The saga of the Earn service on the Gemini crypto exchange continues. Except this time, maybe the end of the tunnel is beginning to be glimpsed.
The problem with the Gemini crypto exchange
Everything originated in the days following the failure of FTX.
Indeed, since FTX was one of the largest crypto exchanges in the world, its bankruptcy generated a cascading series of problems, including the suspension of withdrawals by Genesis Global Capital due to lack of liquidity for uncollectible claims against FTX itself.
The fact is that the Gemini crypto exchange of the Winklevoss twins was backing one of its services, Earn, on Genesis Global Capital itself.
So the blocking of Genesis Global Capital’s cascading withdrawals inevitably caused the blocking of withdrawals on Gemini Earn as well.
Since then, funds deposited by Gemini customers on the Earn service still appear to be blocked and not withdrawable.
The possible solution devised by crypto exchange Gemini
A few days ago one of Gemini’s two founders, Cameron Winklevoss, announced that the company has reached an agreement with Genesis Global Capital through which they could finally allow Earn customers to withdraw their funds.
1/ Today, @Gemini reached an agreement in principle with Genesis Global Capital, LLC (Genesis), @DCGco, and other creditors on a plan that provides a path for Earn users to recover their assets. This agreement was announced in Bankruptcy Court today.
— Cameron Winklevoss (@cameron) February 6, 2023
Winklevoss reveals that the agreement was announced to the bankruptcy court that is handling Genesis Global Capital’s bankruptcy due to insolvency, and he also cites Digital Currency Group (DCG) because it is the holding company of the group to which Genesis also belongs.
To be clear, the DCG group includes Grayscale, CoinDesk, and Luno in addition to Genesis. However, only Genesis is bankrupt, and that bankruptcy does not seem to have affected the other companies in the group.
Winklevoss adds that the settlement is a step toward recovering funds for all of Genesis’ creditors. Not only Gemini, but admits that the exchange will be forced to add $100 million out of its own pocket in order to allow Earn’s users to recover all funds.
However, he acknowledges that there is still much work to be done to complete this process, and that court approval of the settlement is still required.
Therefore, on the one hand it is not 100% certain that the agreement will be approved and that Earn users’ funds will be released, while on the other hand, even if it is approved, it will still take a long time before users can withdraw their funds.
The gemini.com/earn page of the exchange’s official website will post any news regarding this process.
One remaining problem for Gemini, however, is related to allegations that it concealed from Earn’s customers the fact that their funds would not be held by the exchange itself, but entrusted to a third party.
Instead, they seem to have tried to convince their clients that the funds would be insured by the US government agency FDIC. But without making it explicitly and obviously clear that this insurance applied only to funds held on the exchange’s wallets, and not to those entrusted to a third party as in the Earn service.
It does not appear, though, that these allegations have already been formalized in a complaint to the judiciary. It is likely that much will depend on whether or not users are actually able to recover all of their funds.
Cameron Winklevoss’s fight
Aside from the fact that Gemini crypto possibly may have convinced its customers to invest in the Earn program by lying about securing funds, the underlying problem was caused by Genesis, not the exchange.
Indeed, Cameron Winklevoss last month had lashed out hard at DGC CEO Barry Silbert, accusing him of fraud.
Genesis owes the exchange $900 million, and according to Winklevoss the group’s holding company CEO allegedly hid behind lawyers and bankers in order not to return those funds.
It seems these harsh accusations finally had an effect. Which was to push Silbert into accepting a deal by which much of those funds will be returned. Perhaps drawing on DGC’s coffers more than Genesis’s. After all, it is Genesis’ responsibility, not Gemini’s, to have chosen to lean on FTX, thus unintentionally causing it to lack the liquidity needed to remain solvent.
Partly because previously, according to Winklevoss’ allegations, Genesis had also lent more than $2.3 billion to Three Arrows Capital (3AC). Which is a crypto fund that had already failed in June as a result of the implosion of the Terra/Luna ecosystem. This failure would have left a net loss of $1.2 billion in the group’s accounts.
The risks of crypto services
This ugly incident if nothing else shows rather clearly what risks can be taken by investing in some crypto services.
First of all, when handing over one’s funds to someone else, it is by no means certain that the custodian will keep them completely safe. Not only can he lose them through theft, as has happened many times before. He can also dissipate them through mismanagement (see FTX). Or even hand them over in turn to another custodian who perhaps lends them out and never receives them back.
Furthermore, lending is by far one of the most widely used systems in the crypto industry for paying returns. Anyone who entrusts his or her funds to a custodian who promises to pay him or her returns should know that those funds will most likely be lent to a third party, about which there is no certainty. Indeed, this is precisely what happened to Gemini Earn’s unfortunate clients.
Type of custody
Moreover, there is also always the risk that those who ask for money by promising earnings are lying in order to achieve their goal. In fact, this is actually a widespread practice, and not only in the crypto sector.
The problem is that when the lies pertain to the custody of funds, for example, they can have even very serious consequences. Such as the total loss of the funds given in custody.
Unfortunately, even self-custody is not without risk, besides the fact that it does not generate returns. Indeed, many thefts are well known to have been perpetrated against users who stored their tokens on proprietary wallets, but without carefully guarding the seed or private keys.
It is worth noting that depositing one’s funds on a decentralized smart contract to obtain returns is not actually self-custody. Because in that case custody is entrusted to the smart contract. Which can also stop working, be hacked, or provide some kind of backdoor that allows developers to steal funds.
In other words, there is no way to zero out the risks from possible incorrect custody if you want to get some kind of return beyond the mere holding of the tokens.
Moreover, even mere holding carries risk. Not only because self-custody merely shifts security risk from the keeper of the wallet to the holder itself. But also and especially because of the volatility of the market value of the tokens. Since holding does not at all necessarily mean making a profit.