The New York Attorney General (AG) has filed a lawsuit against Gemini Exchange and the Digital Currency Group (DCG), alleging a massive $1.1 billion fraud. The lawsuit centers around the assertion that Gemini and DCG-owned Genesis Global Capital (Genesis) engaged in a lending program in 2021 without adequately disclosing the associated risks.
The AG claims that Gemini misled investors regarding the risks involved in extending loans to third parties, such as Alameda Research. These loans purportedly resulted in substantial losses, and it is alleged that Genesis and Gemini tried to conceal these losses.
Failure to Disclose Risks
The lawsuit emphasizes that Gemini and Genesis failed to disclose the risks associated with their lending program. Letitia James, the Attorney General, asserts that these companies exploited the relatively under-regulated cryptocurrency industry to the detriment of investors. She further accuses them of deceiving customers with false promises, promising stricter regulatory enforcement in the future.
James specifically accuses Genesis of deceiving Gemini about the regular auditing of its borrowers’ financial health. However, no records of audits were found over a two-year period. The lawsuit also alleges that Genesis concealed its actual financial situation through a $1.1 billion promissory note, while Gemini did not alert customers to Genesis’ financial difficulties, even when contemplating the potential closure of the Earn program.
Legal Action and Potential Consequences
The lawsuit seeks to prohibit Gemini, Genesis, and DCG from offering investment services within the state of New York. Furthermore, James is requesting investor restitution and disgorgement of any alleged illegal profits made by these companies.
This legal action comes at a challenging time for all parties involved, as Gemini is concurrently facing allegations from the US Securities and Exchange Commission (SEC) for offering Gemini Earn as an unregistered security. This program involved depositing funds with Gemini, which were then loaned to third parties to deliver an 8% annual yield.
Genesis’ financial troubles are evident, as it filed for bankruptcy earlier this year due to the collapse of several cryptocurrency firms it was involved with, including Three Arrows Capital and Voyager Digital. Genesis also suffered significant losses from Babel Finance.
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The outcome of this lawsuit could have profound implications for Gemini, which, while smaller compared to major exchanges like Coinbase, brought a sense of legitimacy to the cryptocurrency industry. Should the legal action succeed, Gemini may shift its focus to non-US markets, particularly in regions like India and Singapore. It may also expedite efforts to establish robust operations in the UK and Hong Kong.
The lawsuit serves as a reminder of the growing scrutiny and regulation within the cryptocurrency industry, reflecting a broader trend towards enhancing transparency and investor protection.
