In a statement released today, the United States - Securities and Exchange Commission (SEC) charged Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program.
It is alleged that through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors. Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.
In a statement released from the SEC, Genesis loaned Gemini users’ crypto 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.
It is alleged that because of this arrangement, Genesis was required to have registered that product as a securities offering pursuant to US securities laws, SEC officials said.
“Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,” - SEC chair Gary Gensler said in a statement.
Gemini’s Earn program, supported by Genesis’ lending activities, met the SEC’s definition by including both an investment contract and a note, SEC officials said. Those two features are part of how the SEC assesses whether an offering is a security.
The regulators are seeking permanent injunctive relief, disgorgement, and civil penalties against both Genesis and Gemini. The two firms have been engaged in a high profile battle over $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program, which was shuttered this week.
This charge is the latest in a series of recent crypto enforcement actions led by Gensler after the collapse of Sam Bankman-Fried’s FTX late last year.
The SEC and the Commodity Futures Trading Commission (CFTC), are the two regulators that oversee crypto activity in the U.S. Both agencies filed complaints against Bankman-Fried, but the SEC has increased the pace and the scope of enforcement actions.
Is Australia in a similar regulatory conundrum?
In Australia, ASIC had commenced civil penalty proceedings in the Federal Court against fintech company Block Earner in late 2022 alleging it provided unlicensed financial services in relation to its crypto-asset based products and that it operated an unregistered managed investment scheme.
Block Earner offered a range of fixed-yield earning products based on crypto-assets under the names USD Earner, Gold Earner and Crypto Earner.
ASIC Deputy Chair Sarah Court said, ‘We are concerned that Block Earner offered financial products without appropriate registration or an Australian Financial Services licence, leaving consumers without important protections. Simply because a product hinges on a crypto-asset, does not mean it falls outside financial services law.’
‘ASIC is aware that many consumers are interested in purchasing or investing in crypto-assets. Crypto-assets are risky, inherently volatile and complex and ASIC remains concerned that potential investors in crypto-assets may not fully appreciate the risks involved. ASIC supports the development of an effective regulatory framework covering crypto-assets to protect consumers and investors.’
ASIC is seeking declarations, injunctions, and pecuniary penalties from the Court.
It appears there is a growing trend of increased regulation of cryptocurrency firms in the wake of several high-profile collapses of exchanges and trading firms.
Governments and financial regulators are taking a closer look at the crypto industry and implementing stricter oversight measures in what is being called an effort to protect consumers and prevent fraud. While this could potentially lead to more stability in the crypto market, it may also stifle innovation and create barriers for new firms entering the space.
It will be important to closely monitor the developments in crypto regulation to see how they affect the industry in the long term.
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