Genesis Settles with SEC for $21 Million in Crypto Lending Case

Genesis, a subsidiary of the prominent crypto conglomerate Digital Currency Group (DCG), has reached a notable settlement with the Securities and Exchange Commission (SEC). The agreement entails Genesis paying a substantial $21 million civil penalty to resolve charges without admitting or denying any allegations leveled against it.

The genesis of this settlement lies in the SEC’s accusations regarding Genesis’ involvement in the unregistered offering and sale of securities through its crypto asset lending program dubbed Gemini Earn. This program, aimed at providing customers with returns on their crypto deposits, was alleged to have violated essential disclosure requirements designed to safeguard investors.

The SEC, in its announcement of the settlement, emphasized its unwavering commitment to upholding securities laws within the cryptocurrency market. SEC Chair Gary Gensler underscored the gravity of the charges, highlighting Genesis’ failure to register its retail crypto lending product before making it available to the public.

A key component of the settlement involves a permanent injunction against Genesis, preventing any further violations of Section 5 of the Securities Act. Notably, the SEC will only receive a portion of the penalty once Genesis fulfils its obligations to creditors and customers, including retail investors affected by the Gemini Earn program.

Genesis, established in 2013 by Barry Silbert, initially offered a range of services tailored to institutional clients and high-net-worth individuals, such as over-the-counter trading, lending, and custody of cryptocurrencies. However, the company’s fortunes took a downturn when it filed for Chapter 11 bankruptcy protection in January 2023, owing substantial amounts to creditors and customers amidst financial turmoil.

The bankruptcy filing was exacerbated by the collapse of FTX, a significant exchange, and ensuing market volatility in the digital asset realm. Genesis’ troubles were further compounded by disputes with Gemini and challenges faced by its parent company, DCG.

The collapse of the Gemini Earn program served as a stark reminder of the risks inherent in non-compliance with federal securities laws, as emphasized by Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. However, recent developments indicate progress towards rectification, with Genesis agreeing to return $1.1 billion in digital assets to users of the Earn program, pending court approval.

Moreover, Genesis has received court sanctions to sell Grayscale cryptocurrency trust shares to repay creditors, signalling efforts towards resolution and customer restitution. The company is actively devising a liquidation plan to wind down operations and reimburse stakeholders in cash or cryptocurrency, with a commitment to prioritizing customer repayments.

The settlement between Genesis and the SEC marks a significant step towards regulatory compliance and investor protection within the crypto lending sphere. While challenges persist, ongoing efforts towards resolution and restitution offer a glimpse of stability and accountability in an evolving market landscape.