A federal judge has ruled that the lawsuit brought forth by the US Securities and Exchange Commission (SEC) against cryptocurrency firms Gemini and Genesis will proceed in court.
The judge’s decision follows attempts by Gemini and Genesis to dismiss the lawsuit, which alleges the sale of unregistered securities through the Gemini Earn program.
In a 32-page order issued on March 13, New York District Court Judge Edgardo Ramos rejected motions to dismiss filed by Gemini and Genesis. Judge Ramos stated that the SEC’s allegations were plausible enough to warrant further legal proceedings. Additionally, the judge denied a separate request by the companies to halt the SEC’s demand for them to cease selling securities and to hand over Gemini Earn profits if the SEC prevails in the lawsuit.
Judge Ramos acknowledged that the SEC’s lawsuit, filed in January 2023, “plausibly alleges” that the Gemini Earn program, a crypto yield-bearing product offered by Gemini and managed by Genesis, involved the sale of unregistered securities. He noted that the SEC provided sufficient evidence to establish that Gemini Earn met the criteria of an investment contract under the Howey test, a legal framework used to classify securities.
According to Judge Ramos, Genesis pooled assets on its balance sheet instead of segregating them and lent funds to institutional borrowers based on its own discretion and judgment. The judge also highlighted that customers’ expectation of profits was dependent on Genesis’ efforts. The SEC’s claim that the Gemini Earn agreements constituted notes, which are debt securities obligating loan repayments with interest, was also upheld in the order.
However, it’s important to note that the judge’s decision does not indicate a ruling in favor of the SEC. The regulator still needs to provide evidence to support its case, and both sides will proceed with the collection of evidence.
Genesis has reached a settlement agreement with the SEC, agreeing to pay $21 million to resolve the lawsuit. In November 2022, Gemini Earn had approximately 340,000 customers and $900 million in assets under management, as stated in the SEC’s lawsuit. Following FTX’s bankruptcy in the same month, Genesis temporarily suspended Gemini Earn withdrawals, citing “unprecedented market turmoil” and liquidity issues.
Genesis filed for bankruptcy after the SEC’s lawsuit was filed in January of the previous year. In February, Gemini agreed to return $1.1 billion to Gemini Earn customers through the Genesis bankruptcy proceeding, as part of a settlement with New York’s financial regulator.
Over the past year, the SEC has filed numerous lawsuits against cryptocurrency firms, with SEC Chair Gary Gensler consistently asserting that most cryptocurrencies should be classified as securities.
For instance, the agency initiated a civil case against Sam Bankman-Fried, co-founder of FTX. In addition to the case against Bankman-Fried, the SEC filed lawsuits against other major crypto players, including Binance, its CEO Changpeng Zhao, and Coinbase.