Cryptocurrency exchange Gemini, led by the Winklevoss twins, has reached a significant settlement with the New York Department of Financial Services (NYDFS). As part of the agreement, Gemini agrees to over $1 Billion restoration and faces a $37 million fine. This development unfolds amid legal challenges and increased regulatory scrutiny in the cryptocurrency space.
The NYDFS revealed that Gemini failed to oversee and vet its partner, Genesis Global Capital, in the Earn program. The now-bankrupt crypto lender’s failure resulted in 200,000 Earn customers being unable to access their virtual currency, currently valued at about $1.8 billion. The regulator identified deficiencies in Gemini’s compliance programs, including customer due diligence and internal audit plans.
Gemini, co-founded by Tyler and Cameron Winklevoss, tweeted that it reached a settlement in principle with Genesis and other creditors. The agreement aims to return all Earn users’ digital assets in kind. Pending approval by the bankruptcy court, Gemini anticipates providing 97% of its assets within two months and the remaining balance within a year.
Critical Juncture for Gemini Following Earn Program Setback
The news that Gemini agrees to over $1 Billion restoration comes in the wake of allegations related to its Earn program. The program, designed to provide customers with up to a 13% yield on lent cryptocurrencies, faced challenges when its sole counterparty, Genesis Global Capital, encountered difficulties during the 2022 market downturn, freezing assets exceeding $1.7 billion.
The consent order reveals that despite public statements from Gemini, Genesis Global Capital was not adequately vetted or monitored. In November 2022, Genesis defaulted on approximately $940 million in loans made by Earn customers. NYDFS Superintendent Adrienne A. Harris emphasized the severity of Gemini’s oversight, stating that the exchange failed to conduct due diligence on an unregulated third party accused later of massive fraud. This negligence harmed Earn customers who were unable to access their assets after Genesis Global Capital’s financial meltdown.
Broader Issues Uncovered in NYDFS Investigation
The NYDFS investigation into Gemini uncovered wider concerns, including practices that undermined the exchange’s financial stability and exposed customers to undue risk. Gemini Liquidity, LLC, an unregulated affiliate, accrued substantial fees, weakening the exchange’s financial standing. The consent order asserts that Gemini’s statements about vetting Genesis were misleading in several respects.
The NYDFS announcement regarding Gemini follows a settlement with Genesis Global Trading, which agreed to an $8 million fine and relinquished its New York state Bitlicense due to compliance lapses. The DFS superintendent expressed that Genesis had demonstrated a disregard for the Department’s regulatory requirements.
Regulatory Challenges and Lawsuits
Gemini is under scrutiny from various regulators, with the U.S. Securities and Exchange Commission (SEC) suing Genesis and Gemini in January 2023, alleging violations of investor-protection laws. In October, New York Attorney General Letitia James filed a lawsuit against Gemini, Genesis, and Genesis’s parent company, Digital Currency Group, alleging fraud exceeding $3 billion.
Gemini, acknowledging Earn program investors as victims of fraud, disagreed with being named in the lawsuit. Digital Currency Group expressed its intent to fight the claims. As part of the settlement, Gemini commits to returning cryptocurrencies owed to Earn customers within a year of the effective date of Genesis’s bankruptcy plan.
Gemini’s $1.1 billion settlement with NYDFS reveals a failure in due diligence, as the cryptocurrency exchange’s Earn program collapsed with Genesis Global Capital’s default. Regulatory lapses, including insufficient oversight and compliance issues, underline systemic problems.
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