As tensions rise between Gemini and Genesis over their dispute, the Securities and Exchange Commission (SEC) has filed a complaint against both players for failing to comply with federal securities laws.
SEC takes on Gemini and Genesis
As the Securities and Exchange Commission (SEC) began investigating Digitial Currency Group (DCG) last week, it is now turning its attention to its subsidiary Genesis and the Winklevoss twins’ exchange Gemini. The SEC is accusing both entities of “unregistered offering and sale of securities to retail investors” in connection with the Gemini Earn product.
According to the complaint filed by the US financial regulator, the two players are accused of having offered Gemini Earn to investors based in the United States during the period from February 2021 to November 2022, in violation of federal securities laws.
As the SEC points out, the product was born out of an agreement between Genesis and Gemini in December 2020. In addition, the complaint points to a lack of transparency on the part of both parties. Indeed, Gemini allegedly deducted up to 4.29% in management fees from the returns paid by Genesis, before distributing them to its clients. On the other hand, the contract between the two companies seemed to lack safeguards:
“Genesis exercised its discretion over how to use investors’ crypto-assets, to generate revenue for its business and pay the interest rates it promised [to investors in] Gemini Earn. The Gemini Earn agreement contained no explicit terms to restrict how investors’ crypto-assets would be used by Genesis. “
Gary Gensler speaks out on regulation
Following the case, SEC Chairman Gary Gensler took the opportunity to provide a reminder of the industry’s regulatory needs:
We @SECGov charged Genesis & Gemini for the unregistered offer & sale of crypto asset securities through Gemini Earn.
Crypto intermediaries need to comply with our securities laws. This protects investors. It promotes trust in markets. It’s not optional. It’s the law.
– Gary Gensler (@GaryGensler) January 12, 2023
To introduce his message, he used an explicit analogy about safety in cars. This comparison allows him to argue that the cryptocurrency industry should be regulated in the same way as the entire finance sector, despite the technological differences:
“Seatbelts are a standard in every car. This is true despite many innovations in car technology. Whether the car is four-wheel drive, two-wheel drive, runs on gasoline or electricity, drivers and passengers deserve to be protected. In the same way, our federal safety laws protect investors. “
If regulation is to be there to protect investors from fraudulent actions such as those of FTX, or from the lack of transparency that Gemini and Genesis seem to have shown, then it must be fair, appropriate and enforceable.
Indeed, if the abuses are a reality and must be punished, the challenge will be not to use them as a pretext to blame an entire industry.
