Three more well-known cryptocurrency companies have been charged by the attorney general of deceiving their clients in the state of New York, where Sam Bankman-Fried, the founder of the now-defunct exchange FTX, is on trial for fraud. A total of $1.1 billion in losses for hundreds of thousands of investors have been attributed to cryptocurrency exchange Gemini, which is operated by the Winklevoss twins, Cameron and Tyler, as well as cryptocurrency lender Genesis and its parent company, Digital Currency Group.
The civil lawsuit was filed and concerns the Gemini Earn program, which was advertised to consumers as a safe and secure means of earning interest on cryptocurrency holdings—up to 8%. Customers of Gemini contributed assets that were combined and given to cryptocurrency lender Genesis, which lent them to major organizations in exchange for a percentage of the earnings.
The CEO of trading platform Swan Bitcoin, Cory Klippsten, claims that these cryptocurrency services were positioned as an efficient savings account alternative to banks. That’s how people understood these platforms, whether you use that language or not. However, the New York attorney general claims that the Earn program posed far greater risk than the promotional materials indicated.
As per the complaint, Gemini knew from the start of the program that the loans given out by Genesis were high-risk and concentrated among a select few third parties. These parties included FTX’s sibling company Alameda Research, which accounted for 60 percent of the loans made by Genesis at one point. Customers of Gemini stood to lose their invested money if any of Genesis’ major creditors were to go into default.
As it happened, Gemini Earn holders lost out on approximately $900 million when Genesis was involved in the FTX blowback in November 2022 and had to file for bankruptcy two months later.
The US financial regulator, the Securities and Exchange Commission, had previously sued Gemini and Genesis in January over the Gemini Earn program, which it claimed amounted to an unregistered securities offering. However, the attorney general of New York has filed charges that are more extensive.
The attorney general alleges that while Gemini neglected to notify clients of their exposure to risk, Genesis and DCG neglected to evaluate the quality of the loans they provided and then made an effort to hide losses sustained in the middle of 2022 when the $1.1 billion in loans that Three Arrows Capital, a hedge fund, and a smaller counterparty defaulted on were given. Shortly after, Genesis CEO Michael Moro and DCG CEO Barry Silbert are named as defendants and charged with making false public statements regarding Genesis’ financial situation.
Middle-class investors suffered as a result of these cryptocurrency companies’ deception and attempts to conceal losses totaling over a billion dollars, according to a statement from New York Attorney General Letitia James. Because they were told flagrant lies about the safety and growth potential of their money if they invested in Gemini Earn, hardworking New Yorkers and investors across the nation lost over $1 billion.
In a post on X, the former Twitter, Gemini stated that it was looking forward to defending itself against the lawsuit, but it did not respond to a request for comments. Requests for comment from Genesis and DCG were not answered.
The lawsuit against the three is the most recent in a string of legal actions taken in the US this year against cryptocurrency businesses. Another exchange, Kraken, agreed to end a service that allowed US users to receive incentives for locking up their cryptocurrency as part of a settlement agreement the SEC reached in February. The SEC claimed that Paxos’ BUSD stablecoin was a security and that Paxos had to abide by securities laws. As a result, the regulator warned Paxos that it intended to sue. The regulator accused exchanges Binance and Coinbase of breaking securities laws in June when it filed charges against them on separate days.
A number of the pioneers of the cryptocurrency space have also been arrested. In addition to Su Zhu of Three Arrows Capital in September, Bankman-Fried was arrested in December, as was Alex Mashinsky of cryptocurrency lender Celsius in July.
According to the press release, the attorney general’s lawsuit calls for “restitution for all defrauded investors and disgorgement of all ill-gotten gains,” in addition to barring Gemini, Genesis, and DCG from conducting business in New York. However, the lawsuit’s ramifications might also affect other areas of the cryptocurrency industry.
According to Travis Kling, the founder of the cryptocurrency asset management company Ikigai Asset Management, the lawsuit may delay the much-anticipated approval of a bitcoin exchange-traded fund, a financial instrument that would enable regular people to invest in bitcoin through their typical stock broker. Grayscale, another DCG subsidiary, is one of the companies waiting for approval. However, Kling finds it difficult to believe that Grayscale will produce the first bitcoin ETF while these accusations against its parent company are still pending.
According to crypto-skeptic analyst Stephen Diehl, DCG’s involvement in the cryptosphere through its venture investments is so great that a conviction and significant financial fine might have unanticipated secondary consequences. According to Diehl, it’s a huge holding company with ties to a huge portion of the American crypto industry. It’s a huge cog in the cryptocurrency wheel.
In the interim, the possibility of additional enforcement action against cryptocurrency industry participants looms. According to Klippsten, the last shoe hasn’t fallen. It is unlikely to stop until offshore, unregulated, and opaque cryptocurrency businesses are brought to account.
