SEC charges over Gemini, Genesis Earn program latest shot at crypto lending

The Securities and Exchange Commission’s recent charge against cryptocurrency exchange Gemini and crypto firm Genesis over a lending product is another warning shot to the industry on yield-bearing accounts.

The U.S. regulator charged Gemini and Genesis Jan. 12 for the unregistered offer and sale of securities to retail investors through a Gemini crypto lending program. That program has been the subject of a public feud between Gemini’s Cameron and Tyler Winklevoss and the head of Genesis’ Digital Currency Group, Barry Silbert.  

“It creates a warning signal for other exchanges and actors in the crypto space that are also offering yield bearing products, which is quite frankly a lot of the exchanges,” said Alex More, a partner at Carrington, Coleman, Sloman & Blumenthal who focuses on digital assets.  

Gemini ended the Gemini Earn program earlier this month. Retail investors in Gemini Earn have not been able to withdraw their assets, the SEC said on Thursday. Those charges last week and others make clear that crypto lending platforms and other intermediaries need to comply with securities laws, SEC Chair Gary Gensler said.  

“We look forward to defending ourselves against this manufactured parking ticket. And we will make sure this doesn’t distract us from the important recovery work we are doing,” Gemini co-founder Tyler Winklevoss tweeted in response to the allegation. A spokesperson for Digital Currency Group declined to comment on the charges. 

The SEC alleges that the Gemini Earn program constituted an offer and sale of securities, said Michael Piwowar, executive vice president of finance at the Milken Institute and a former Republican SEC commissioner.   

“The nuance is that the SEC is not alleging that the underlying crypto assets themselves are securities,” Piwowar said.  

Lending no more credibility

This is not the first time the SEC has brought charges against a crypto lending firm. Prior to its bankruptcy filing, BlockFi settled with the agency in February for $100 million and said it would cease its unregistered offers and sales of its lending product.   

Zachary Fallon, partner at Ketsal, a law firm that specializes in fintech and digital asset industries, said the SEC’s move last week is another warning for crypto companies interested in lending and yield products.

“The SEC’s action this week against Gemini and Genesis is nothing new, and it’s in line with some of its previous actions in the industry, including with BlockFi,” Fallon said in an emailed statement. “That said, the business of crypto-focused lending among institutions will likely continue, but this most recent action should disabuse market participants of any notion that retail-focused crypto lending products can be offered in the United States without compliance with the securities laws.” 

Other exchanges have tried to move forward with a lending product. Crypto exchange Coinbase had plans to launch its own crypto lending product, but dropped that in September 2021 in light of the SEC’s view that it would constitute a security.  

“Platforms that offer these sort of programs are going to be continually targeted for them and they need to make a correct legal and risk assessment if they’re going to offer them,” said Christopher LaVigne, head of U.S. litigation at law firm Withers and co-chair of Withers’ Global Digital Assets Practice. 

The SEC’s broader view towards crypto

Piwowar thought it notable that the SEC made no allegations concerning whether the underlying crypto in this case are securities. But he added that the agency could still make those allegations in other cases. 

“It just means they feel they don’t need to make those arguments for this case,” Piwowar said.  

LaVigne also said the action is a reminder that they agency has a broad view that nearly everything in the crypto sector should be subject to its regulatory regime.  

“They want to be the main regulator,” he said.  

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