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In the state of New York, where Sam Bankman-Fried, founder of fallen crypto exchange FTX, is standing trial for fraud, the attorney general has accused a further three high-profile crypto businesses of lying to their customers. Crypto exchange Gemini, run by the Winklevoss twins, Cameron and Tyler, as well as crypto lender Genesis and its parent company, Digital Currency Group, have been charged with causing a combined $1.1 billion in losses for hundreds of thousands of investors.
Filed today, the civil lawsuit pertains to a program called Gemini Earn, which was marketed to customers as a safe and secure way to earn interest (as high as 8 percent) on crypto holdings. The assets committed by Gemini customers were pooled and handed off to crypto lender Genesis, which loaned them out to large institutions and returned a cut of the profits.
These kinds of crypto services were pitched as a “better form of savings account to replace your bank,” says Cory Klippsten, CEO of bitcoin financial services firm Swan Bitcoin. “Whether you use that language or not, that’s how people understood these platforms.” But the Earn program, the New York attorney general alleges, was far more risky than the marketing let on. The complaint states that Gemini was aware from the program’s inception that loans handed out by Genesis were high-risk and concentrated among a small number of third parties—specifically Alameda Research, FTX’s sibling company, which at one point constituted 60 percent of the Genesis loan book. If any of Genesis’ large creditors were to default on their debt, Gemini customers stood to lose the funds they had invested.
Lo and behold, when Genesis was caught in the FTX blowback in November 2022 and forced to file for bankruptcy two months later, Gemini Earn customers lost access to about $900 million of their money.
Gemini and Genesis had already been sued by the Securities and Exchange Commission in January in relation to the Gemini Earn program, which the US financial regulator claimed amounted to an unregistered securities offering. But the charges brought by the New York attorney general are broader in scope.
While Gemini failed to alert customers to their risk exposure, the attorney general claims, Genesis and DCG failed to assess the quality of the loans it meted out, then attempted to conceal losses incurred in mid-2022 when hedge fund Three Arrows Capital and another smaller counterparty defaulted on loans amounting to $1.1 billion. Soon after, DCG CEO Barry Silbert and Genesis CEO Michael Moro, both named as defendants, are accused of making misleading public statements about the financial condition of Genesis.
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“These cryptocurrency companies lied to investors and tried to hide more than a billion dollars in losses, and it was middle-class investors who suffered as a result,” Letitia James, New York attorney general, said in a statement. “Hardworking New Yorkers and investors around the country lost more than a billion dollars because they were fed blatant lies that their money would be safe and grow if they invested it in Gemini Earn.”
Gemini did not return a request for comment, but in a post on X, formerly Twitter, said it “looks forward to defending ourselves” against the lawsuit. Neither Genesis nor DCG returned requests for comment.
The lawsuit filed against the trio is the latest in a line of civil cases brought against crypto companies in the US this year. In February, the SEC reached a settlement with another exchange, Kraken, which agreed to halt a service that gave US customers the ability to earn rewards for locking up their crypto. The regulator also issued crypto firm Paxos a warning of intent to sue over its BUSD stablecoin, which the SEC asserted was a security and hence was required to comply with securities regulations. In June, the regulator filed charges against exchanges Binance and Coinbase on consecutive days, accusing both of violating securities laws.
A series of crypto founders have also found themselves in custody. Bankman-Fried was arrested in December, Alex Mashinsky of crypto lender Celsius in July, and Su Zhu of Three Arrows Capital in September.
In bringing its suit, the attorney general is seeking to prevent Gemini, Genesis, and DCG from doing business in New York, the press release states, as well as “restitution for all defrauded investors and disgorgement of all ill-gotten gains.” But the implications of the lawsuit may spill into other quarters of the crypto sector too.
The case could cause delays in the much-anticipated approval of a bitcoin exchange-traded fund, a financial vehicle that would allow regular people to invest in bitcoin through their regular stock broker, speculates Travis Kling, founder of Ikigai Asset Management, a crypto asset management firm. Another DCG subsidiary, Grayscale, is among the firms lining up for approval. But it is “hard to imagine that the first bitcoin ETF [will come from Grayscale]” while these charges against its parent company are outstanding, says Kling.
Given the extent to which DCG is entangled in the cryptosphere, by means of its various venture investments, says Stephen Diehl, a crypto-skeptic commentator, a conviction and large financial penalty could also have second-order effects that are difficult to predict at this juncture. “It’s a massive holding company with affiliations with an enormous part of the American crypto industry,” says Diehl. “It's a massive spoke in the hub of crypto.”
Meanwhile, the prospect of further enforcement action against members of the crypto industry looms. “The final shoe hasn’t dropped,” says Klippsten. “Until off-shore, unregulated, and opaque crypto businesses are brought to heel, I don’t think it will stop.”
