Gemini Responds to SEC Lawsuit Over Alleged Unregistered Securities

Cryptocurrency exchange Gemini has filed a reply brief in response to a lawsuit initiated by the United States Securities and Exchange Commission (SEC). The lawsuit, which is being heard in the U.S. District Court for the Southern District of New York, alleges that Gemini’s service, Gemini Earn, violated securities regulations by offering “unregistered securities.”

A Robust Defense

Gemini’s legal defense, represented by firms JFB LEGAL, PLLC, and SHEARMAN & STERLING LLP, has been robust. The reply brief, dated August 18, 2023, challenges the SEC’s claims, arguing that their complaint is based on “conclusory statements” and lacks concrete evidence. Specifically, Gemini’s defense has highlighted the SEC’s failure to answer pivotal questions, such as when the alleged security was sold, who were the buyer and seller, and at what price it was offered.

Gemini Earn at the Center of Controversy

The core of the lawsuit revolves around the Gemini Earn service, which facilitates customers in lending crypto assets like Bitcoin to Genesis. The SEC asserts that this service breached securities regulations. However, Gemini has consistently contested this claim. On May 27, the exchange posited that transactions within the Gemini Earn program were essentially loans, urging the SEC to dismiss the complaint based on this perspective.

Adding to the public discourse, Jack Baugham, a founding partner of JFB Legal, made a statement highlighting the inconsistent nature of the SEC’s arguments. He described the regulator’s approach as “floundering” and emphasized the contradictory facets of their claims.

Previous Legal Challenges

Earlier in the year, the legal waters were further muddied when US regulators initiated a lawsuit against both Gemini and Genesis Global Capital, alleging unregistered securities trading through the Gemini Earn program. This was compounded by accusations from investors against Gemini and its co-founders, alleging fraudulent activities.

In an official blog post, Gemini addressed the lawsuit, terming it “ill-conceived.” They underscored the clarity of “Section 5 of the securities act” and criticized the SEC for their ambiguous stance on the matter.

The Downfall of Gemini Earn

Genesis served as the primary lender for the Gemini Earn program, which once boasted an impressive annual return of over 8%. Digital Currency Group (DCG) borrowed a significant $1.65 billion from Genesis and subsequently channeled these funds primarily to Three Arrows Capital and the cryptocurrency exchange FTX. Unfortunately, both entities declared bankruptcy in 2022, leading to challenges for Gemini Earn users in retrieving their investments.

For transparency, the Gemini Earn website has been consistently updated with unfolding events. As of August 18th, the website reported that mediation sessions were held on August 16th and 17th, with Genesis extending the mediation to August 23rd. Gemini has voiced concerns over the prolonged negotiations with DCG, aiming to ensure fair compensation for Genesis’s creditors, including Earn users. DCG defaulted on a payment of $630 million due to the Genesis bankruptcy estate between May 9th and 11th.

Despite facing a motion by DCG and its CEO, Barry Silbert, to dismiss a lawsuit alleging them of fraud, Gemini claims to remain steadfast in its stance. They are set to respond to this motion by September 14th. On a positive note, Genesis has brokered a settlement agreement with the FTX estate, reducing FTX’s claim from $3.7 billion to $175 million against Genesis, promising better recoveries for all affected creditors.

Image source: Shutterstock


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Coinbase Faces $5M Penalty from New Jersey Securities Bureau and SEC Charges, Stock Tumbles 20%

The New Jersey Bureau of Securities has issued a Summary Cease and Desist Order against leading cryptocurrency exchange Coinbase, Inc. for allegedly offering unregistered securities tied to its cryptocurrency staking services. The Bureau has further levied a hefty penalty of $5 million against Coinbase.

This action was led by the New Jersey Office of the Attorney General and the Division of Consumer Affairs, aiming to enforce compliance with Securities Law. The violation pertains to Coinbase’s promotion of unregistered securities to New Jersey residents through their staking services. However, this order does not prevent Coinbase from offering staking services, as long as it aligns with New Jersey law.

Staking is a process where investors commit their crypto assets for a specified period to aid blockchain transaction validation, and in return, receive additional cryptocurrency. Coinbase’s staking program, which promises returns up to 10%, is under scrutiny. Coinbase pools the investors’ crypto assets and uses a team of engineers or contracts with third-party validators to generate staking rewards. These profits are then shared with investors after Coinbase’s cut.

“Companies cannot make up their own rules in the cryptocurrency securities market. They need to properly address the risks of investing in crypto,” stated Shirley Emehelu, Executive Assistant Attorney General. Cari Fais, Acting Director of the Division of Consumer Affairs, emphasized the necessity of registering anyone selling securities in New Jersey.

Coinbase’s staking securities are not insured by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation. Over 3.5 million investors across the country, including approximately 145,270 New Jersey investors, are not shielded from loss.

This legal action is the culmination of a collaborative investigation by state securities regulators, led by California and inclusive of multiple other states.

Further, the U.S. Securities and Exchange Commission (SEC) has also charged Coinbase with operating as an unregistered securities exchange, broker, and clearing agency. This double whammy of regulatory trouble has caused a severe reaction in the market, with Coinbase’s stock price plunging more than 20%.

The Bureau reiterated its commitment to protect investors from investment fraud and ensure the regulated operation of the securities industry in New Jersey.


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Coinme Fined $4 Million by SEC

The US Securities and Exchange Commission (SEC) has fined Coinme, a cryptocurrency exchange, nearly $4 million for allegedly offering unregistered securities and making “misleading statements” about its crypto token, UpToken. Coinme, its subsidiary Up Global SEZC, and its CEO, Neil Bergquist, were charged by the SEC on April 28, with Up Global agreeing to pay a $3.52 million penalty, for which Coinme was also held liable. The SEC alleged that Coinme’s Initial Coin Offering (ICO) of UpToken between October and December 2017 was an investment contract under the Howey test and was an unregistered securities offering. The ICO raised around $3.6 million to expand Coinme’s fleet of Bitcoin ATMs, with the funds used to add 30 ATMs, and UP holders received benefits such as discounted fees and cashback when using the ATMs. However, in January 2019, Coinme changed its offering and partnered with Coinstar to use its cash-counting kiosks to facilitate cash-to-crypto transactions instead of its own ATMs. Coinme shut down all of its ATMs by July 2019, and there is currently no use for UpToken, with its market cap falling to around $50,000 and 24-hour trading volumes topping just over $180.

Coinme was found to have offered unregistered securities, and the SEC handed down fines totalling almost $4 million to the company, its subsidiary Up Global SEZC, and the CEO of both firms, Neil Bergquist. The SEC found that Coinme’s ICO of UpToken between October and December 2017 was an unregistered securities offering, and the ICO was considered an investment contract under the Howey test. Coinme raised approximately $3.6 million through the ICO to expand its fleet of Bitcoin ATMs, adding 30 ATMs with ICO funding. UP holders received discounted fees and 1% cashback in UP when using the ATMs. However, in January 2019, Coinme changed its offering, partnering with Coinstar to use its cash-counting kiosks for cash-to-crypto transactions instead of its own ATMs. Coinme shut down all of its ATMs by July 2019, rendering UpToken unusable. The SEC also found that Bergquist and Up Global made false and misleading statements about the demand for UpToken and the amount raised in the ICO.

The SEC’s action against Coinme underscores the agency’s increased scrutiny of the cryptocurrency market, particularly with regard to ICOs and the sale of unregistered securities. The SEC has warned repeatedly that ICOs are subject to federal securities laws, and that any token offered or sold in an ICO must be registered or qualify for an exemption from registration. Failure to comply with these laws can result in enforcement action, as demonstrated in the case of Coinme.

Coinme’s ICO of UpToken highlights the risks associated with investing in ICOs, particularly those that are not registered with the SEC. Investors should conduct thorough due diligence and carefully review the offering materials before investing in any ICO. The case also highlights the importance of transparency and accurate disclosure in the cryptocurrency market, with companies facing enforcement action if they make false or misleading statements.


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Terraform Labs co-founder defends against SEC allegations

Do Kwon, co-founder of blockchain company Terraform Labs, has defended himself against allegations of fraud brought by the US Securities and Exchange Commission (SEC). Kwon’s lawyers requested the dismissal of the lawsuit, arguing that the SEC’s allegations were unfounded and that US law prohibited regulators from asserting jurisdiction over the digital assets in question.

According to a Bloomberg report, Kwon’s lawyers stated that “US law prohibits the SEC from using federal securities law to assert jurisdiction over the digital assets in this case.” They also claimed that the SEC failed to prove that Kwon had defrauded US investors in connection with the collapse of Terra’s stablecoin, UST.

Kwon’s legal troubles began in March 2022 when he was arrested at Podgorica airport in Montenegro while allegedly attempting to fly to Dubai using fake documents. Following his arrest, both South Korean and American authorities requested Kwon’s extradition. As of now, it remains unclear which country, if any, will be granted their extradition request.

Montenegrin Justice Minister Marko Kovač recently commented on the matter, stating that “determining to which state they will be extradited is based on several factors like the severity of the committed criminal offense, the location and time when the criminal offense has been committed, the order in which we have received the request for extradition and several other factors.”

In addition to defending himself against the SEC’s allegations, Kwon’s lawyers also argued that the UST stablecoin is a currency, not a security. This claim is significant, as US securities law only applies to securities, not currencies.

The collapse of Terra’s UST stablecoin has been a point of controversy for some time. The stablecoin was designed to maintain a stable value of $1, but its value plummeted to $0.85 in late 2021. The collapse reportedly cost investors $40 billion.

While Kwon fights against the SEC’s allegations, another Terraform Labs co-founder, Shin Hyun-Seong, has managed to avoid legal trouble. The Seoul Southern District Court recently denied an arrest warrant for Shin, citing the unconfirmed nature of the allegations and the unlikeliness of Shin being a flight risk or destroying evidence.

In conclusion, the legal proceedings against Do Kwon and Terraform Labs are ongoing, and it remains to be seen how the case will be resolved. However, Kwon’s lawyers’ defense against the SEC’s allegations suggests that there may be significant legal challenges ahead for the regulatory agency.


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Terraform Labs Co-Founder Argues Against SEC Lawsuit

In recent news, Terraform Labs co-founder Do Kwon’s lawyers have made arguments in court against the US Securities and Exchange Commission’s (SEC) lawsuit alleging that Kwon illegally offered unregistered securities to US investors. Kwon’s lawyers have requested the lawsuit be dismissed, citing that US law prohibits regulators from using federal securities law to assert jurisdiction over the digital assets in the case. According to Bloomberg, the lawyers also claim that the SEC has failed to prove that Kwon defrauded US investors in connection with the $40 billion collapse of TerraUSD (UST) and Luna (LUNA) cryptocurrencies. The lawyers argue that the stablecoin in question is a currency and not a security.

The legal proceedings began when Kwon was arrested in Podgorica airport, Montenegro, on March 23, while attempting to fly to Dubai using fake documents. Following his arrest, both South Korean and American authorities requested the entrepreneur’s extradition. At present, it is unclear which country, if any, will be granted the extradition of Kwon.

The Seoul Southern District Court recently denied an arrest warrant for Terraform Labs co-founder Shin Hyun-Seong. Although prosecutors saw Kwon’s arrest as an opportunity to apprehend Shin, the court denied the request citing unconfirmed allegations and the unlikeliness of Shin being a flight risk or destroying evidence.

Montenegrin Justice Minister Marko Kovač, through an interpreter, stated that determining to which state Kwon would be extradited would be based on several factors such as the severity of the committed criminal offense, the location and time when the criminal offense was committed, the order in which the request for extradition was received, and several other factors.

Terraform Labs, which is behind the development of the Terra blockchain and several stablecoins, has gained attention in the cryptocurrency industry in recent years. The company has been working on a variety of projects, including an online marketplace and decentralized finance applications. The SEC lawsuit against Kwon is just one of several legal battles that the company has been involved in, including a lawsuit filed by the South Korean financial watchdog against the company’s stablecoin, Terra.

In conclusion, the legal battle between Do Kwon and the SEC is ongoing, and the outcome remains uncertain. However, Kwon’s lawyers’ arguments that the stablecoin in question is a currency and not a security may have implications for the broader cryptocurrency industry. Additionally, the issue of Kwon’s extradition remains unresolved, and it is unclear which country, if any, will be granted the request for his extradition. The Terraform Labs legal battles highlight the regulatory challenges faced by the cryptocurrency industry as it continues to grow and develop.


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Bibox beats lawsuit alleging unregistered securities issuance

A lawsuit accusing crypto exchange Bibox of selling six unregistered securities was thrown out of a U.S. District Court after Judge Denise Cote ruled the plaintiff had failed to file the complaint within 12 months of trading the tokens.

Plaintiff Alexander Clifford filed the class-action complaint on June 3, 2020, seeking to recover investments he previously made into Bibox’s native BIX token, in addition to Eos (EOS), Tron (TRX), Aave (LEND), and Aelf (ELF) on behalf of other investors.

The lawsuit alleged that Bibox had selectively withheld information from investors to conceal that the tokens comprised unregistered securities while facilitating trade in the assets during October 2017. The lawsuit emphasized Bibox’s apparent failure to register its BIX token with regulators.

However, the case was tossed out with relative ease on April 16, with the judge noting that Clifford’s final BIX transaction was conducted around December 2018 — outside of the 12-month deadline for securities claims.

“Plaintiff’s claims regarding BIX are dismissed as barred by the statute of limitations,” Judge Cote said.

The judge also noted that the lead plaintiff lacked standing on the claims against the other five tokens as Clifford had only traded BIX and failed to show how other class members had any injury caused by the sale of the other tokens.

“The plaintiff has not alleged that he suffered any actual injury from the conduct of the defendants regarding the five tokens he did not purchase.”

The initial lawsuit was filed amid a wave of complaints filed from law firm Roche Freedman in 2020, with the firm alleging securities violations on the part of the several top crypto exchanges and token issuers, including KuCoin, Block.One, and Tron Foundation.

While several of Freedman’s complaints have been rejected by the courts, its lawsuits against Binance and Bitmex operator HDR Global are still ongoing.