In the midst of the stormy conditions plaguing the crypto industry in the summer of 2022, the board members of Gemini, the well-known crypto exchange founded by Tyler Winklevoss and Cameron Winklevoss, convened to discuss their collaboration with Barry Silbert’s crypto-lending business, Genesis Capital.
Just a month prior, Three Arrows Capital had defaulted on a staggering $1 billion in loans from Silbert’s Genesis. Furthermore, Genesis was highly exposed to the fallout from Alameda Research, as FTX-founder Sam Bankman-Fried’s trading arm faced imminent collapse, resulting in the loss of billions of dollars in customer funds.
Unfortunately, Gemini found itself entangled in this precarious situation as nearly $1 billion of their customers’ money was tied up in Genesis. To compound the issue, Gemini’s in-house risk analysis had recently downgraded Genesis to a CCC rating, or “junk-rated,” signifying an extremely high-risk investment with a 50%-60% probability of failure.
According to a lawsuit by New York State Attorney General Letitia James, one of Gemini’s board members drew a parallel between Genesis Capital’s debt-to-equity ratio and that of Lehman Brothers prior to its catastrophic collapse. This revelation implies that the entire foundation of the Gemini-Genesis partnership was built on fraudulent premises, resulting in losses exceeding $1 billion for over 230,000 customers.
During a meeting held in late July 2022, the concerned board member cautioned, “If the market sneezes, you’re in the same situation again,” highlighting the precariousness of the arrangement.
Despite these alarm bells, Gemini decided against severing ties with Genesis and notifying its customers about the potential peril their investments faced. Instead, they chose to maintain their current course, continuing to funnel hundreds of millions of dollars in customer funds to Genesis.
In November of the same year, the collapse of FTX forced Genesis to impose a freeze on all withdrawals, leaving around $1 billion of Gemini’s customer money trapped. As a consequence, Genesis filed for bankruptcy protection. Furthermore, Bankman-Fried, the mastermind behind FTX, currently faces trial for fraud and could potentially serve decades in prison if convicted.
Lawsuit Alleges Fraud and Concealment of Losses
In a recent lawsuit filed by the New York attorney general’s office, Genesis, its former CEO Soichiro Moro, its parent company DCG, and DCG’s CEO Barry Silbert are accused of defrauding investors and the public. This case revolves around an alleged attempt to conceal over $1.1 billion in losses.
Gemini’s Alleged Deception
The lawsuit also claims that Gemini, a cryptocurrency exchange, misled its customers regarding the safety of their investments. Despite being aware of Genesis’ unstable financial condition, Gemini reassured its customers that their funds were secure while in Genesis’ hands.
Seeking Restitution and Restrictions
The New York attorney general’s office is seeking full restitution for defrauded investors. Additionally, they are requesting a lifetime ban on any involvement in the purchase and sale of securities and commodities within or from New York for those implicated in the case. It is important to note that the lawsuit does not personally implicate Tyler and Cameron Winklevoss, co-founders of Gemini.
Genesis, DCG, Silbert, and Moro’s Response
As of now, representatives for Genesis, DCG, Silbert, and Moro have not responded to requests for comment regarding the lawsuit. However, Gemini has taken to X (formerly known as Twitter) to defend themselves. The company claims that it was misled by Genesis about its financial condition and asserts its status as a victim in this case. Gemini expresses disappointment about being charged and intends to vigorously contest the allegations.
The Relationship Between Gemini and Genesis
Gemini’s association with Genesis primarily revolved around a product called Gemini Earn. Through this platform, customers could pool their money to lend to others and earn additional interest payments. Gemini assured its customers that their funds would be invested safely, distinguishing themselves from other entities in the cryptocurrency space. “Ask for permission, not forgiveness” had become one of Gemini’s prominent slogans.