Yesterday, the Securities and Exchange Commission (SEC) filed a lawsuit (full text here) against Winklevoss-owned Gemini Trust and DCG-owned Genesis Capital over the Gemini Earn offering. Gemini Earn allowed consumers to deposit cryptocurrencies that were lent to Genesis Capital in exchange for interest. The product has been withdrawn, but nearly $900 million related to 340,000 accounts is locked up with crypto lender Genesis Capital, which stopped allowing withdrawals in November 2022 due to loans made to Alameda’s bankruptcy.

The lawsuit alleges that both parties were involved in an unregistered securities offering that harmed hundreds of thousands of investors. “Gemini itself repeatedly described Gemini Earn as an investment on its website,” the lawsuit claims.

“The recent collapse of crypto asset lending programs and the suspension of the Genesis program underscore the critical need for platforms offering securities to retail investors to comply with federal securities laws,” said Gurbir S. Grewal, director of the Enforcement Division of the SEC.

Gemini had a crypto lending product since 2018, but initially it only targeted institutional and accredited investors. That changed in February 2021 when the Gemini Earn product was opened up to consumers after signing a deal with Genesis Capital.

According to the complaint, Gemini earned a broker fee of between 0.06% and 4.29%, depending on the crypto asset involved, and received $2.7 million for the three months ending in March 2022.

The agreements with the clients forced Genesis to return the cryptocurrencies within three days if any investor requested it.

Gemini’s Tyler Winklevoss pushes back

Tyler Winklevoss expressed his disappointment that the lawsuit does not help Gemini Earn users get their money back.

He said on Twitter: “As a matter of substance, the Earn program was regulated by @NYDFS and we have been in discussions with the SEC about the Earn program for over 17 months. They never raised the possibility of any enforcement action until AFTER Genesis stopped the withdrawals on November 16.”

However, the lawsuit states that “although Gemini is registered with the NYSDFS as a New York limited purpose trust company, the NYSDFS did not supervise Genesis… Any capital reserve requirements applicable to Gemini did not apply to Genesis or the crypto assets offered to Genesis. through Gemini Earn.”

Discussion between the Winklevoss twins and DCG’s Barry Silbert

Gemini understandably wants its customers to be rewarded. Earlier this week, Cameron Winklevoss posted a explosive letter on Twitter make complaints of fraud. The Digital Currency Group responded.

Earlier this year, Digital Currency Group (DCG) bailed out Genesis after the collapse of Three Arrows Capital (3AC). DCG issued a $1.1 billion note to fill the 3AC hole. In addition to the note, DCG borrowed $527 million from Genesis Capital prior to May 2022, which is still outstanding.

However, one of the key problems is that Gemini continued with the Gemini Earn program even after the May crash and the Genesis bailout. Another high-profile company that was involved with Genesis Capital was Circle. However, it was in a more fortunate position to benefit from rising interest rates, so it began downplaying the loan product. When the November withdrawal freeze happened, Circle’s clients were only exposed to a sum of $2.6 million, so it decided to cover the cost itself.