After a year and a half of frozen client funds in Gemini’s Earn program, there’s finally progress towards a resolution.
On May 17, Judge Sean H. Lane approved Genesis’ Chapter 11 bankruptcy plan, paving the way for the return of customer funds frozen since November 2022. The platform anticipates returning approximately $3 billion to creditors in both cash and crypto assets.
Court documents indicate that Gemini will initiate refunds to Earn members by the end of May.
The payment ruling stems from a judge’s dismissal of a lawsuit filed by Digital Currency Group (DCG) and a specific interest group, Genesis Crypto Creditors. DCG had argued that it was appropriate to evaluate all claims in U.S. dollars when the company filed for bankruptcy in January 2023.
Inception of the Conflict: The Genesis of the Gemini Earn Program Dispute
In 2020, Gemini and Genesis established mutually beneficial cooperation terms. Gemini extended an offer to its clients in the U.S. to earn interest from their crypto assets, with Genesis handling the payments. The Earn program has been running at full capacity since February 2021.
Gemini served as an intermediary connecting Genesis with private investors.
In November 2022, the cryptocurrency community faced challenges with the collapse of the FTX exchange and a significant downturn in Bitcoin (BTC) and major altcoin prices. Despite earlier promises of returns up to 13%, issues arose amid the 2022 market downturn, leading Genesis Global Capital to freeze client assets.
On November 16, 2022, Genesis informed customers about the temporary halt in repayments and the issuance of new loans due to market turbulence and the FTX collapse. Consequently, Gemini had to restrict customer payments via a specific Gemini Earn program. The outstanding debt to clients on the Gemini platform from Genesis amounted to $900 million, contributing to a total deficit exceeding $1 billion on the company’s balance sheet at that time.
Gemini Intensifies Conflicts with Renewed Energy
Thanks to Gemini co-founder Cameron Winklevoss, Genesis’s issues gained significant publicity. Winklevoss accused DCG CEO Barry Silbert of employing “unfair tactics” and stalling the decision to return $900 million to exchange clients. In an open letter addressed to the head of DCG, Winklevoss claimed that Gemini had not yet received an agreement to settle this debt.
“Earn users are tired. They’re scared. Many are now in dire straits. And yet despite all that they have had to endure, they have been remarkably patient and supportive. But there is only so much more they can take.”
Cameron Winklevoss, Gemini co-founder
On behalf of Gemini and its 340,000 users of the Gemini Earn service, Winklevoss requested the DCG board to oust Silbert. He cited DCG’s inability to make payments to creditors under Silbert’s leadership.
The official Digital Currency Group X account issued a reply to an open letter from the Gemini co-founder.
The company affirmed its commitment to taking all necessary legal measures to safeguard its interests and to engage in continuous dialogue with Genesis’ creditors.
“DCG will continue to engage in productive dialogue with Genesis and its creditors with the goal of arriving at a solution that works for all parties.”
DCG statement
Legal Disputes with the SEC
In January 2023, the Securities and Exchange Commission (SEC) initiated legal action against Genesis Global Capital LLC and Gemini Trust Company LLC concerning Gemini Earn.
The SEC filed a civil lawsuit in the Manhattan federal court, contending that Genesis should have registered Gemini Earn and provided customers with comprehensive financial information about the program.
Contrary to the SEC’s stance, Gemini and Genesis argue that the Gemini Earn Program should not be categorized as a securities offering. They assert it is a straightforward loan agreement, and the alleged investment contracts were not traded on the secondary market. Tyler Winklevoss, a co-founder of Gemini, has also criticized the regulator’s allegations.
The companies argued that the transactions could be viewed as loans, prompting them to petition the court to either dismiss the SEC’s lawsuit or issue an alternative ruling — rejecting the SEC’s plea for a permanent injunction against the program.
In November 2023, Genesis opted to file a $689 million lawsuit against Gemini. Genesis’s legal team contended that the actions of the exchange’s management harmed other creditors, leading them to pursue justice by filing a lawsuit in New York’s bankruptcy court against the exchange.
Resolution Reached
In February, Gemini’s management declared that the exchange had reached a settlement regarding Genesis’ bankruptcy. Pending approval, all participants in the Gemini Earn program could recover 100% of their digital assets.
Recently, the court endorsed a repayment plan for Genesis’s debts to creditors. Additionally, the court dismissed the challenge, concluding that Genesis’ parent company lacked legal grounds to contest the compensation arrangement.
Genesis’s Fate Post-Court Decision
Simply put, the court determined that the debtor’s assets were insufficient for DCG to profit as a shareholder after repaying unsecured debts. Despite using DCG’s proposed valuation method, the court found that DCG, as a public company shareholder, faced significant financial losses amounting to billions of dollars.
Given the size of creditors’ claims, Genesis will use nearly all of the bankruptcy estate to settle obligations to senior creditors. Consequently, DCG has virtually no chance of receiving payments and is left without compensation or any prospects of recovery due to the court’s ruling.
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