The cryptocurrency industry is facing a legal challenge from the U.S. Securities and Exchange Commission (SEC), which has accused Gemini Trust Co., a crypto exchange, and Genesis Global Capital, a bankrupt lender, of violating securities laws with their Earn product. Earn was a service that allowed Gemini users to lend their digital assets to Genesis and earn interest on them.
The SEC vs. Gemini and Genesis
The SEC claims that Earn was an unregistered securities offering that did not comply with federal securities laws. They allege that Gemini and Genesis did not disclose the risks involved in lending crypto assets, such as the possibility of default, insolvency, hacking, or regulatory actions. The institution also alleges that Gemini and Genesis misrepresented the nature of the Earn product as a loan agreement, when in fact it was a security that gave users a right to share in the profits of Genesis.
Gemini and Genesis have filed motions to dismiss the SEC lawsuit, arguing that Earn was not a security, but a loan contract between three parties: Gemini, Genesis, and the Earn users. They contend that Earn users did not have any expectation of profit from Genesis, but only received a fixed interest rate from lending their crypto assets.
They also contend that Earn users did not rely on the efforts of Gemini or Genesis to generate income but on their own decision to lend their crypto assets.
MDALA Contract at the Heart of the Conflict
The SEC accused Gemini and Genesis of selling unregistered securities through a contract called MDALA, which allowed Gemini customers to lend their crypto to Genesis and earn interest. Gemini argued that the SEC’s claim was unfounded and unsupported by law or facts. They further claimed that the MDALA contract was not a security and that the SEC did not show any evidence of its sale or offer to anyone.
Gemini and Genesis claim that the SEC lawsuit is ill-conceived and harms the interests of Earn users, who have been unable to access their funds since Genesis filed for bankruptcy in November 2023. Gemini says that it is working with a creditors group to find an alternative solution to recover over $1.1 billion in assets for approximately 232,000 Earn users affected by Genesis’ bankruptcy.
