A company founded by Cameron and Tyler Winklevoss was one of two cryptocurrency firms charged with offering unregistered securities by the Securities and Exchange Commission on Thursday.
Gemini, the Winklevoss’ crypto exchange, and Genesis, a broker under the heavyweight conglomerate Digital Currency Group, together raised “billions of dollars’ worth of crypto assets from hundreds of thousands of investors” for Gemini Earn, a program that promised investors high interest on the assets they lent to Genesis.
Earn was billed to customers as a way to passively grow their crypto holdings, with advertised annual returns as high as 7.4 percent. The set-up was simple: customers would deposit their funds into the program, and the money would then be lent out to a third-party, generating interest.
As The Daily Beast reported in December, Gemini assured users that they could cash out their crypto “at any time… plus the interest you’ve earned!” But it turns out that wasn’t quite true. In November, amid fallout from the collapse of FTX, the cryptocurrency exchange founded by Sam Bankman-Fried, Gemini’s lending partner Genesis abruptly “paused withdrawals,” meaning roughly 340,000 customers could no longer access their funds. Those assets, estimated at $900 million in total, are still stuck in limbo.
“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.
“Doing so best protects investors,” he added. “It promotes trust in markets. It’s not optional. It’s the law.”
The SEC’s complaint seeks permanent injunctive relief, disgorgement, and civil penalties.
Former Gemini employees told The Beast that Gemini Earn’s terms and conditions were highly dubious from the outset. One staffer recalled reading the fine print for the first time, saying, “[We] were like, ‘Holy shit, are you fucking kidding me?’”
Among those terms: Customer assets were loaned out on “an unsecured basis,” which meant that their money would not be safe in the event of a market collapse. The deposits were also not insured, nor were they guaranteed against errors or fraudulent activity. Promised investment returns could also change at any time.
In recent weeks, Gemini has unsuccessfully attempted to wrest the Earn assets from Genesis, which owes its creditors more than $3 billion, according to a Thursday report by the Financial Times.
The Winklevosses and DCG’s founder and chief executive, Barry Silbert, have exchanged potshots amid the bridling negotiations. Accusing Silbert of engaging in “bad faith stall tactics” earlier this week, Cameron Winklevoss called for his removal, calling him “unfit to run DCG and unwilling and unable to find a resolution with creditors that is both fair and reasonable.” A DCG spokesperson called the remarks “malicious, false and defamatory.”
“This is another desperate and unconstructive publicity stunt from Cameron Winklevoss to deflect blame from himself and Gemini, who are solely responsible for operating Gemini Earn and marketing the program to its customers,” the rep said.
The Winklevoss twins previously rankled employees last summer after taking their amateurish cover band on tour just days after axing scores of workers.
“They laid off 10 percent of their staff,” one former employee told The Daily Beast at the time, “and then they went on tour with their rock band.”