Gemini, a well-known cryptocurrency exchange, has taken legal action by filing an adversarial lawsuit against Genesis Global Holdco, a cryptocurrency lender currently in bankruptcy proceedings. The dispute centers on the fate of 62,086,586 shares of the Grayscale Bitcoin Trust (GBTC), which were used as collateral to secure loans that Genesis borrowed from 232,000 users of the Gemini Earn program. The total value of this collateral is currently close to $1.6 billion.
According to the lawsuit filed in the Bankruptcy Court for the Southern District of New York, Gemini had managed to obtain $284.3 million through foreclosure to benefit the users of the Earn program. However, Genesis contested this action, which has so far prevented Gemini from distributing the proceeds. Notably, Genesis suggested using the original collateral value, exceeding $800 million, to determine the defect claims of Earn users. This would free up hundreds of millions of dollars for distribution to other creditors. Gemini argued that it assumed market risk associated with the initial collateral to benefit the Earn program users, meaning that only these users are entitled to benefits arising from this risk assumption.
The lawsuit also alleged that Digital Currency Group (DCG), Genesis's parent company, transferred additional collateral to Genesis with the sole intention of immediate distribution to Gemini for the benefit of the Earn users. However, Genesis proposed using this collateral for other purposes, which Gemini contested. The lawsuit argued that recognizing Earn users' rights to additional collateral would facilitate the return of more than $1 billion in digital assets wrongly withheld by Genesis.
Gemini Earn users represent 99% of Genesis's creditors, and their claims account for 28% of all claims by value. Genesis initially filed for bankruptcy in January, which led to the suspension of withdrawals in November 2022, affecting the Gemini Earn program. In July, Gemini sued DCG and its CEO Barry Silbert, alleging fraud connected to the Earn program. Both companies have also faced regulatory issues. The U.S. Securities and Exchange Commission (SEC) charged them with offering unregistered securities through Gemini Earn, and the New York Attorney General, Letitia James, filed a lawsuit against Gemini, Genesis, and DCG, accusing them of defrauding users through the Earn program.
