YEREVAN (CoinChapter.com) – The Securities and Exchange Commission (SEC) has been on a quest to bring crypto exchanges to compliance since the DeFi boom in 2020 and 2021. In the latest development, the governmental agency charged the nearly insolvent crypto lender Genesis and its sister crypto exchange Gemini’s yield earning program.
Meanwhile, adequate regulation of the crypto market sector has become an eyesore and a source of debate for many market participants. But before getting into the broader debate, investigating what happened to Gemini Earn is essential.
SEC changes Gemini and Genesis with security fraud
As announced late on Jan 12, the SEC accused both Gemini and Genesis of selling ‘unregistered securities.’ Notably, before securities—like stocks, bonds, and notes—can be offered for sale to the public, they first must register with the SEC. Any stock that does not have an effective registration statement on file with the SEC is considered “unregistered.”
But where do the crypto assets fall? No answer as of yet.
In December 2020, Genesis, a subsidiary of Digital Currency Group, entered into an agreement with Gemini to offer Gemini customers, including retail investors in the United States, an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest.
read the official SEC filing.
Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors. Additionally, Gemini terminated the Gemini Earn program earlier this month. As of today, the Gemini Earn retail investors have still not been able to withdraw their crypto assets.
SEC chair Gary Gensler also commented on the allegations, alleging that “Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors.”
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. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.
Meanwhile, the law-enforcement agency chose a rather interesting time to file the lawsuit, given that Gemini earn has been operating since Feb 2021. Both companies are now already on the verge of insolvency.
What happened to the DCG subsidiaries?
As CoinChapter reported in the previous Gemini/Genesis battle review, the Winklevoss brothers, founders of Gemini, led a campaign against the sister company Genesis and their parent crypto giant Digital Currency Group (DCG).
In detail, the Gemini Earn program offered its clients quite unrealistic 8% gains on their digital asset investments. Moreover, Gemini claims that Genesis caused the program’s insolvency, as it borrowed from Gemini and couldn’t make timely payments, hurting Earn clients in the end. Moreover, allegations were made against DCG as well and its CEO Barry Silbert, accusing him of accounting fraud.
Additionally, while Gemini Earn’s high APY was possible to pull off in a bullish market, the general downturn in 2022 brought the whole sector to its knees, and several large implosions followed, such as Terra Ecosystem in May and FTX in Nov.
Meanwhile, the SEC delivered a blow to both companies at once, with allegations of neglect towards US securities laws. However, if the SEC has investor interests at heart, why would the agency evoke a wave of indignation from the very investors it was created to protect?
SEC’s lack of regulation harms the cryptocurrency sector
There have been many occasions where the SEC’s actions caused raised eyebrows from both governmental officials and retail traders. The latest example came with the FTX implosion. The infamous Sam Bankman-Fried, former FTX CEO, who now faces considerable jail time, met with Gensler on several occasions.
They allegedly talked about strategy and regulation and seemed to be on the same page. But lo and behold, FTX crashed and burned merely months after the “successful” meetings. Did the regulation watchdog overlook the situation? Gensler denies his fault, claiming that he “laid out the rules” for SBF.
Crypto regulation is like a car seatbelt, a failed analogy from Gensler
On Jan 13, the SEC Chair published another video of his running segment “Office Hours with Gary Gensler.” The official compared crypto regulation to car seatbelts that come mandatory with each vehicle regardless of its model. However, the comparison crumbles upon even a shallow inspection of the SEC’s actions.
True, a modern standard seatbelt was introduced decades after the internal combustion engine. But the technology PREVENTS accidents; it does not beat drivers over the head AFTER the accident has already happened. That’s precisely what the SEC chooses to focus on instead of coming up with a valid regulatory framework.
Also read: Bitcoin’s Security Model is Flawed — Top Analyst.
The necessity for crypto regulation is apparent, and several SEC officials have been outspoken about the problem for years. For example, Hester Pierce, a SEC Commissioner, has been advocating for a regulatory framework since 2019.
Timely regulation is crucial.
In the latest interview on an 11, Pierce commented that it is crucial for lawmakers to decide “where the crypto jurisdiction lies.”
I think over time crypto is not going to be housed in one regulatory agency. But they should give us some parameters as to which would be the main authority. That would be helpful.
For now, the main battle for regulatory authority goes on between SEC and US Commodity Futures Trading Commission (CFTC). And CFTC’s main complaint against the SEC is precisely what was discussed earlier – regulation by “enforcement.”
In plain English, the CFTC blames the SEC for punishing people AFTER their wrongdoing but doesn’t bother to lay out the rules BEFORE they actually start their wrongdoing.
Were Gemini and Genesis running a business in violation of US securities laws? The court will answer that. Meanwhile, the most damage will still lie on the shoulders of retail investors who lost billions. So, it is still unclear how the SEC proposes to protect those investors. By lengthy lawsuits that will fill legal pockets for years without helping to bring investor money back?
It seems that the best move would be to create valid regulations, helping investors AVOID fraud.
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