud and mismanaging customer deposits. Silbert has denied the allegations.

Tyler Winklevoss condemned the SEC’s action on Twitter, calling it “disappointing” and “counterproductive.” The Gemini co-founder said that his firm and the SEC have been communicating about the Earn product for 17 months and only when Genesis paused withdrawals did the SEC raise the possibility of an “enforcement action.”

Gemini Earn paused withdrawals on Nov. 16, citing Genesis’ lending arm, which holds the bulk of Earn assets and also paused withdrawals, as the reason for the move. Earn’s approximately 340,000 users have yet to get their deposits back.

Neither Silbert or DCG has posted a comment on the SEC action. DCG has reportedly come under investigation by U.S. prosecutors.

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The Defiant

From a DeFi perspective, where protocols dictate where value flows rather than centralized actors, the SEC’s ruling isn’t necessarily a bearish signal — Gemini Earn differs from DeFi lending protocols like Aave or Compound in that it took custody of users’ assets.

This allowed Earn’s users to get caught out in the cold as their assets weren’t under their control, reinforcing a central tenet of DeFi yet again: Not your keys. not your coins.

Still, the SEC case is yet another sign that it considers many crypto products securities or investment contracts that fall under existing law and must be registered and disclosed the same way as stocks or bonds.