Cameron and Tyler Winklevoss went from co-creators of Facebook duped by Mark Zuckerberg (as dramatized in the movie “The Social Network”) to early cryptocurrency adopters who became “Bitcoin billionaires.” Now your company has been charged by the Securities and Exchange Commission of the United States (SEC) precisely of securities fraud.
The SEC accused Gemini, the twins’ cryptocurrency exchange, on Thursday of violating US regulations with its Gemini Earn program, which promised a return to clients who deposited their cryptocurrency holdings. Genesis, its lending partner in the program and a subsidiary of Digital Currency Group (DCG), was also charged along with Gemini.
Charges occur after several weeks of increasingly public disputes between Gemini and DCG management following the November collapse of cryptocurrency exchange FTX, which triggered a new contagion wave in the sector, since the funds stored in FTX were blocked or disappeared. Apparently, Genesis is responsible for more than 900 million dollars of funds from Gemini clients.
How did we get to this? Here’s a look at the Winklevoss twins’ rapid rise in the cryptocurrency industry and the recent moves that led to a public spat between Gemini and DCG, SEC charges, and a seemingly gaping hole in Gemini’s finances.
The Winklevoss twins received about $65 million in cash and Facebook shares in the 2008 settlement to create the social media giant. After creating the family office Winklevoss Capital in 2012, the brothers began amassing large amounts of Bitcoin. The Twins owned up to 1% of the offer circulation of the leading cryptocurrency in November 2013, according to the Washington Post.
They went from buying a stash of Bitcoin to leading an investment round in BitInstant, an early Bitcoin exchange website whose founder, Charlie Shrem, was later jailed for money laundering related to the Silk Road market. Also that year, the twins attempted to launch the first Bitcoin ETF (or exchange-traded fund), which was rejected by the SEC.
In 2015, the Winklevoss brothers opened Gemini, a licensed cryptocurrency exchange in their home state of New York. The platform expanded over the years and acquired the market of NFTs Nifty Gateway in 2019, before the eventual NFT market boom in 2021. Parent company Gemini Space Station was valued at $7.1 billion in November 2021.
Cameron and Tyler were considered “Bitcoin billionaires” for the first time in 2017 (as recounted in the book of the same name by Ben Mezrich) when the price of Bitcoin rose to nearly $20,000, and Forbes currently estimates that each brother has a net worth of 1.1 billion dollars.
But with the cryptocurrency industry in turmoil in recent months, Gemini and its founders have faced new challenges. In June 2022, the US Commodity Futures Trading Commission indicted Gemini “for making false or misleading statements” when seeking approval for its Bitcoin futures product, and Gemini laid off 10% of its staff when the cryptocurrency market crashed.
Gemini vs. Genesis
A new wave of turmoil in the cryptocurrency sector triggered Gemini’s recent woes, sparked by the bankruptcy in early November of cryptocurrency exchange FTX and its sister company Alameda Research.
Soon after, Genesis announced that would suspend withdrawals of funds from clients of its lending arm due to the “impact of FTX,” citing “unprecedented market turmoil” in not being able to continue business as usual. Genesis was Gemini’s partner for its Earn product, and Gemini said it would have to freeze customer funds as a result.
In December, the Financial Times reported that Genesis had in its possession some $900 million of funds from clients of the Gemini Earn program. Digital Currency Group — which owns Genesis, Grayscale Investments and other cryptocurrency firms — is allegedly dealing with liquidity problemsaccording to Cameron Winklevoss, although its founder and CEO Barry Silbert has otherwise assured to investors.
In early 2023, private negotiations between Gemini and Genesis were made public when Winklevoss wrote an open letter to Silbert. In the letter, he accused Silbert of “bad faith delaying tactics” to find a solution to the dispute over the funds, suggesting evasive tactics on the part of the DCG boss. Silbert denied the accusations.
The allegations escalated on January 10 when Cameron Winklevoss called for Silbert’s resignation, suggesting misrepresentation and accounting fraud at DCG. The company answered calling Winklevoss’s claims “yet another desperate and unconstructive publicity stunt” by the Gemini founders, who he said were “solely responsible for the operation of Gemini Earn and for marketing the program to its customers.”
gemini advertisement then that it had officially ended its Earn program, which it said would force Genesis to return the more than $900 million in customer funds it holds. The program had been running for almost two years in partnership between Gemini and Genesis.
That situation remains unresolved at the time of writing, but now both Gemini and Genesis face a new hurdle in the form of SEC allegations related to Gemini Earn. The agency alleges that the companies sold unregistered securities to clients, raising billions of dollars in cryptocurrency in the process from hundreds of thousands of users.
“We allege that Genesis and Gemini offered unregistered securities to the public, circumventing disclosure requirements designed to protect investors,” said SEC Chairman Gary Gensler. “Today’s charges build on previous actions to make clear to the market and the investing public that cryptocurrency lending platforms and other intermediaries must comply with our time-tested securities laws.”
In a reply tweetTyler Winklevoss disputed the timing of the charges, saying that Gemini had been in talks with the SEC for 17 months and that the program was regulated by the New York Department of Financial Services.
1/ It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.
—Tyler Winklevoss (@tyler) January 12, 2023
“Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. Super pathetic,” he tweeted. “It’s unfortunate that they are optimizing political points instead of helping us advance the cause of 340,000 Earn users and other creditors.”
He added that “Geminis has always worked hard to comply with all relevant laws and regulations.” Genesis and DCG have yet to comment on the SEC’s allegations.
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From Bitcoin Millionaires to SEC Defendants: Meet the Winklevoss Twins: – Decrypt