23rd November 2023 – (New York) Crypto lending firm Genesis Global has launched a lawsuit against its partner, Gemini Trust Co., in a bid to recover more than $689 million. The funds in question were withdrawn by customers in what has been described as a ‘run on the bank’, leading to Genesis Global’s subsequent descent into bankruptcy.
The lawsuit details how upwards of 230,000 users participating in the joint ‘Earn’ investment scheme withdrew in excess of half a billion dollars from the crypto lending platform. These transactions occurred within a 90-day window prior to Genesis filing for bankruptcy in January.
According to U.S. bankruptcy law, these withdrawals could potentially be recuperated to enable a more equitable distribution amongst all Genesis’ creditors. This provision forms the foundation of the lawsuit, which was recently lodged in the federal bankruptcy court in New York.
The operating agreement between the two companies saw Genesis borrow crypto assets from customers involved in the ‘Earn’ scheme. These assets were then reinvested, with interest paid back to customers. Gemini’s role in this partnership was to act as custodian, processing deposits and withdrawals, and receiving a slice of the payments from Genesis to ‘Earn’ users.
Genesis has been under the microscope since filing for bankruptcy, facing scrutiny from U.S. securities regulators and experiencing internal discord amongst participants in the ‘Earn’ program.
Despite the ongoing legal disputes, Genesis is pushing forward with a bankruptcy liquidation plan. This could see some cryptocurrency returned to customers, though it fails to fully address the competing legal claims.
The U.S. Securities and Exchange Commission sued Genesis, its parent company Digital Currency Group (DCG), and Gemini in January. Additionally, a lawsuit was filed by New York Attorney General Letitia James in October, alleging that these three companies defrauded investors out of more than $1 billion.
Gemini, overseen by the Winklevoss twins — famous for their legal face-off with Meta Platforms CEO Mark Zuckerberg — had previously sued DCG over the breakdown of their crypto lending partnership. Gemini also sued Genesis for failing to return shares in a Bitcoin trust, which had been pledged as collateral on the Gemini Earn loans.
Genesis has counter-sued DCG, seeking to recover $600 million in unpaid loans made to its parent company.
Genesis Global’s bankruptcy filing in January followed the collapse of significant counterparties, including FTX, which triggered a freeze on customer redemptions in November 2022. This escalating series of events serves as a stark reminder of the potential pitfalls and risks inherent within the burgeoning crypto lending industry.