A federal judge has ruled that the U.S. Securities and Exchange Commission's charges against cryptocurrency firms Gemini and Genesis, alleging the sale of unregistered securities through the Gemini Earn program, are substantiated and can proceed in court. New York District Court Judge Edgardo Ramos issued a 32-page order on March 13, rejecting Gemini and Genesis' motion to dismiss the SEC lawsuit.
Judge Ramos also dismissed a separate request to halt the SEC's injunction to stop selling the securities and to compel Gemini and Genesis to surrender Gemini Earn profits if the SEC prevails. He stated that the SEC's lawsuit filed in January 2023 "plausibly alleges" that Gemini Earn, a crypto income product managed by Genesis and offered by Gemini, involved the offering and selling of unregistered securities. The SEC contended that Gemini Earn met the criteria of investment contracts under the Howey test, a legal framework for determining securities classification.
Furthermore, Judge Ramos noted that Genesis consolidates the assets on its balance sheet rather than keeping them separate and exercises discretion in lending funds to institutional borrowers. He emphasized that clients' profit expectations rely on Genesis' efforts. The order upheld the SEC's assertion that the Gemini Earn Agreement constituted a note, which is a debt security with an obligation to repay a loan plus interest.
Despite the judge's ruling, it does not imply a conclusive decision in favor of the SEC. The regulator still needs to substantiate its case, and both parties will continue gathering evidence. In a bankruptcy court filing last month, Genesis disclosed reaching a $21 million settlement agreement with the SEC.
In November 2022, Gemini Earn boasted approximately 340,000 customers and managed assets worth $900 million, according to the SEC lawsuit. During the same period, FTX encountered financial distress leading to bankruptcy, prompting Genesis to temporarily suspend Gemini Earn withdrawals due to market volatility and liquidity challenges. Genesis subsequently filed for bankruptcy in January after the SEC filed a lawsuit. In February, Gemini agreed to reimburse $1.1 billion to Gemini Earn customers as part of a settlement with New York financial regulators through the Genesis bankruptcy proceedings.
