In January 2023, the SEC (Securities and Exchange Commission) filed a lawsuit against Genesis, accusing the company and Gemini of raising "billions of dollars' worth of crypto assets from hundreds of thousands of investors" through Gemini Earn. Allegedly constituting the sale of a security, the program ran afoul of federal securities law by failing to register with the SEC.
Genesis, a subsidiary of Digital Currency Group, and Gemini, owned by billionaire twins Cameron and Tyler Winklevoss, found themselves in hot water. In November 2022, Genesis announced a freeze on withdrawals for Gemini Earn investors, citing insufficient liquid assets following crypto market volatility, holding roughly $900 million in investments from 340,000 investors.
This market turbulence was linked to the collapse of the crypto trading platform FTX. In February, Gemini faced further penalties, with the New York State Department of Financial Services imposing a $37 million fine for compliance failures tied to the Gemini Earn program.
Genesis Global Capital Settles with SEC
Genesis Global Capital has agreed to pay a $21 million civil penalty to the Securities and Exchange Commission (SEC) to resolve allegations regarding the unregistered nature of the Gemini Earn investment program.
Notably, the agency clarified in a press release that it will only receive a portion of the penalty once the company addresses its bankruptcy claims.
Bankruptcy Filing and Chapter 11 Process
Genesis, a subsidiary of Genesis Global Holdco, has initiated a Chapter 11 bankruptcy filing, signaling its strategic efforts to restructure its business operations. The firm has taken proactive measures by submitting voluntary Chapter 11 petitions to the U.S. Bankruptcy Court for the Southern District of New York. This decision encompasses Genesis Global Holdco, LLC, along with its lending business subsidiaries, Genesis Global Capital, LLC, and Genesis Asia Pacific Pte. Ltd.
The Chapter 11 proceedings will involve devising a roadmap for an exit strategy, which may include establishing a trust to distribute assets to creditors and exploring potential sales of all or parts of the business to new owners. Genesis states that this step is aimed at "maximizing value for all clients and stakeholders" through a systematic restructuring process.
The company asserts its active involvement in constructive discussions with creditors and advisors, with the ultimate goal of emerging from the Chapter 11 process to realign itself within the cryptocurrency industry.
Genesis Bankruptcy Spurs Legal Battles
The fallout from Genesis's bankruptcy has reverberated through the Gemini Earn program, triggering a cascade of lawsuits. Gemini filed a suit against Digital Currency Group (DCG) and its CEO Barry Silbert, alleging fraud. Conversely, Genesis has counter-sued DCG, seeking repayment of loans exceeding $600 million.
Adding to the fray, U.S. regulatory agencies have intervened, and the SEC accused Genesis and Gemini of selling unregistered securities. At the same time, the New York Attorney General filed a lawsuit accusing DCG, Genesis, and Gemini of defrauding investors.
Court filings indicate that market disruptions, including the collapse of Terraform Labs and Three Arrows Capital, prompted Gemini to withdraw funds from Genesis, exacerbating a "run on the bank" scenario.
The legal feud between the two crypto giants intensified following FTX's collapse in November 2022, sparking a public spat involving the CEOs. Disputes over fund recovery escalated, with accusations of non-cooperation and threats of further legal action.
Previously, Gemini initiated legal proceedings against Genesis to access shares of the Grayscale Bitcoin Trust, which are valued at approximately $1.6 billion and used as collateral for loans through the Gemini Earn program.