Gemini, the cryptocurrency exchange led by the Winklevoss twins, has agreed to a substantial settlement with the New York State Department of Financial Services (NYDFS). The settlement includes an imposing fine of $37 million over compliance failures and the compulsory return of a mammoth $1.1 billion to Gemini Earn lending program customers.
This settlement was publicly announced on Wednesday by NYDFS. This is the latest development in the Gemini Earn legal issues. The program began in 2021, designed by Gemini. It lets customers lend crypto to Genesis Global Capital LLC. Genesis, now bankrupt, had promised returns of up to 7.4% annually.
Where Did Gemini Fall Short?
In a public statement, the NYDFS Superintendent, Adrienne Harris, framed the settlement as a victory for the Earn customers. She pointed out that Gemini had failed to perform due diligence on a non-regulated third party that later stood accused of massive fraud. As a result of this oversight, Earn customers found themselves unable to access their assets when Genesis Global Capital went under.
Part of the agreed settlement is a caveat that the NYDFS could take further action against Gemini if the company fails to return at least $1.1 billion to the Earn customers as part of the bankruptcy proceedings of Genesis Global Capital. On top of this, another $40 million will be contributed to the bankruptcy fund by Gemini.
NYDFS outlined that Gemini's lack of sufficient due diligence on Genesis Global Capital and its failure to retain adequate reserves throughout the Earn project's lifespan had inflicted significant reputational and monetary harm. Gemini faces a debacle where over 200,000 Earn customers, amongst them nearly 30,000 New Yorkers, have no access to their virtual currency.
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Gemini's Commitment and Legal Controversies
As part of the recovery process, Gemini committed to ensuring a full recovery of virtual currency for Earn customers. If the settlement gains bankruptcy court approval, Earn users will get 100% of their digital assets reinstated.
Gemini acknowledges the hardship this lengthy process had caused in a statement released Wednesday. The company expressed heartfelt gratitude towards its customers for their patience and support throughout this trying period.
The Gemini Earn saga has also attracted litigation from the New York Attorney General's office, which sued Gemini, Genesis Global Holdco, and its parent company, the Digital Currency Group, over the crypto lending scheme. Genesis announced earlier that it had reached a settlement with the NYAG.
Only a month prior, Genesis Global Holdco settled another lawsuit brought forward by the Securities and Exchange Commission against Genesis and Gemini. These lawsuits accused the Gemini Earn initiative of being an unregistered securities offer, helping them amass "billions of dollars" worth of crypto from legions of investors.
However, the Securities and Exchange Commission pointed out that Genesis did not maintain enough liquid assets to cover withdrawal costs one year into the program, draining investors. Genesis Global Holdco sought bankruptcy protection in January 2022. This occurred following financial losses incurred due to the collapse of the cryptocurrency hedge fund Three Arrows Capital and the cryptocurrency exchange FTX in 2022.
