The aftermath of the FTX bankruptcy continues to create problems in the crypto sector, particularly for exchanges. Among the major ones to suffer the most seems to be Gemini.
Gemini’s crypto Earn program
Specifically, the problem for Gemini is its Earn program, which had already been suspended in the very aftermath of the FTX bankruptcy.
This problem arose because of the suspension of Earn by Genesis Global Capital.
1/6 We are aware that Genesis Global Capital, LLC (Genesis) — the lending partner of the Earn program — has paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days. https://t.co/9e48pF3Ymn
— Gemini (@Gemini) November 16, 2022
Thus, this is the classic chain reaction, which probably started as early as May 2022 with the depeg of the UST stablecoin, which imploded the Terra/Luna ecosystem, and which then in turn laid the groundwork for the failure of FTX resulting in the suspension of Genesis withdrawals.
However, Gemini never suspended withdrawals for lack of liquidity, and to date is still solvent, except precisely for the Earn program suspended in November.
The charges against the Gemini crypto exchange
The crypto exchange has indeed been accused of lying to its customers about the very features of this investment program.
Gemini had implied that investments in the Earn program were safe due to some sort of insurance, when in fact it was later revealed that the service relied on an unsecured external provider (Genesis).
The allegations were reported by Axios that Gemini had mistakenly implied that funds put into Earn were protected by FDIC insurance.
FDIC, or Federal Deposit Insurance Corp, is a US government agency that provides insurance on bank deposits of up to $250,000 per depositor.
Claiming that funds are protected through FDIC insurance is equivalent to saying that up to $250,000 in deposits one would be entitled to full repayment of the amount even in the event of bankruptcy.
Instead, it turned out that the funds deposited on the Earn program were not insured, which is why Gemini was accused of lying.
Apparently, though, the exchange never explicitly stated that FDIC insurance also applied to the Earn program, but according to Axios’ response to their customers’ questions about the security of funds deposited on Earn, some of Gemini’s answers emphasized precisely the association with the Federal Deposit Insurance Corporation.
The problem, as Axios points out, is that some clients did not understand that FDIC insurance actually had nothing to do with the funds in the Earn program, but rather with those deposited in trading accounts. Indeed, some clients explicitly stated that Gemini’s responses had led them to believe that all funds deposited on Gemini were insured by the government agency.
Customers’ funds in Earn
Thus the problems for Gemini right now are twofold: their customers’ funds still stuck on the Earn program, and the allegations of lying.
As things currently stand, however, it would not appear that the crypto exchange is under investigation by authorities for these allegations, whereas it is under investigation by the SEC for offering unregistered securities.
It is worth noting that US law explicitly prohibits insinuating that an uninsured product is FDIC-insured, so there is speculation that it may be under investigation itself even if not yet officially. The company for now declined to answer specific questions about this.
There are still around 340,000 Earn program customers who have nearly $1 billion still locked up on the platform, and it is still unclear whether they will ever get it back.
Indeed, Genesis is now bankrupt, so it is hard to imagine that it will be able to cover the shortfall anytime soon. Moreover since it is a billion dollars, it is not even easy to imagine that Gemini could cover it with its own funds.
However, a few days ago the exchange itself notified its customers via email that it is working to try to release their funds, after being sued by some Earn program customers in the same days.
In this regard, Gemini said that investors depositing funds on Earn should have known that by enrolling in the program they were in fact agreeing that their funds would be placed in the custody of a third party, and that they were facing a risk of total loss.
When trying to persuade investors to invest their funds in a high-risk financial product it should be made sure that all information relevant to properly assessing the level of risk has been clearly and comprehensively provided to them.
Even in the case where such deals are not offered by providing outright false information, or lies, any failure to provide correct and complete information should still be considered a dishonest practice.
This reasoning should also apply in the case where the information was formally correct and complete, but unclear, i.e., difficult to understand for a user who is not necessarily an expert.
Those unable to provide such clear information to non-expert users would do better to limit themselves to providing financial services only to experienced users, who are generally already aware of issues similar to those related to Gemini’s Earn program.
Indeed, it is often extremely difficult for casual amateur investors to understand well and thoroughly the intricacies of complex financial products, so much so that it is very easy to confuse them into thinking, for example, that the level of risk is not as high as it actually is.
Strictly speaking, therefore, it is entirely possible that the US authorities are now picking on Gemini for not providing good service to its less experienced retail customers.