On October 27, Gemini Trust Co. initiated legal action against Genesis Global Capital, a troubled digital asset lender. The objective of the lawsuit is to recover $1.6 billion in collateral that Genesis withheld, which has caused financial harm to Gemini customers who were unable to withdraw their funds when Genesis suspended withdrawals in November.
The lawsuit, filed in bankruptcy court, asserts that Genesis improperly retained collateral that was designated to secure loans made by Gemini users through the exchange’s Earn program. The collateral, consisting of more than 30 million shares of the Grayscale Bitcoin Trust (GBTC), was held in an account by Gemini for the benefit of the lenders participating in the Earn program.
The purpose of this GBTC collateral was to ensure the fulfillment of Genesis’s obligations and liabilities under the master loan agreements governing the Earn loans. Gemini alleges that Genesis has obstructed the distribution of the collateral proceeds to over 230,000 Earn users.
This dispute originated from a significant downturn in the cryptocurrency markets during the summer, which led Genesis and other major lending platforms to freeze withdrawals. With debts exceeding $3 billion, Genesis has disputed Gemini’s claim on the collateral shares.
Thursday’s lawsuit intensifies a high-stakes conflict regarding the allocation of losses among Genesis creditors, the majority of whom are Gemini customers. The outcome of this legal battle could have a substantial impact on the terms of any reorganization plan.
Gemini asserts that it acted as an agent for the Earn users by loaning out their cryptocurrency. To safeguard the users, Gemini required Genesis to provide collateral. However, Genesis has contested the validity of Gemini’s foreclosure on some of the shares.
The relationship between cryptocurrency exchange Gemini and troubled digital asset lender Genesis is interconnected due to their common owner, Barry Silbert’s Digital Currency Group (DCG). Through a partnership with Genesis, Gemini offered an Earn program that allowed customers to lend their cryptocurrency to Genesis and earn interest.
However, when the crypto markets crashed in 2022, Genesis suspended withdrawals from the Earn program, leaving Gemini customers unable to access $900 million in funds. Consequently, Gemini has filed lawsuits against both Genesis and DCG, alleging that they deceived investors about Genesis’s precarious financial situation, which was connected to the failure of hedge fund Three Arrows Capital.
DCG has denied any involvement in the Earn program, but Gemini argues that DCG was aware of Genesis’s insolvency and deliberately concealed this information.