Gemini and Genesis’ legal troubles will further shake up the industry

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With investor confidence seemingly at an all-time low thanks to the slew of bankruptcies, a new saga appears to be unfolding now in real time. This includes one of the cryptocurrency exchange Winklevoss twins and Barry Silbert, CEO of the Digital Currency Group (DCG) — the parent company behind cryptocurrency market maker and lender Genesis.

in january. 2, Cameron Winklevoss published an open letter to Barry Silbert reminding him of the fact that it had been “47 days since Genesis halted withdrawals” while offering a seemingly candid assessment of DCG’s current business practices:

“Over the past six weeks, we have done everything within our power to communicate with you in good faith and in a cooperative manner in order to reach a consensual solution to repay the $900 million you owe.”

The letter also indicated that the aforementioned amount was loaned to Genesis as part of Gemini’s Earn program, an offer that enables customers to earn up to 7.4% annual return on cryptocurrency. Cameron then issued another tweet asking Silbert to “publicly commit” to solving the issue by January 4th. 8- A request that seems to have been ignored by him, at least on Twitter.

Tensions escalated

Genesis’ ongoing problems stem from the fact that a large portion of its funds (an estimated $175 million worth) were locked into an FTX trading account. After the collapse of the second largest crypto exchange late last year, the company was forced to halt withdrawals on November 3rd. 16, and even hired the advisory services of investment bank Moelis & Company just a week later to get himself out of the woods.

in December. 7 letter Dirar Islam, interim CEO of Genesis, told customers that “it will take additional weeks rather than days until we come up with a way forward.” In response, Winklevoss and his company hired the investment bank Houlihan Lockie to set up a framework by which they could “solve liquidity issues” and prevent them from paying members of the Gemini “earn” program.

Then things took an ugly turn on December 3rd. 27 when investors sued the twins for blocked funds in the Earn program, accusing the two of fraud and multiple violations of US securities laws.

Moreover, Silbert responded to Cameron’s constant Twitter alerts on January 3. 2, stating that Genesis had already taken action with regard to Gemini’s proposal while also claiming its innocence to DCG, stating unequivocally that the company was not in arrears in its payments to Genesis. In response, Cameron tweeted again:

Gemini is ending the Earn Program with Genesis

After weeks of turmoil, on January 3rd. 10, the Winklevoss twins sent an email to users letting them know that Gemini had ended their Earn flagship with Genesis two days earlier. The move was the latest of many shots fired between the company and the cryptocurrency lender, as the email stated:

“We are writing to inform you that Gemini – acting as your agent – ​​has terminated the Principal Loan Agreement (MLA) between you and Genesis Global Capital, LLC (Genesis), effective January 8, 2023.”

The message then went on to add that effective immediately, Genesis was required to clear any outstanding assets associated with the program, which until last month was offering users up to 8% interest on their crypto holdings.

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For now, customers can view their earnings balances under the “Pending” column as Gemini officials continue to look for a way to return customers’ funds as soon as possible. “Returning your assets remains our top priority and we will continue to work at full speed,” the email read.

Finally, in the lawsuit filed in court on January 28 (January). 8 In response to the class action lawsuit brought by Gemini Earn’s customers, Gemini says that like its customers, it has also been a victim of conduct by Genesis and DCG Group, alleging that company executives “misled the defendants about Genesis, its financial condition and its ability to serve as a responsible borrower in the Gemini Earn program.” “.

Gemini denied all accusations brought against it by its clients, saying that it had all signed an agreement to “arbitrate claims related to the Gemini Earn Program” and that it should not litigate the various claims and causes of action initiated by the plaintiffs. In any forum unless Genesis also participates in the same thing.

Genesis and Gemini are charged by the SEC

in january. On September 12, the US Securities and Exchange Commission charged Gemini and Genesis with selling unregistered securities as part of Earn’s offering. According to the regulator, Genesis lent the accumulated assets from Gemini users while returning a portion of the profits to Gemini, with the latter deducting agent fees of about 4% and returning the remaining profits to its customers.

According to SEC officials, Genesis has been asked to register the program as a securities offering, with chair Gary Gensler adding that the fee is designed to build on such previous actions to inform “crypto lending platforms and other brokers” that they need to comply with the securities laws of the regulator that has been issued. tested by time.

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Gensler testifying before the Congressional Oversight Committee. Source: Reuters / Evelyn Hochstein

The Earn program has had a direct impact on a whopping 340,000 investors, the Securities and Exchange Commission said, adding that between January 2022 and March 2022 alone, Gemini collected $2.7 million in agent fees, with the company using client assets to facilitate various lending activities as well as use as collateral for personal borrowing. During the same three-month period, the agency claimed that Genesis generated $169.8 million in interest income while paying customers (including Gemini) $166.2 million in dividends.

Genesis’ main backers include crypto hedge fund Three Arrows Capital and Sam Bankman-Fried’s Alameda Research, two now nearly worthless entities.

The rocky road ahead

To get a better overview of the matter, Cointelegraph reached out to Rachel Lin, co-founder and CEO of SynFutures – a decentralized crypto derivatives exchange. In its view, Genesis failed to properly hedge its portfolio risk and manage its treasury, leaving its balance sheets severely affected by the FTX infection. She added:

Silbert has yet to fully embrace this fiasco, with some viewing his recent actions as a stalling tactic as they search for emergency liquidity. Instead of calling out Gemini and co-founder Cameron Winklevoss’ demands as publicity stunts, both parties should put users’ deposits first, where there are contractual obligations on both sides.

And while Gemini’s termination of the principal loan agreement with Genesis may be a way to deflect blame and play the victim, Lin believes that in the long run, the move may be a net positive for winning over depositors, as it puts additional pressure on Genesis to pay back its debt to Gemini.

Lin noted, “Gemini is not without blame in this incident. Although the company claimed to have conducted appropriate due diligence on Genesis, that was clearly not enough. As a result, Gemini must bear at least part of the responsibility for Earn’s software.” defunct”.

Matthijs de Vries, founder and chief technology officer of blockchain technology company AllianceBlock, told Cointelegraph that while it is difficult to know the exact truth in this situation, it does not matter because the issue once again highlights the obvious problem of centralization. he added:

“You trust people rather than smart contracts means you trust people, not technology. All the issues we saw in 2022, and continue to see, make the need for self-custodial more and more important. Having your own assets and being able to manage those assets as You like is crucial.”

He further stated that the tactics Silbert uses do not present a good view of the company. De Vries also argued that, rather than simply playing the blame game, the industry as a whole should learn from this. “Blockchain is built to be decentralized, where you trust yourself with your assets, not powerful individuals,” he concluded.

A similar view was shared by Jeremy Epstein, CMO of Radix — a smart contract platform for decentralized finance (DeFi) — who told Cointelegraph that the episode reinforces the need for transparent ledgers and the insight that comes from a decentralized financial system. In his view, when there are centralized entities that can hide their books behind walls, it makes fostering trust very difficult while further tarnishing the reputation of the industry.

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Finally, Liu Sheng, lead developer of Opside — a multi-tiered, three-tier architecture for high-throughput Web3 applications — told Cointelegraph that such cases will never see the light of day with DeFi and decentralized autonomous organizations, where users never have to give up ownership of their assets when Chase returns. Sheng added:

“We hope that this implosion of centralized service providers will take us one step closer to a decentralized economy where greed can be managed in a more transparent atmosphere. If we put in place the right infrastructure, we hope to convince retail investors that it is safe to do business with decentralized entities.”

The latest SEC action seems to have changed the course of the whole story, especially with what Tyler Winklevoss said on January 23. 13 that Gemini was getting closer to solving its clients’ persistent problems and that the SEC’s action was completely unnecessary. chirp:

As more details of the case continue to emerge, it will be interesting to see how things play out for the two companies as well as the digital asset industry going forward, especially with the market going through a significant lack of investor confidence.