Crashes haunt cryptocurrency investors

David (not his real name) constantly lies to his mother. When she asks him about the savings he is managing for her, he tells her not to worry. In fact, her “future savings” of $100,000 from the sale of her house is stuck with a cryptocurrency lending company.

“If I told her, she would have a heart attack,” says the 37-year-old from New York. “That was all she had.”

Keen to avoid high inflation eroding his mother’s life savings, the TV executive last year put the money into Gemini, a cryptocurrency exchange founded by the Winklevoss twin brothers.

Gemini, run by Cameron and Tyler Winklevoss, introduced a product called EARN, which appeared to be an attractive haven for investors to put their money in. Investors can earn more than 7 percent annually from this program at a time when interest rates in conventional banks were close to zero.

David is now one of 340,000 Gemini Earn clients whose funds were suspended after the group’s lending partner was hit hard by shocks to the cryptocurrency market after the failure of Sam Bankman-Fred’s private FTX exchange in November. ) Past. The plight of the victims highlighted the often confusing patchwork of regulations governing encryption in the United States.

The Financial Times spoke to five users who said they thought the software looked like a savings account, but in reality the product was a risky crypto lending strategy. “I thought I was putting the money in a high-yield savings account and could withdraw it at any time,” said David.

In return for higher interest rates, Earn’s producer has been lending cryptocurrencies to customers. As of February 2021, Gemini took retail investors’ money and lent it to crypto brokerage Genesis, which in turn lent it to other digital asset market participants.

When the FTX imploded, anxious investors scrambled to pull their money out of Genesis. The brokerage firm was unable to meet customer withdrawal requests amounting to $827 million, forcing it to suspend withdrawals from its lending firm. On Friday, Genesis’s lending unit filed for bankruptcy.

David was one of many people who entrusted their money to Gemini, persuaded by the flashy ads plastered on billboards and on the New York subway, which boasted that the company was regulated: “Finally, a regulated place to buy, sell and store cryptocurrency,” says one ad. “What’s the best that could happen?” According to another ad.

Now both Gemini and Genesis have been sued by the Securities and Exchange Commission, the Wall Street regulator, alleging that the EARN program was not properly registered as a stock offering and that ordinary investors “suffered significant harm”.

Gemini co-founder Tyler Winklevoss said EARN is regulated by the New York Department of Financial Services and called the SEC’s enforcement action “counterproductive”. He added that the company has “always worked hard to comply with all relevant laws”. Genesis did not respond to multiple requests for comment on the lawsuit.

Adding to David’s fears is a family member who needs surgery that costs tens of thousands of dollars. “My mum says use the money and I keep lying to her, telling her I’m trying to get insurance,” he says, adding that the large amount stuck was emotionally difficult. “I’m going to therapy now. I’ve had some very dark moments.”

In the crypto industry, where many major exchanges operate outside the US, or lack official headquarters, Gemini’s office in midtown Manhattan has been a source of reassurance for some clients.

“I knew it was staged in New York,” said Christine, who lives a few blocks from Gemini’s office and asked that her last name not be used. The mother of one child has put $600,000 into the EARN program.

Different aspects of the crypto market are overseen by different regulators, which underscores the confusion for customers.

Gemini is licensed by the New York State Department of Financial Services, which allows customers in the state to trade cryptocurrencies on an exchange. However, the SEC said in its lawsuit that, given that Gemini’s EARN product lent cryptocurrency for investment in exchange for an expected profit, it should have been registered as a security. Failure to do so, the regulator added, would mean the EARN program violated securities rules.

“The highly fragmented system of financial regulation in the US does not help investors, does not help companies create products, and creates loopholes,” said Yulia Guseva, professor of law and chair of the Fintech and Blockchain Program at Rutgers University in New Jersey.

She added that growing anxiety over the frozen funds prompted Christine to start taking medication and seeking treatment. “I believed in them (…) I never thought this could happen to me.”

We will use every tool available to us in bankruptcy court to maximize recovery for EARN users, said Cameron Winklevoss, after the Genesis exchange filed for bankruptcy on Friday, adding that recovering investors’ money “remains our top priority.” Customer funds stuck in its platform.

For many ordinary investors, the appeal of the EARN program was that it provided a stream of high income that dwarfed the returns offered by traditional banks. The Securities and Exchange Commission said Gemini’s website claimed that investors “can get more than 100 times the national average interest rate, which is among the highest in the market.” The Securities Regulatory Authority added a


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