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Digitalcurrency Group, a venture capital firm, has filed a motion to dismiss the criminal case brought against it by the New York Attorney General's Office.
The legal battle between DCG and NYAG has been going on for months, and is directly intertwined with a dispute between two other prominent companies in the cryptocurrency space: Genesis, a now-defunct brokerage, and Gemini, an exchange and bank. These groups have been embroiled in a series of disputes dating back years, which have included dramatic changes in relationships and serious accusations of fraud. A particularly relevant development in the whole situation is the fact that bankrupt Genesis was and remains a subsidiary of the very powerful DCG, which has billions in assets under management and counts ETF issuer Grayscale as another subsidiary.
In other words, untangling the background of all the different players involved here is a fairly large undertaking, especially given the fraught environment that currently exists. Not only was the Attorney General's action equally directed against DCG, Genesis, and Gemini, but Genesis and Gemini also faced civil suits independent of this. The NYAG accused these companies in October 2023 of mass defrauding investors to obtain more than $1 billion, and the mutual accusations created a chaotic atmosphere. To start, as important as nowhere else is the recent revelation found in the court files surrounding this chapter. Specifically, court documents revealed last March that Genesis and Gemini had considered merging in 2022.
In 2022, DCG CEO Barry Silbert sat down with Gemini co-founder Cameron Winklevoss over lunch to discuss some of the motivations and logistical issues involved in merging the two corporate entities together. At the time, Genesis was at risk of bankruptcy, and its large partnerships with Gemini meant that the fallout was likely to hurt the company's other businesses. Gemini loaned significant funds to Genesis as part of the Gemini Earn Program, which Genesis proceeded to lose. Hedge fund Three Arrows Capital was responsible for this money when it went bankrupt in the wake of the FTX collapse, and Genesis faced a billion-dollar dilemma. As for the original source of these missing funds, the NYAG accused the companies of defrauding these funds from investors.
At the meeting, Silbert made a sales pitch that the two companies should merge, and that they would “be a juggernaut and be able to compete with Coinbase and FTX.” He added that even if Genesis and Gemini cannot reach an agreement on those terms, “there is only so much Gemini and Genesis can do together and the two companies should lean together, not separate.” Although Winklevoss was “intrigued” by the proposed deal, it did not happen. Frictions arose, along with Genesis' bankruptcy, in the immediate aftermath.
A particular point of contention is found in the aforementioned Gemini Earn partnership, which made headlines in February when Genesis won a court ruling against Gemini. Essentially, Genesis owned a slice of Grayscale Bitcoin Trust (GBTC) shares that had been promised to Gemini as collateral for the exchange of funds between the two companies, but Genesis declared bankruptcy before the shares were actually traded. Because GBTC is unique among Bitcoin ETFs as a pre-existing fund that was converted into an ETF, this tranche of shares had swelled by early 2024 to be worth more than $1.2 billion. DCG's use of both Grayscale and Genesis further complicated the issue. Gemini contested Genesis' legal right to sell shares it had promised years earlier, triggering a lengthy civil lawsuit.
Although the matter was resolved through a series of settlements that allowed Genesis to make the sale and prevented it and Gemini from pleading guilty, the NYAG still filed a complaint alleging that the parties involved were all jointly guilty of gross fraud. There was more than a billion dollars missing, and the Attorney General's Office was tired of the recriminations between the parties involved. Even if Genesis could make enough money from its sale to compensate its investors, this still does not address the issue of criminal activity. A particular example of the hostile environment arose when DCG, Genesis' parent company, objected to Genesis's own settlement with the NYAG.
So, this brings us to the present day. On March 7, Silbert and DCG filed a motion to dismiss the Attorney General's lawsuit, claiming that the allegations against these companies are completely baseless. In this motion, DCG's legal team claimed that “the allegations against DCG in this case are a thin web of baseless innuendo, blatant mischaracterizations and unsupported closing statements. In search of a headline-worthy scapegoat for the losses caused by others, OAG [Office of the Attorney General] “Unlawfully seeks to portray DCG's good faith support of a subsidiary as engaging in fraud.” They specifically allege that DCG acted in good faith by transferring funds to Genesis after Three Arrows' collapse, investing “hundreds of millions of dollars of additional capital At its subsidiary during the months before its bankruptcy, although DCG was under no obligation to do so. The prosecutor had a different view, as DCG's net contributions masked a massive drain on Genesis' funds at a crucial moment: DCG got its money back, Genesis declared a “liquidity crisis” and did not allow users to withdraw their cryptocurrencies, and Genesis promptly went bankrupt. However, the burden of proof is on them to prove that this was an intentional fraud tactic.
As yet, there is no way to know what the judge thinks of DCG's proposed defense or motion to dismiss, or whether settlement is possible if the motion to dismiss is denied. However, an unmistakable good sign emerged from this morass: Gemini announced its plans to compensate alleged users who were defrauded in the Gemini Earn partnership with in-kind assets. In other words, bitcoin was stolen from them from those users in 2022, and Gemini has pledged to repay them, marking the jump in bitcoin's price since then. This added another $700 million to the price tag on over $1 billion in assets, a clear sign of the company's confidence.
If nothing else, this decision to compensate users like this is a great show of honesty and good intentions from Gemini. Gemini is named as a co-defendant in all legal documents filed by Silbert's legal team regarding the NYAG lawsuit, and would also benefit significantly from the lawsuit being dismissed. This gesture of good faith may not be enough to clear the air for DCG and Genesis, but it certainly can't hurt anyone's chances of escaping the fiasco without a criminal conviction. Although Gemini failed to stop Genesis' attempt to make money from GBTC sales, Gemini remains a successful and prominent exchange. It was clearly able to offer compensation of this size without relying on the GBTC chip.
It's anyone's guess how the lawsuit will play out in the coming months. When NYAG first filed a complaint after the first round of settlements, it seemed clear that the plaintiffs were quite fed up with the caustic attitude of these former business partners. However, Gemini's recovery plan will certainly go a long way in proving its resolve to do right by its users. If nothing else, it shows that they are proactive in taking the problem seriously. We will have to watch the situation carefully as it develops, but it seems clear that the mutual hatred and deceit shown so far has not been rewarded. The broader digital asset space has been periodically filled with shaky businesses and outright scams, but they all eventually collapse. Bitcoin, on the other hand, has had legitimate success. When the dust settles, the biggest winners may actually be fraudulent users, who collectively will see their expected returns nearly double thanks to the power of Bitcoin. Compared to these types of winnings, it is difficult to imagine that a scam works much better.
