Notes 1/13: SEC Sues Gemini, Bitcoin Price

The public spat between cryptocurrency exchange Gemini and lending firm Genesis Capital took an unexpected turn yesterday after the Securities and Exchange Commission (SEC) sued both parties for an unregistered sale of securities.

The agency is pursuing a different approach from its earlier case against bankrupt lending firm Celsius, when it targeted the company’s token CEL as an unregistered security. In its complaint, the agency alleged that Gemini Earn was an investment contract that was marketed to retail investors as an interest-bearing program and resulted in profits for both Gemini and Genesis. Therefore, it was a security.

Balance Sheet Transfers

According to the agency, Genesis held approximately $900 million in investor assets from approximately 340,000 Gemini Earn investors in November 2022. That was when Genesis paused withdrawals for Gemini Earn customers due to insufficient liquidity. Gemini earned $2.7 million as agent fees or it’s cut for facilitating Earn transactions from the time that it was launched in February 2021, the SEC alleged.

Perhaps, the most interesting aspect of the SEC’s complaint are the transfers of customer digital assets between the balance sheets of Gemini, Genesis, and Institutional borrowers. The Gemini Earn agreement rescinds responsibility for the assets once they leave the company’s custody.

“You understand that we cannot be and are not responsible for any Digital Assets once they leave our custody,” the agreement states. The SEC’s complaint says that Genesis retained possession and control over the investors’ crypto assets on its balance sheet. In simple words, this means that retail customers signed away ownership of their assets while participating in the program.

Three Gemini Earn users are reported to be pursuing a class action lawsuit against Genesis and its parent the Digital Currency Group (DCG) for concealing insolvency. My guess is they have a slog ahead to prove their case.

Ripple Redux?

In the short term, the case may not have much of an effect on operations at either Gemini or Genesis. Former Trial Counsel at the SEC Howard Fischer told CoinDesk that such cases can “take years.” He estimated a time frame of three to four years for the case.

There’s precedent. The agency filed a case against Ripple back in 2020, making similar allegations of an unregistered sale of securities for its token XRP. That case is still ongoing.

Meanwhile, scandals and crashes continue to plague the crypto ecosystem. The biggest financial fraud since Bernie Madoff has occurred under the agency’s watch and a major stablecoin has imploded. But the SEC continues to amble along the crypto avenue of financial disasters, filing long drawn-out cases and fighting turf wars with the CFTC.

Bitcoin Price Jumps Above $19,000

What’s going on with bitcoin price?

The cryptocurrency shook off its recent humdrum price movement and jumped above $19,000 yesterday on positive inflation data. It is continuing to hold strong above that level, as of this writing, even after the SEC filed a case against Gemini and Genesis – two of crypto’s biggest players.

Is the Worst Over?

For many, the move upwards is an augury of positive price momentum.

Vijay Ayyar, vice president of corporate development at crypto exchange Luno, told CNBC that bitcoin’s prices yesterday were an indication that “the [crypto] market is accepting the [negative news about crypto] quite well, sell pressure is being absorbed, and hence we’re moving to an accumulation stage.”

“This could also mean that the market thinks the worst is over for crypto and that most negative news in now priced in,” he said.

But that might be wishful thinking.

The tea leaves for the current bump in bitcoin price were already read in the bitcoin futures premium some days ago. The futures curve is tending towards backwardation, meaning prognosis for the months ahead, according to those futures, is bleak. The worst may be yet to come for cryptocurrencies and bitcoin price in the coming months.

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