Gemini and Genesis Call for Dismissal of SEC Lawsuit But Will They Succeed?

In recent events, Genesis Global Capital, a cryptocurrency lending entity on the brink of bankruptcy, along with the digital asset exchange platform Gemini, have appealed to a U.S. court to dismiss a lawsuit. The U.S. Securities and Exchange Commission (SEC) has lodged this legal complaint, alleging that the firms have participated in the sale of unregistered securities through a platform known as Gemini’s Earn program.

SEC Allegations: Unregistered Securities and Discretionary Use of Crypto Assets

The SEC originally initiated the lawsuit in a New York court in January. The regulatory body singled out Gemini’s yield-generating product, Earn. According to the SEC’s allegations, the product, which is not registered, facilitated the raising of billions of dollars in crypto assets from hundreds of thousands of investors. 

The SEC contends in its complaint that “Genesis was given the liberty to decide how to employ investors’ crypto assets to generate income and pay interest to Gemini Earn investors.”

Gemini, on the other hand, disputed these claims in its filings. It stated that while the Earn program did allow both the borrower and lender to partake in subsequent transactions, it did not mandate any lending or borrowing from any party. 

Furthermore, Gemini clarified that a lender couldn’t transfer or assign it without the unequivocal consent of all parties involved.

Debating the MDALA’s Classification as an Unregistered Security

One of the critical points of contention, in this case, revolves around the tri-party Master Digital Asset Loan Agreement (MDALA) contract. This agreement involves Genesis, Gemini, and the users of Earn. 

Gemini maintains that the SEC’s categorization of MDALA as an unregistered security is unsupported by legal precedent and factual evidence. 

According to the document supporting a motion to dismiss, the SEC has failed to adequately argue that MDALA is a security. 

Moreover, the SEC could not substantiate non-conclusory allegations that MDALA had been sold to anyone, or that any party had proposed to sell it.

Frozen Withdrawals and Bankruptcy Filing

The SEC’s original complaint pointed out that Genesis owned approximately $900 million in assets. These assets belonged to roughly 340,000 Gemini Earn investors when Genesis ceased withdrawals from the platform. This halt in operations occurred shortly before Genesis applied for bankruptcy protection in the U.S.

Gary Gensler, Chair of the SEC, voiced his concerns about this situation, stating:

“We allege that Genesis and Gemini offered unregistered securities to the public, sidestepping disclosure requirements designed to safeguard investors.” 

This statement was met with a sharp retort from Gemini co-founder Tyler Winklevoss, who dismissed the lawsuit as a “manufactured parking ticket.”

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