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The currency circle quickly collapsed like dominoes. First, the crypto hedge fund’s top three arrows capital thundered, and then FTX, the world’s second largest digital currency exchange by trading volume, collapsed. Genesis, the world’s largest cryptocurrency lender, was also knocked down. A mine is about to be detonated.
Wall Street News previously mentioned that after Genesis suspended redemption and new loan issuance, cryptocurrency exchange Gemini also announced that its high-yield products for retail investors would suspend redemption.
The reason behind this is that Gemini has failed to recover a large debt, and this debt comes from Genesis, which has just announced that it has filed for bankruptcy.
According to Genesis’ bankruptcy filing, it owes $765.9 million in outstanding loans to the Gemini exchange. According to previous media reports, Gemini claimed that Genesis owed it as much as $900 million.
900 million U.S. dollars could not be withdrawn, and once relied on “7% high interest rate to collect reserves”
After Gemini announced a suspension of redemptions, the life savings of countless investors were trapped in the cryptocurrency exchange.
Gemini has a product called Earn, from which investors can earn more than 7% a year, compared with traditional bank interest rates that are currently close to zero.
According to the US Securities and Exchange Commission (SEC), Gemini’s official website claims that investors can “get 100 times (yield) more than the average national interest rate, ranking among the highest interest rates in the market.” Gemini takes a fee from the returns Genesis pays to Earn investors, with rates sometimes as high as 4.29%.
Such a high return makes Earn an excellent choice for ordinary people to fight against inflation, attracting as many as 340,000 people to invest.
And to achieve high interest rates, Earn lends out clients’ cryptocurrencies. Beginning in February 2021, Gemini lent retail funds to Genesis, which in turn lent these funds to other digital asset market participants.
Nervous investors pulled money from Genesis after FTX crashed in November, with the broker unable to meet $827 million worth of withdrawal requests from clients, forcing it to suspend withdrawals from its lending business.
This in turn resulted in the inability to withdraw $900 million belonging to Gemini’s client funds.
Now, Genesis and Gemini have been sued, with the SEC alleging that ordinary investors “suffered material harm” by offering unregistered securities to investors.
Gemini co-founder Tyler Winklevoss said Earn is regulated by the New York Financial Services Authority and called the SEC’s enforcement action “counterproductive.” He added that the company had “always endeavored to comply with all relevant laws”.
Can Gemini successfully defend its rights?
After Genesis filed for bankruptcy, another Gemini founder, Cameron Winklevoss, tweeted that Genesis parent company Digital Currency Group (DCG) and its CEO Barry Silbert “continue to refuse to provide creditors with a fair deal.” Exclude immediate legal proceedings against Digital Currency Group and related parties.
He also said: “We will use all the tools available in bankruptcy court to fight for the best interests of Earn users.” Recovering customer funds “remains our top priority.”
Creditors, including Gemini, are in talks to compensate customers with cash and equity in DCG, a person familiar with the matter said.
It is worth mentioning that the outside world suspects that the relationship between Genesis and its parent company DCG is exactly the same as Alameda and FTX.
According to an open letter from Winklevoss on social media, DCG owes Genesis a total of $1.675 billion, and this money was used by DCG founder Barry Silbert to drive “greedy stock buybacks, illiquid venture capital, and Kamikaze-style Grayscale Capital Net Asset Value Transactions”. Grayscale Capital is another fund company under DCG, and it is also the fund that holds the largest number of Bitcoins in the world.
The parent company is also in trouble now, can it help Genesis tide over the difficulties?
This article is selected from “Wall Street Insights”, author: Bu Shuqing, editor of Zhitong Finance and Economics: Zhang Jinliang.
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