S.E.C. Charges Crypto Companies With Offering Unregistered Securities

The Securities and Exchange Commission on Thursday charged the cryptocurrency lender Genesis Global Capital and the cryptocurrency exchange Gemini Trust with offering unregistered securities through a program that promised investors high interest on deposits.

The S.E.C. said that Genesis, a subsidiary of Digital Currency Group, and Gemini, which is run by Tyler and Cameron Winklevoss, had raised billions of dollars of assets from hundreds of thousands of investors without registering the program, which was called Gemini Earn.

By doing so, Genesis and Gemini bypassed “disclosure requirements designed to protect investors,” Gary Gensler, the S.E.C. chair, said in a statement. He added that the charges should “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.”

The S.E.C.’s action against Genesis and Gemini is part of the fallout of cryptocurrency markets melting down last year. A crash in the prices of cryptocurrencies like Bitcoin last spring led to a domino effect, with crypto hedge funds such as Three Arrows Capital and other crypto companies declaring bankruptcy. In November, FTX, a major cryptocurrency exchange run by the entrepreneur Sam Bankman-Fried, also collapsed after the crypto equivalent of a bank run.

In the wake of these failures, regulatory scrutiny of crypto companies has heightened.

In its complaint on Thursday, the S.E.C. said that Genesis partnered with Gemini on the program that let customers earn high interest on assets they lent to Genesis. Gemini facilitated the transactions, the S.E.C. said, pooling customer assets and transferring them to Genesis. In return, Gemini deducted an agent fee of as high as nearly 4.3 percent from the returns that Genesis paid to Gemini Earn investors.

After FTX imploded in November, Genesis froze withdrawals, leaving Gemini Earn customers stranded, according to the complaint. About 340,000 Earn customers are out about $900 million in crypto assets, the S.E.C. said.

Gemini has recently been unsuccessfully negotiating with Genesis and its parent company, DCG, for the release of Earn customer assets. Those negotiations have come to a standstill in recent weeks, with the Winklevosses publicly accusing DCG of stalling to keep funds that belong to its customers.

The Winklevosses said DCG and Genesis have misrepresented financial information and mischaracterized the value of company assets to give the impression that Genesis was in better health than it was. DCG’s founder and chief executive, Barry Silbert, disputed the allegations in a letter to shareholders this week.

Gemini Earn is not the first crypto lending program that the S.E.C. has cracked down on. Last year, the agency reached a $100 million settlement with the now-bankrupt crypto lender BlockFi. In 2021, the agency also blocked the crypto exchange Coinbase, which abandoned its plans to start a yield product.

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.

Matthew Goldstein contributed reporting.