SEC Moves Against Genesis and Gemini for Crypto Earn Programs

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What happened

The Securities and Exchange Commission (SEC) charged crypto exchange Gemini and crypto lender Genesis with selling unregistered securities last week. The Gemini Earn program had allowed users to earn interest by lending out their crypto assets through Genesis. However, last year, Genesis froze withdrawals on its platform, leaving about 340,000 Gemini Earn customers unable to access around $900 million in assets. 

So what

It isn’t clear whether the move will help Gemini Earn customers get their money back. But for crypto investors, the dangers of crypto lending platforms have never been more evident. Whatever crypto exchange you use, if you’re earning interest, make sure you understand where that money is coming from.

The SEC is pursuing cases against several crypto lenders on the basis that these interest-bearing accounts are a type of security. There are strict rules about how securities can be bought and sold, enforced by the SEC. These include fully informing investors about the risks involved, something the SEC says Gemini and Genesis did not do.

When you put your money in an interest-bearing savings account, there are rules about what the bank can do with your funds. There are also protections against bank collapse, such as FDIC insurance. For stock brokerages, the Securities Investor Protection Corporation (SIPC) covers investors against company failure. While some crypto platforms have third-party insurance, and some U.S. dollar deposits are covered by FDIC insurance, a lot of assets on crypto platforms are not protected. 

“The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

Tyler Winklevoss, one of Gemini’s founders, hit back at the SEC on Twitter. He said Gemini had been in discussions with the SEC about the Earn program for more than 17 months. “They never raised the prospect of any enforcement action until AFTER Genesis paused withdrawals on November 16th,” he said.

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Now what

When you invest in crypto, there aren’t as many safeguards as you’d get with traditional finance. Know that there are big differences between the following crypto accounts, and each offers different levels of risk:

  • Custodial wallets: If you leave your assets on the platform where you bought them, they’ll usually be held in a custodial wallet. If the platform fails, your account may be frozen and you may not be able to access your money. Indeed, your funds could get tied up in bankruptcy proceedings. 
  • Staking accounts: Some cryptocurrencies, known as proof-of-stake cryptos, pay rewards to token holders who agree to tie up their coins to help secure the blockchain. There are different ways to stake crypto, but staking is often a safer way to earn rewards than crypto lending.
  • Lend-earn accounts: The idea behind crypto lending is to take the middleman out of loans. Essentially, you lend your crypto directly and get paid the interest. Unfortunately, it isn’t always clear what risks are being taken with your assets or who they are being lent to.
  • Non-custodial wallets: This is a type of crypto wallet that you control. Unlike a custodial wallet, you’re in charge of your funds and there’s no risk of loss if your exchange collapses. That said, there’s a steep learning curve and if you lose your password or seed phrase, you could also lose access to your crypto.

Don’t assume your funds are safe. Instead, consider moving your assets to a crypto wallet that you control, or at least removing them from crypto lending schemes. The volatility of crypto is risky enough without adding in the risk of platform failure.

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