Welcome to today's video where we'll be discussing the recent lawsuit against Gemini Trust Company,
a crypto lending platform run by the Winklevoss twins, and Genesis Global Capital for breaking
securities rules.
We'll dive into the legal definition of what a security is and how it relates to crypto
products.
We’ll finish up by looking at whether Logan Paul’s Crypto Zoo could be seen as an unregistered
securities offering.
So, US regulators announced last week that they are suing Gemini Trust Company - a retail
crypto lending product run by the Winklevoss twins’ and Genesis Global Capital for breaking
securities rules.
The SEC says that the two firms illegally raised billions of dollars from hundreds of
thousands of retail investors through the Gemini Earn program.
Now look, I have felt that regulators should have cracked down on the Winklevoss Twins
for quite some time now, not so much for their Crypto shenanigans, but for their music.
My friend Darin who runs the How Money Works YouTube channel sent me a link to their band
“Mars Junction” (terrible band name) a few months ago, and I don’t think I will
ever be able to forgive him for that.
I’m not one for stirring up online hate mobs, but if you happened to have opened up
another YouTube tab to check out their music when I mentioned the name of the band, don’t
blame me – I feel I warned you, instead go over to How Money Works and leave an angry
comment under one of his videos.
It’s his fault.
So anyhow, there is no Music Regulator – to protect listeners (I’m not really a proponent
of excessive regulation, but equally, music festival goers should not be subjected to
DJ D-Sol – The CEO of Goldman Sachs either) – but in the way that Al Capone was taken
down for Tax Evasion rather than his more serious criminal activities, the Winklevoss
Brothers are being charged for the Unregistered Offer and Sale of Crypto Asset Securities
to retail investors through the Gemini Earn Lending Program.
Now obviously what they are accused of is bad, but kinda like Al Capones tax evasion,
it’s not the worst thing that they’ve done.
Tyler Winklevoss (one of the Winklevoss’s) decided to take the Elon Musk approach to
dealing with the SEC and referred to the suit as a “parking ticket” on Twitter and vowed
to defend his company.
We will get to see over time if this is a good approach or not.
I kinda get the feeling that no one in the crypto space hires a lawyer before mouthing
off on Twitter.
Maybe Lawyers won’t accept their tokens…
Anyhow, Gemini – the Winklevoss company - launched Earn two years ago, with the idea
of offering passive returns on cryptocurrency in exchange for the right to lend those tokens
out.
By August of 2021, the program, which offered quite high interest rates reached $3 billion
in assets.
The SEC’s complaint alleges that the Gemini Earn program constitutes an offer and sale
of securities and should have been registered with the SEC.
Now, back in 2021 – around the time Gemini Earn had reached $3 billion in assets, Coinbase
– who notified the SEC that they planned on issuing a similar product - received a
Wells Notice from the SEC warning them against launching a product that would allow customers
to earn interest on their crypto holdings.
Brian Armstrong – the CEO of Coinbase wrote a long Twitter Thread at the time arguing
that this was unfair (it’s worth noting that all communications from crypto companies
seem to occur on Twitter).
Central to Armstrong’s argument was that the SEC refused to explain why they think
a crypto lending product is a security.
Now, Securities are actually fairly well defined in the United States, but, before we go through
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As I was saying, Securities are actually fairly well defined in the United States.
The definition of a “security” includes a wide range of investment vehicles, including
“investment contracts” and “notes.”
An investment contract is an investment of money in a common enterprise with a reasonable
expectation of profits derived from the entrepreneurial or managerial efforts of others.
And under that definition, crypto lending products are clearly securities.
In fact many crypto tokens that you can think of would be classified as securities under
that definition.
The only other thing a crypto lending product could be considered is a bank account, and
the reason bank accounts are not classified as securities is that they were specifically
exempted from securities regulation because they are subject to banking regulation, which
is significantly more onerous.
You don’t have to file a prospectus to issue bank accounts, but you do have to meet banking
capital requirements and have bank examiners drop in from time to time and so on.
Crypto firms are definitely not aiming to be regulated as banks.
So, Gemini – the Winklevoss company has (or had) this Earn product where it paid its
customers interest on their crypto.
They received that interest by lending the customers crypto to this other company - Genesis,
a unit of Barry Silbert’s Digital Currency Group.
Genesis, in order to receive interest, lent the crypto to big crypto traders like Three
Arrows Capital and Alameda Research – and I think you can probably guess how that worked
out.
When Genesis lost a lot of the money that they had been lending out - they shut down
all withdrawals, including for Gemini Earn customers.
Cameron Winklevoss began attacking Silbert about this on Twitter – the standard place
for corporate disputes.
Cameron was upset that Silbert made bad loans with customer money – which is essentially
the exact same thing that the Twinkletoes brothers did.
If there is one good thing, I can say about Silbert, at least he hasn’t released any
videos of his music on YouTube.
I should point out that the Singing Winklevoss (as opposed to the guitar playing one) wears
one of those wallet chains on stage – which is maybe a bit surprising for someone with
such a passion for new forms of money.
But anyhow…
The SEC are now suing both of these firms (Gemini and Genesis) together for doing unregistered
securities offerings, and the reason for this is of course that the two firms together appear
to have done unregistered securities offerings.
According to the complaint, in December 2020, Genesis - entered into an agreement with Gemini
to offer Gemini customers, including retail investors in the United States, an opportunity
to loan their crypto assets to Genesis in exchange for a promise to pay interest.
Beginning in February 2021, Genesis and Gemini began offering the Gemini Earn program to
retail investors.
Gemini deducted an agent fee, sometimes as high as 4.29 percent, from the returns Genesis
paid to Gemini Earn investors.
According to the complaint, Genesis then exercised its discretion in how to use investors’
crypto assets to generate revenue and pay interest to Gemini Earn investors.
The SEC’s complaint alleges that the Gemini Earn program constitutes an offer and sale
of securities under applicable law and should have been registered with the Commission.
The complaint cites the two Supreme Court cases — Reves v. Ernst & Young and SEC v.
Howey — that decided what makes an investment a “note” or an “investment contract”
under the law.
They highlight that no alternative regulatory scheme or risk-reducing factors existed to
protect investors with respect to the Gemini Earn program, thus the SEC has jurisdiction
in this case.
The complaint says that from its inception, the defendants have explicitly marketed the
Gemini Earn program as an investment opportunity which led investors to reasonably expect to
profit from their efforts.
They include promotional media from the company websites, social media posts and so on where
both firms publicly touted the ability for investors to earn yield or returns via Gemini
Earn.
The complaint says that Gemini repeatedly described Gemini Earn as an investment, repeatedly
touted that the Gemini Earn interest rates were “among the highest rates on the market”
and that Gemini Earn investors could “receive more than 100x the national interest rate”
The lawsuit argues that Gemini Earn investors were led to expect that the Defendants’
efforts to generate the investment returns would result in profit for investors.
The main remedy in cases like this for an unregistered securities offering is that the
issuer has to return all of the money to the investors, whether the security lost money
or not and pay a fine to the SEC.
The complaint is asking the court to order the defendants to disgorge their ill-gotten
gains Tyler Winklevoss – One of the Winklevosses
– told the FT that Earn was regulated by the New York Department of Financial Services,
and called the SEC’s enforcement action “counterproductive”
In their complaint the SEC highlighted that while Gemini is licensed by the New York State
Department of Financial Services, that licensing allows customers in the state to trade digital
currencies on the exchange, but because the Earn product lent crypto for investment in
return for an expected profit, it should have been registered as a security.
Genesis filed for Bankruptcy last week, and Cameron Winklevoss (one of the Winklevoss’s)
announced on their corporate communications platform – Twitter - We will use every tool
available to us in the bankruptcy court to maximize recovery for Earn users,” he added
that recouping customer funds “remains our highest priority”.
– That hopefully means they won’t have time for music…
So that is at least a relief.
It might have been better if the SEC had shut this scheme down early on – like they did
with coinbase, before the money had been lost (or rendered inaccessible – as they say
in the crypto space).
There are of course numerous other crypto coins and tokens out there that under the
Howey test would be classified as securities.
In August of 2021, YouTube Children’s Entertainer Logan Paul took to his podcast to announce
another of his NFT Projects.
“It’s so fun.
It provides a yield with a token, it can earn you money, Paul said on the podcast.
He promised investors that CryptoZoo would eventually "enter the metaverse" – whatever
that means…
It turned out to not be fun and to lose people money – but who knows… maybe it will still
one day enter the metaverse…
I read the “whitepaper” for Logans Zoo Token – and doing so was worse than listening
to Mars Junction…
It was significantly worse.
Logan Paul’s whitepaper was a crime against humanity…
It included the phrase “by combining the proven success of gamified animal ownership
with the anticipatory optimism of collecting trading cards” Yeah… and it goes on like
that…
It could be argued that Logans crypto products are also unregistered securities offering.
The children who watch his YouTube channel invest money in a common enterprise with an
expectation of profits derived from the entrepreneurial or managerial efforts of Logan Paul and his
Crypto cronies.
That makes it sound a lot smarter than it actually is…
After Logan was exposed by Coffeezilla, for taking advantage of his audience, or at least
for attempting to take advantage of his audience, Logan Paul offered to reimburse some of the
“investors” in his product.
(I’m obviously using the term investors quite loosely) He is not paying them back
in full for their losses as he has chosen to pay them back in Ethereum, which has fallen
significantly in value since he launched his NFT zoo).
Additionally, he is not compensating the investors who sold his tokens at a loss when they saw
that he had abandoned the project.
If the SEC were to get its act together and go after more of these schemes, Logan would
likely be required to make all of his “investors” whole, and to pay a fine.
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