"Genesis earned profit by lending the crypto assets to Institutional Borrowers at a higher rate than it paid to its investors," the complaint states. "Genesis pooled the investors' crypto assets and exercised discretion over how to deploy the assets to earn income."
Hedge funds borrow crypto to make leveraged bets on tokens and crypto derivatives. Genesis lent $2.4 billion to now insolvent crypto hedge fund Three Arrows Capital, which was ordered into liquidation in June, leading Genesis Global Trading to file a $1.2 billion claim against the fund. Genesis' parent company, Digital Currency Group, assumed Genesis' liabilities in the case.
In December 2020, Genesis entered an agreement with Gemini to begin offering Gemini customers, including U.S. retail investors, the chance to loan their crypto assets to Genesis in exchange for earned interest.
The two companies began offering the Gemini Earn program to retail investors in February 2021, which raised billions of dollars' worth of crypto assets, the SEC said. The complaint states that the Gemini Earn program was in violation of federal securities law for offering and selling securities without being registered with the SEC.
"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," SEC Chairman Gary Gensler said in a news release Thursday. "Doing so best protects investors. It promotes trust in markets. It's not optional. It's the law."
In November 2022, Genesis announced it would not allow Gemini Earn investors to withdraw their crypto assets due to a liquidity crunch, prompted by the collapse of crypto trading platform FTX and subsequent volatility in the crypto market. At the time, Genesis had about $900 million in assets from 340,000 Gemini Earn investors, the SEC said, and today, retail investors are still unable to withdraw their crypto assets.
In a Twitter thread on Thursday, Gemini co-founder and CEO Tyler Winklevoss said the complaint was "disappointing," and questioned why the SEC chose to file the complaint.
"This does nothing to further our efforts and help Earn users get their assets back," he said. "Their behavior is totally counterproductive."
Mr. Winklevoss also said the company looks forward to defending itself "against this manufactured parking ticket."
Genesis did not immediately respond to a request for comment.
The complaint was filed in the U.S. District Court for the Southern District of New York, and the SEC said investigations into other, related securities laws violations are ongoing.