Bankrupt cryptocurrency bank Genesis, a subsidiary of Digital Currency Group (DCG), has agreed to pay a $21 million civil fine to settle charges with the Securities and Exchange Commission (SEC) without admitting or denying any allegations.
The settlement resolves allegations that Genesis engaged in the unregistered offer and sale of securities through a crypto asset lending program known as Gemini Earn.
The SEC announced the settlement on Tuesday morning, reaffirming its commitment to enforcing securities laws in the cryptocurrency market.
“We accused Genesis of failing to register its retail cryptocurrency lending product before going public, bypassing basic disclosure requirements designed to protect investors,” SEC Chairman Gary Gensler said in a press release.
The settlement includes a permanent injunction against Genesis for violation of Section 5 of the Securities Act. Notably, the SEC will not receive any portion of the penalty until the company pays the money it owes to creditors and customers, including claims from retail investors in the Gemini Earn program.
Founded by Barry Silbert in 2013, Genesis offers various services, including over-the-counter (OTC) trading, lending, and cryptocurrency custody, and primarily targets institutional clients and high-net-worth individuals. But in January 2023, it filed for Chapter 11 bankruptcy protection with $150 million remaining in the bank and owed at least $3.4 billion to creditors and customers.
The SEC complaint alleged that the Gemini Earn program, which offered customers a return on their cryptocurrency deposits after lending them to Genesis, constituted an unregistered offering of securities. But in November 2022, Genesis froze withdrawals for Gemini Earn customers due to lack of sufficient liquid assets following volatility in the crypto asset market.
Genesis' bankruptcy was primarily caused by the collapse of FTX, a major exchange founded by Sam Bankman-Fried, and the resulting downturn in the digital asset market. Genesis' financial struggles were further complicated by disputes with Gemini and problems faced by Genesis' parent company DCG.
“The collapse of the Gemini Earn program underscores the unknown risks to investors when market participants fail to comply with federal securities laws,” Gurbir S. Grewal, director of the SEC's Division of Enforcement, said in the news release.
Gemini recently announced that Genesis has agreed to return $1.1 billion in digital assets to users of the platform's Earn program. This development, if approved by the bankruptcy judge, will result in all Earn users receiving 100% of their digital assets in-kind.
In a recent development, Genesis received court approval to sell approximately $1.6 billion of Grayscale cryptocurrency shares to repay creditors. The company is working on a liquidation plan to cease operations and pay customers in cash or cryptocurrency. Genesis also reached settlements with the U.S. Securities and Exchange Commission and the New York Attorney General to prioritize customer premium payments.
Edited by Stacey Elliott.
