SEC Charges Crypto Firms with Selling Unregistered Securities

In a sign of increasing scrutiny of the crypto market, the US Securities and Exchange Commission (SEC) this week charged two prominent crypto firms, Genesis Global Capital and Gemini, for selling unregistered securities to investors through Gemini's Earn crypto asset lending program.

The SEC says that Gemini’s Earn program constituted an offer and sale of securities under SEC law, avoiding disclosure obligations created to protect investors and raising billions of dollars of crypto assets from thousands of investors. The SEC says Gemini should have registered the sale of these securities with it.

In December 2020, Genesis Global Capital entered into an agreement with Gemini to give Gemini customers the opportunity to loan their crypto investments to Genesis Global Capital in exchange for interest payments.

The program went live in February 2021, with Gemini handling the transaction and taking an agent fee as high as 4.29% from returns it received from Genesis. The SEC alleges that Genesis took legal liberties in deciding how to use borrowed crypto assets to generate revenue for investors.

In November, Genesis announced it would pause withdrawals as it lacked the liquidity to honor withdrawal requests. At the time, Genesis was holding roughly $900 million in Gemini customer deposits, which are still inaccessible today.

The SEC’s action is intended to disband the program and to recover any illegally earned profits. In addition, a group of investors have brought a class action lawsuit against Gemini, alleging they were deceived into investing in the program and were not told the securities were unregistered.