Crypto has just taken another body blow to its already fragile reputation. On October 19, 2023, the New York attorney general announced a lawsuit against Gemini Trust, Genesis Global, and Digital Currency Group (DCG) for allegedly defrauding investors out of over $1 billion.
Gemini, the cryptocurrency exchange founded by the Winklevoss twins, partnered with Genesis on its Earn lending program at the heart of the case. Digital Currency Group (or DCG), an investment firm founded by Barry Silbert, owns Genesis, as well as CoinDesk and a number of other crypto firms.
The civil suit against Genesis, Gemini, and Digital Currency Group, charges the firms and executives, including Genesis CEO Michael Moro and DCG founder Barry Silbert, with lying to customers, each other, and the public about risk exposure.
The allegations portray an interconnected web of issues similar to those seen in the FTX-Alameda implosion. Genesis had high concentration risk with loans to Alameda. Though Gemini downgraded Genesis’ credit rating to junk status, it continued marketing the Gemini Earn program tied to Genesis as low risk and didn’t inform customers.
“Gemini hid the risks of investing with Genesis and Genesis lied to the public about its losses,” said New York Attorney General Leticia James.
Gemini allegedly knew the program carried major risks from the start but didn’t withdraw until executives moved their own money out in summer 2022. A $1.1 billion promissory note between Gemini and Genesis/DCG allegedly concealed Genesis’ true shaky finances.
When FTX collapsed in November 2022, it triggered Genesis filing bankruptcy and froze $900 million in Gemini Earn customer funds. The NY attorney general’s office is seeking restitution for defrauded New York investors and repayment of any illegitimate earnings.
Executives from the firms have denied wrongdoing and vowed to contest the charges in court. The allegations add to the mounds of legal trouble and regulatory action swirling around major players in the crypto industry.
Chris Warren of the Warren Law Group told CCN that any investigation by the Attorney General was serious. He also added that it fitted with a pattern of New York AG’s office aggressively pursuing blockchain-based financial fraud.
“Depending on the scope of the investigation and any potential findings of liability, the damages could severely impact Gemini’s ability to continue operating. Similar to the FTX’s collapse, there could be a world of trouble for Gemini in the future,” explained Warren.
He advised that if you or someone you know was an employee or officer of Gemini and received a request for information from the Attorney General, they should seek legal advice.“ It’s important that they retain legal counsel to provide clear guidance on how to appropriately respond to the Attorney General,” said Warren.
“This situation is extremely serious, with potential far-reaching implications for the cryptocurrency industry as a whole,” says Blake Harris, Founding Principle of Blake Harris Law. “The core allegations of deception and lack of transparency strike at the heart of trust in the cryptocurrency ecosystem.”
Harris added that the SEC, CFTC, and other regulators will point to cases like this to justify expanded powers to subpoena, investigate, and prosecute crypto companies engaging in fraud or deception. Furthermore, any loss of consumer confidence and trust could depress mainstream adoption and acceptance.