The SEC accused Genesis and Gemini of selling unregistered securities

The Securities and Exchange Commission on Thursday charged crypto firms Genesis and Gemini with allegedly selling unregistered securities in connection with a high-yield product offered to depositors.

Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which advertised returns of up to 8% for customers.

According to the SEC, Genesis lent crypto to Gemini users and sent a portion of the profits back to Gemini, which then deducted an agent fee, sometimes over 4%, and returned the remaining profit to its users. Genesis had to register that product as a securities offering, SEC officials said.

“Today’s charges build on previous actions to make clear to the market and the investing public that crypto-lending platforms and other intermediaries must comply with our time-tested securities laws,” SEC Chairman Gary Gensler said in a statement.

Gemini’s Earn program, backed by Genesis’ lending activities, meets the SEC’s definition as including both an investment contract and a note, SEC officials said. These two features are part of how the SEC evaluates whether an offering is a security.

Regulators are seeking a permanent injunction, release and civil penalties against Genesis and Gemini.

The two firms were engaged in a high profile battle over $900 million in client assets that Gemini entrusted to Genesis as part of the Earn program, which closed this week.

Gemini, which was founded in 2015 by bitcoin defenders of Cameron and Tyler Winklevoss, has an extensive exchange business that, while under siege, could withstand enforcement.

But Genesis’ future is more uncertain as the business is heavily focused on customer crypto lending and has already engaged restructuring advisers. The crypto lender is a unit of Barry Silbert’s Digital Currency Group.

SEC officials said the possibility of DCG or Genesis going bankrupt had no bearing on whether to file charges.

This is the latest in a series of recent crypto enforcement actions led by Gensler since the collapse of Sam Bankman-Fried’s FTX in November. Gensler was heavily criticized on social media and by the legislators on the SEC’s failure to enforce safeguards on the nascent crypto industry.

Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulators overseeing crypto activity in the US. Both agencies filed complaints against Bankman-Fried, but the SEC has recently increased the pace and scope of enforcement actions.

The SEC filed a similar lawsuit against now-bankrupt crypto lender BlockFi and arranged last year. Earlier this month, Coinbase arranged with New York State regulators over historically inadequate KYC protocols.

Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has brought five crypto-related enforcement actions.

This is breaking news. Check back for updates.

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