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SEC Blames 2 Cryptocurrency Firms for Not Disclosing Risks to Investors

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For nearly two years, ordinary Americans have been putting money into a crypto platform called Gemini, earning high interest rates for their money at a time when that can be extremely hard to come by.

But in November, all 340,000 users of the program — led by Silicon Valley twins Cameron and Tyler Winklevoss — found themselves unable to withdraw their money as the cryptocurrency market began to crumble and the company experienced a liquidity crunch.

Now the Securities and Exchange Commission is trying to do something about it. On Thursday, the regulator accused Gemini and another company it does business with, Genesis, of failing to register the program they ran. as security. It is an attempt to make companies responsible and can generate losses to reimburse investors.

The SEC is targeting Gemini Earn, a program that promised consumers high interest returns for putting their money into these crypto accounts. He brought the same charge against Genesis.

“We allege that Genesis and Gemini offered unregistered securities to the public, circumventing disclosure requirements designed to protect investors,” SEC Chairman Gary Gensler said in a statement announcing the allegations. Registration, he said, “is not optional. It’s the law.” The agency did not specify the amount of damages it is seeking.

The SEC’s action is part of a government effort to hold cryptocurrency companies accountable for massive customer losses, which have been growing rapidly since cryptocurrency exchange FTX imploded in November, sending ripples through the sector. The SEC and Commodity Futures Trading Commission recently filed complaints against FTX co-founder Sam Bankman-Fried with the same goal in mind.

Under Earn, Gemini offers high fees to customers in exchange for borrowing their money. They did this in partnership with Genesis, which borrows money from Gemini at high rates. In recent weeks, Gemini and Genesis executives have sparred over who has failed in their responsibility to return money to consumers.

As a result, an estimated $900 million is frozen in Gemini Earn with no indication of when customers will be able to access it.

Not every expert is convinced that the SEC has a strong case.

Carol Goforth, a professor at the University of Arkansas School of Law and an expert on securities regulation, said it was unclear whether the Gemini instance would pass one of several legal tests the government uses for securities.

“Just saying that every cryptocurrency is a security is deeply disturbing,” she said. “It really depends on how the product, whether it’s Gemini Earn or whatever, is marketed. They are not all the same.”

Gemini co-founders, the Winklevosses, are known as provocateurs in Silicon Valley. The twin brothers were Harvard Olympic rowers who sued Mark Zuckerberg, alleging that he and his partners stole the idea for Facebook from a company they founded. Forming as early adopters of cryptocurrencies, they have gone on to become some of the most successful entrepreneurs in the industry as Gemini has become one of the most popular cryptocurrency lending platforms.

A big reason for this popularity was Earn, which since it was launched almost two years ago promised returns of up to 8%.

Genesis is part of the Digital Currency Group, or DCG, a conglomerate run by finance tycoon Barry Silbert and whose holdings include asset manager Grayscale Investments and news platform CoinDesk.

Neither Gemini’s Cameron Winklevoss nor a Genesis representative responded to a request for comment.

The SEC has tried to use this power before. In early 2022, for example, the agency and state securities agencies billed and reached a $100 million settlement with cryptocurrency lender BlockFi.

SEC officials told reporters on Thursday that the action against Gemini and Genesis was part of a larger plan to go after cryptocurrency companies that were not registered as securities. They said they are not making a distinction between Gemini and Genesis in moving forward with the action.