Gemini's Double Mess

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Legal Operations
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The Winklevoss twins are back in the news again for something the probably wish didn't happen. Tyler and Cameron Winklevoss, who initially rose to fame after suing Mark Zuckerberg for allegedly stealing their idea when he started Facebook, are now embroiled in a nearly $1 billion mess that includes an investigation by the SEC and mudslinging between the Winklevosses and Barry Silbert's Digital Currency Group.

The story begins when the Winklevi (thanks, Social Network), created a Bitcoin exchange called Gemini, and then introduced a product called Gemini Earn, which pays interest to customers for their deposits. The SEC took issue with this, and is now charging Gemini with "offering unregistered securities", says the New York Times.

Gemini was able to offer interest payments because it was using those customer deposits to loan to Digital Currency Group's subsidiary crypto lender Genesis, which in turn allowed Gemini to take advantage of an arbitrage opportunity. However, as Bitcoin has tumbled in value over the last few months, "Genesis later froze withdrawals," continues the Times. "About 340,000 Earn customers are out about $900 million in crypto assets, the SEC said."

  • Barry Silbert, who runs Digital Currency Group, made his name creating SecondMarket, which allowed shareholders of private companies (like a pre-IPO Facebook) to sell their shares.
  • “For the past six weeks, we have done everything we can to engage with you in a good faith and collaborative manner in order to reach a consensual resolution for you to pay back the $900 million that you owe, while helping you preserve your business,” Cameron Winklevoss wrote in an open letter to Silbert, reports CNBC.

Spreading Contagion

The collapse of FTX and other crypto firms is no doubt at play in this Genesis-Gemini mess. Silbert's Digital Currency Group "took substantial losses in the summer from our bankruptcy" and the collapse of FTX, Zhu Su, co-founder of Three Arrows Capital, tweeted recently. Su claims that FTX repaid DCG a $2.5 billion loan entirely in FTT coin—which, of course, is now worthless. To wit, however, Bitcoin has regained all its losses since the FTX collapse.

The Verdict

It’s clear that regulation is coming to the crypto market. However, until it does, it seems like contagion from the collapse of FTX will just continue to spread as more investors get hurt, and more companies face SEC investigation.