David* is constantly lying to his mother. When she asks about the savings he is managing for her, he tells her not to worry. In reality, the $100,000 “nest egg” from the sale of her house is trapped at a crypto lending company.
“If I tell her, she’s going to have a heart attack,” says the 37-year-old from New York. “This was her everything.”
Eager to avoid rising inflation eroding his mother’s life savings, the television director last year placed the money with Gemini, the crypto exchange founded by the Winklevoss twins.
Gemini, run by Cameron and Tyler Winklevoss, offered a product called Earn that appeared to be an attractive haven for investors to leave their cash. Investors could earn more than 7 per cent a year from the scheme when rates at traditional banks were close to zero.
David is now one of 340,000 Gemini Earn customers whose funds have been locked up after the group’s lending partner was wrongfooted by shockwaves that cascaded through the crypto market following the failure of Sam Bankman-Fried’s FTX exchange in November. Their plight has underscored the patchwork of often confusing regulations governing crypto in the US.
The Financial Times spoke to five users who said they believed it was similar to a savings account; in reality the product was a risky crypto lending strategy. “I thought I was just parking the money in a high-yield savings account and I can get it out anytime,” David said.
In exchange for the high interest rates, the Earn product lent out customers’ crypto coins. From February 2021, Gemini took retail investors’ funds and lent them out to crypto broker Genesis, which in turn loaned them to other digital asset market participants.
When FTX imploded, nervous investors rushed to pull their money from Genesis. The broker was unable to meet clients’ $827mn worth of withdrawal requests, forcing it to suspend withdrawals from its lending business. On Friday, Genesis’ lending unit filed for bankruptcy.
David was one of many people who entrusted their money to Gemini, persuaded by flashy adverts plastered across New York’s billboards and subways, boasting of the company being regulated. “Finally, a regulated place to buy, sell, and store crypto” read one advert. “What’s the best that could happen?” read another.
Now both Gemini and Genesis have been sued by the Wall Street regulator the Securities and Exchange Commission, which alleges the Earn programme was not properly registered as a securities offering and that ordinary investors “have suffered significant harm”.
Gemini co-founder Tyler Winklevoss said Earn was regulated by the New York Department of Financial Services, and called the SEC’s enforcement action “counterproductive”. He added 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 worries is a family member who he says needs surgery costing tens of thousands of dollars. “My mother’s saying ‘use the money’ and I keep on lying to her, saying I’m trying to get insurance,” he says, adding the significant amount trapped has been emotionally difficult. “I’m going to therapy now. I had some very dark moments.”
In a crypto industry where many big exchanges operate offshore or lack official headquarters, Gemini’s office in midtown Manhattan was a source of reassurance to some customers.
“I knew they were regulated in New York. I totally trusted that Gemini would do the job for us, manage the risk,” said Christine, who lives a few blocks away from Gemini’s office and asked that her surname not be used. The mother of one placed $600,000 into Earn.
Different aspects of the crypto market are overseen by different regulators, underscoring customers’ confusion.
Gemini is licensed by the New York State Department of Financial Services, which allows customers in the state to trade digital currencies on the exchange. However, as its Earn product lent crypto for investment in return for an expected profit, it should have been registered as a security, the SEC said in its lawsuit. Failure to do so meant Earn violated securities rules, the regulator alleged.
“The highly fragmented system of financial regulation in the US does not help investors, does not help companies to create products, and creates loopholes,” said Yuliya Guseva, law professor and head of the fintech and blockchain programme at New Jersey’s Rutgers University. She added that the SEC was doing “regulation by enforcement”.
Spiralling anxiety because of the frozen funds has propelled Christine to start taking medication and seek therapy, she said. “I had faith in them . . . I never thought this could happen to me.”
After Genesis filed for bankruptcy on Friday, Cameron Winklevoss said: “We will use every tool available to us in the bankruptcy court to maximise recovery for Earn users,” adding recouping customer funds “remains our highest priority”. Genesis did not respond to a request for comment on clients’ funds locked on its platform.
For many ordinary investors, the appeal of Gemini’s Earn program was that it provided a stream of high income that dwarfed the returns on offer from conventional banks. The SEC said Gemini’s website claimed that investors could “‘receive more than 100x the average national interest rate, among the highest rates on the market’ ”. Gemini took a fee, sometimes as high as 4.29 per cent, from the returns Genesis paid to investors in Earn, the US securities regulator said.
“Seeing the interest add up on a predictable schedule was nice,” said Viv, a stay-at-home mother of three who asked that her surname not be used, adding: “On a high-yield savings account it was basically at zero at that time.”
The Midwesterner put $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 it could ever happen to you.”
The bankruptcy of Genesis’ lending unit has given some customers hope that their money will be returned. Creditors including Gemini’s Winklevoss twins are working on a bankruptcy deal that is likely to pay them back through cash and equity in Genesis’ parent company, Digital Currency Group, said a person familiar with the matter.
For others, the glimmer of hope provides little comfort.
“Even if someday we got all of our money back, mentally the damage is there,” said Christine. “I don’t know how to wake up from this nightmare.”
*His name has been changed to protect his identity