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‘Nightmare’: Collapse of leading crypto lenders traps investors

David* lies to his mother all the time. When she asks him about the savings he manages for her, he tells her not to worry. In reality, the $100,000 nest egg from the sale of her home is trapped at a crypto lending company.

“If I tell her, she’ll have a heart attack,” says the 37-year-old from New York. “That was her be-all and end-all.”

To avoid the rising inflation eroding his mother’s life savings, the TV director placed the money with Gemini, the crypto exchange founded by the Winklevoss twins, last year.

Gemini, operated by Cameron and Tyler Winklevoss, bot launched a product called Earn, which seemed like an attractive haven for investors to bequeath their money. At a time when interest rates at traditional banks were near zero, investors were able to earn more than 7 percent a year from the program.

‘Nightmare’: Collapse of leading crypto lenders traps investors, Crypto Trading News

David is now one of 340,000 Gemini Earn customers whose funds were frozen after the group’s lending partner was caught flat-footed by shockwaves that swept the crypto market following the failure of Sam Bankman-Fried’s FTX exchange in November. Their plight has underscored the patchwork of often-confusing crypto regulations in the US.

The Financial Times spoke to five users who said they thought it resembled a savings account; in reality, the product was a risky crypto lending strategy. “I figured I’d just park the money in a high-yield savings account and pull it out whenever I wanted,” David said.

In exchange for the high interest rates, the Earn product lent crypto coins to customers. As of February 2021, Gemini took the funds from retail investors and lent them to crypto broker Genesis, which in turn lent them to other digital asset market participants.

As FTX imploded, nervous investors rushed to withdraw their money from Genesis. The broker was unable to fulfill $827 million in client withdrawal requests, forcing it to suspend withdrawals from its lending business. Genesis’ credit division filed for bankruptcy on Friday.

David was one of many people who trusted Gemini with their money, persuaded by flashy billboards and subways in New York bragging that the company was regulated. “Finally, a regulated place to buy, sell, and store crypto,” one ad said. “What’s the best that could happen?” read another.

Now both Gemini and Genesis have been sued by Wall Street’s main regulator, the Securities and Exchange Commission, which alleges the Earn program was improperly registered as a securities offering and that ordinary investors “suffered significant harm.”

Tyler Winklevoss, co-founder of Gemini, said Earn was regulated by the New York Treasury Department and called the SEC’s enforcement actions “counterproductive.” He added the company “has always worked hard to comply with all relevant laws.” Genesis did not respond to multiple requests for comment about the lawsuit.

Adding to David’s concerns is a family member he says is in need of surgery, which will cost tens of thousands of dollars. “My mom says ‘use the money,’ and I keep lying to her and saying I’m trying to get insurance,” he says, adding that the significant amount trapped was emotionally difficult. “I’m going to therapy now. I’ve had some very dark moments.”

In a crypto industry where many major exchanges operate offshore or have no official headquarters, Gemini’s Midtown Manhattan office has been a source of reassurance for some clients.

“I knew they were regulated in New York. I had complete confidence that Gemini would do the work for us and manage the risk,” said Christine, who lives a few blocks from Gemini’s office, and asked that her last name not be used. The mother-of-one invested $600,000 in Earn.

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

‘Nightmare’: Collapse of leading crypto lenders traps investors, Crypto Trading News

Ad runs on Gemini’s Twitter account © @Gemini/Twitter

Gemini is licensed by the New York State Department of Financial Services, allowing clients in the state to trade digital currencies on exchanges. However, since its Earn product lent crypto for investments against an expected profit, it should have been registered as a security, the SEC said in its lawsuit. Otherwise, Earn violated securities rules, the regulator claimed.

“The highly fragmented system of financial regulation in the US does not help investors, does not help companies develop products and creates loopholes,” said Yuliya Guseva, law professor and head of the fintech and Blockchainprogram at Rutgers University in New Jersey. She added that the SEC is “regulating through enforcement.”

Growing fears over the frozen funds prompted Christine to start taking medication and seek therapy, she said. “I had faith in her. . . I never thought this could happen to me.”

After Genesis filed for bankruptcy on Friday, came Cameron Winklevoss said: “We will use every tool available to us in the bankruptcy court to maximize recovery for Earn users,” adding that recovering customer funds “remains our top priority.” Genesis did not respond to a request for comment on the client funds locked on its platform.

For many ordinary investors, the appeal of Gemini’s earn program was that it delivered a stream of high yields that dwarfed the returns offered by traditional banks. The SEC said Gemini’s website claimed investors “could get more than 100 times the average national interest rate, one of the highest rates on the market.” Gemini took a fee, sometimes as much as 4.29 percent, on returns Genesis paid to earn investors, the US Securities and Exchange Commission said.

“It was nice to see interest add up on a predictable schedule,” said Viv, a stay-at-home mom of three who asked that her last name not be used, adding, “On a high-yield.” Savings account was basically at zero this time.”

The Midwesterner deposited $130,000 into her Gemini Earn account, proceeds from the sale of her family home. “I’m not like a rich person. . . You hear about people losing everything, but you don’t think that could ever happen to you,” she said.

The bankruptcy of Genesis’ credit division has given some customers hope for a refund. Creditors, including Gemini’s Winklevoss twins, are working on a bankruptcy deal that they will likely repay through cash and equity in Genesis’ parent company, Digital Currency Group, a person familiar with the matter said.

For others, the glimmer of hope is little comfort.

“Even if we get all our money back one day, mentally the damage is there,” Christine said. “I don’t know how to wake up from this nightmare.”

*His name has been changed to protect his identity

Source: Crypto News Deutsch

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