The New York Department of Financial Services on Wednesday announced a settlement with Gemini, the crypto firm founded by the Winklevoss twins, related to its product Gemini Earn.
As part of the consent order, Gemini agreed to pay a fine of $37 million, as well as a full restoration of the funds owed to customers of Earn, a sum of more than $1 billion.
The agreement is the latest blow to Gemini, which is also facing lawsuits from New York’s attorney general and the Securities and Exchange Commission for its troubled Earn product, launched alongside the Digital Currency Group lender Genesis. Notably, Gemini will not be forced to surrender its trust charter issued by DFS.
“Gemini failed to conduct due diligence on an unregulated third party, later accused of massive fraud, harming Earn customers who were suddenly unable to access their assets after Genesis Global Capital experienced a financial meltdown,” DFS Superintendent Adrienne Harris said in a statement shared with Fortune.
Failure to earn
Founded in 2015, Gemini received a key trust charter from DFS the same year, allowing it to operate as a regulated crypto business under the state’s first-of-its-kind oversight regime.
Amid the last bull cycle, Gemini, which had largely operated as an exchange, launched its ill-fated Earn program that allowed customers to lend out cryptocurrencies for a yield of up to 13%. Its sole counterparty in the arrangement was Genesis, the lending arm of the Barry Silbert crypto empire Digital Currency Group, which in turn lent the cryptocurrencies to firms like the hedge fund Three Arrows Capital and the FTX-linked trading firm Alameda Research.
As crypto markets collapsed in 2022, so did Genesis, with the lender freezing withdrawals in November. Genesis entered a contentious bankruptcy in early 2023, pitting it against both Gemini and its parent company, Digital Currency Group. According to a separate October lawsuit from New York Attorney General Letitia James, Gemini was aware of Genesis’s risky arrangements before the assets were locked, although it did not disclose those concerns to customers. More than 200,000 Earn customers still have cryptocurrency frozen on the platform totaling more than $1.7 billion.
Alongside the lawsuit from James, the SEC also sued Gemini and Genesis, alleging that Gemini Earn constituted offering unregistered securities. Although Genesis settled with the SEC, the lawsuit against Gemini is ongoing.
The lingering question was when DFS, which oversaw Gemini Earn, would act. As Fortune reported in December, Gemini had sought and received regulatory approval for Gemini Earn, and DFS was actively investigating its collapse.
In Wednesday’s consent order, DFS contends that Gemini mismanaged the program, failing to prevent harm to customers by not conducting sufficient due diligence on Genesis and making misleading representations to customers. Furthermore, Gemini failed to maintain adequate risk and liquidity reserves. According to the order, Gemini lacked sufficient visibility into Genesis’s risk exposure and did not seek more information until mid-2022, a year after Earn’s launch.
Gemini leadership decided to end Earn in September 2022 but didn’t take steps to do so until mid-October. Even after sending a notice to Genesis that it would suspend the program, Gemini continued to loan cryptocurrencies to Genesis and enroll thousands of new customers. FTX collapsed the following month. DFS described the missteps as “significant failures that threatened the safety and soundness of the company.”
In a Wednesday post to X, formerly Twitter, Gemini also noted that a settlement has been reached “in principle” with Genesis and other creditors in the related bankruptcy that will result in “all Earn users receiving 100% of their digital assets back in kind…If approved, we will be returning over $1.8 billion in value (at today’s prices) — $700 million more than when Genesis halted withdrawals on November 16, 2022.”
Earn Update: Today, we are pleased to announce that we have finally reached a settlement in principle with Genesis and other creditors in the Genesis Bankruptcy that will, if approved by the Bankruptcy Court, result in all Earn users receiving 100% of their digital assets back in…
— GeminiTrustCo (@GeminiTrustCo) February 28, 2024
In January, DFS reached a separate settlement with Genesis Global Trading, a different arm of Digital Currency Group that was not involved with the Earn program. As part of the settlement, Genesis Global Trading agreed to surrender its Bitlicense and cease operations in New York. The company is in the process of winding down.
