Three cryptocurrency-related firms – Genesis Global Capital LLC, Gemini Trust Company LLC and Nexo Inc. are facing legal issues as law enforcement goes after companies in the sector as the fallout from the failure of FTX Trading Ltd. continues.
In the U.S., both Genesis and Gemini have been charged by the Securities and Exchange Commission for the unregistered offer and sale of crypto asset securities. The companies are alleged to have offered and sold securities to retail investors through the Gemini Earn crypto lending program, raising billions in the process.
Gemini Earn was a program offered by Gemini that allows customers to generate yield by lending their crypto assets to a borrowing counterparty.
The SEC alleges that in December 2020, Genesis entered into an agreement with Gemini to offer Gemini customers an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. Genesis and Gemini began offering the Gemini Earn program to retail investors in February 2021, whereby Gemini Earn investors tendered their crypto assets to Genesis, with Gemini acting as the agent to facilitate the transaction.
As part of the process, Gemini deducted an agent fee as high as 4.29% from the returns Genesis paid to Gemini Earn investors. It’s then alleged that Genesis exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.
In November 2022, Genesis announced that it would not allow its Gemini Earn investors to withdraw their crypto assets because Genesis lacked sufficient liquid assets to meet withdrawal requests. Problems at Genesis were first reported in June due to its exposure to the failed crypto hedge fund Three Arrows Capital and Hong Kong-based crypto lender Babel Finance but ultimately came to a head in November with the withdrawal freeze.
The SEC says that at the time of the freeze, Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors. Gemini has since terminated the Gemini Earn program, but retail investors have still not been able to withdraw their crypto assets.
The SEC alleges that the Gemini Earn program constitutes an offer and sale of securities under applicable law and should have been registered with the Commission.
“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” SEC Chair Gary Gensler said in a statement. “Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws.”
While Genesis and Gemini are in trouble in the U.S. over allegedly selling unregistered securities, Nexo is facing far more serious charges in Bulgaria, including allegations of possible money laundering, tax offenses, computer fraud and other crimes.
According to the Sofia Globe, 300 law enforcement personnel are involved in the investigation and its office in Sofia, the capital of Bulgaria, has been raided. Searches and questioning are reportedly still underway, with a police spokesman saying that any indictments would be filed after the data was collected and analyzed.
In response to the raid and investigation, Nexo said on Twitter that it “never makes compromises with regard to our very stringent anti-money laundering and know-your-customer policies” and was “always cooperating with the relevant authorities and regulators.”
Notably, Nexo has also been previously targeted in the US, with eight states – California, Kentucky, Maryland, New York, Oklahoma, South Carolina, Washington and Vermont, having filed cease-and-desist orders against the company in September.
Nexo is also facing a lawsuit in New York alleging that it had failed to register with the state as securities and commodities brokers or dealers and for lying to investors about their registration status.