Gemini Trust Company, founded in 2014 by entrepreneurs Cameron and Tyler Winklevoss, is a crypto exchange and custodian bank that allows customers to trade, store, and earn interest on their crypto. The company emphasizes regulatory compliance as a licensed cryptocurrency exchange and custodian in several U.S. states.
Details of the Settlement Agreement
Gemini has reached a settlement agreement with New York’s financial regulator, the NYDFS, regarding the halt of its Earn program in November 2022. The agreement requires Gemini to repay at least $1.1 billion to over 30,000 Earn customers in New York and over 200,000 customers nationwide through the Genesis Global Capital bankruptcy process.
The settlement stems from Gemini’s partnership with crypto lending company Genesis Global Capital (GGC) to offer the Gemini Earn program. Launched in February 2021, Earn enabled customers to lend their crypto assets through Genesis to generate yield. However, when crypto markets crashed in late 2022, Genesis froze customer withdrawals and subsequently filed for bankruptcy in January 2023, leaving Earn customers unable to access their funds.
As part of the settlement, Gemini must also pay a $37 million penalty to NYDFS for compliance failures in properly overseeing Genesis as a counterparty. The agreement allows Gemini customers to recover 100% of assets plus appreciation, totaling an estimated $1.8 billion at current market prices.
Regulators Claim Gemini Failed to Protect Customers
According to the NYDFS statement, Gemini did not conduct proper due diligence or adequately monitor Genesis’ conduct throughout the operation of Earn.
“Gemini failed to conduct due diligence on an unregulated third party, later accused of massive fraud, harming Earn customers who were suddenly unable to access their assets after Genesis Global Capital experienced a financial meltdown,” said NYDFS Superintendent Adrienne A. Harris.
Harris stated that the settlement is a “win” for Earn customers to recover their entrusted assets. However, NYDFS retains the right to take further action against Gemini if it fails to return the minimum $1.1 billion amount through Genesis’ bankruptcy process.
SEC Alleged Earn Program Was Illegal
The settlement follows charges leveled against Gemini and Genesis in January by the Securities and Exchange Commission (SEC). According to the SEC, the Earn program constituted an illegal, unregistered securities offering because the crypto assets loaned through Genesis qualified as securities under the law. This differed from Gemini and Genesis’ stance that Earn involved simple crypto interest-bearing accounts, not securities.
If the Earn program legally qualified as a securities offering, Gemini and Genesis would have needed to follow strict investor disclosure and compliance regulations, which regulators claim did not occur. The SEC identified major red flags regarding Genesis’ operations and financial condition that Gemini purportedly ignored to keep earning significant fees from the Earn program’s growth.
Settlement Ends Earn Program
The settlement agreement helps pave the way to make Earn customers financially whole after suddenly losing access to their funds for months. However, given the regulatory scrutiny it now faces, the stringent penalty and oversight conditions imposed on Gemini will likely close the door to reviving the Earn program anytime soon.
While the SEC case remains ongoing, the repayment of Earn customer assets in cooperation with Genesis’ bankruptcy takes a big step toward resolving regulatory issues related to New York-based investors. Gemini continues aiming to lead the cryptocurrency industry in regulatory compliance amidst heightened scrutiny over digital asset companies.
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