A class action lawsuit has been filed against the founders, two administrators and the Gemini exchange platform by an investor who has about $2 million in funds frozen at the failed crypto lender, BlockFi.
The responsibility of the Gemini crypto exchange to BlockFi
Cryptocurrency trading platform BlockFi Inc. is facing a proposed class action lawsuit in the US District Court for the District of New Jersey.
The suit alleges that the company’s founders and two other directors, along with their alleged partner Gemini Trust Co. should be held liable for digital assets lost in BlockFi‘s investment accounts.
The plaintiff, Trey Greene, argues that the unregistered “BlockFi interest accounts” meet the definition of securities and that BlockFi has been one of the largest providers and sellers of unregistered securities in the form of interest-bearing accounts to residents of the United States and other countries.
Tyler Winkevoss’ Gemini previously held custody of the crypto holdings of BlockFi’s clients through its custodial services and is accused of misrepresenting the accessibility of these funds to clients.
“Gemini knew of, and consented to, materially false and misleading statements about the status, safety, and accessibility of plaintiff’s and class members’ assets at Gemini and risks of loss. Gemini provided materially false and misleading information to BlockFi for use in marketing the BIAs [BlockFi interest accounts].”
Gemini is accused of violating the Exchange Act, but was not included in the other charges.
The lawsuit against BlockFi
The alleged failure to register BlockFi’s investment accounts as securities with the US Securities and Exchange Commission (SEC) could have serious consequences for investors who have lost their digital assets.
BlockFi’s investment accounts allow users to earn interest on their cryptocurrencies by lending them to institutional figures.
The company promises high returns on these accounts, which apparently appeared to be backed by its own balance sheet and insurance policies.
However, cryptocurrency lending carries risks, including the possibility of default by borrowers or the loss of digital assets due to security breaches.
The lawsuit alleges that BlockFi misrepresented the risks associated with its investment accounts and failed to disclose material information to investors.
The complaint also alleges that BlockFi committed financial fraud by offering unregistered securities to the public. The plaintiff seeks to represent a class of all investors who suffered losses due to BlockFi’s alleged misconduct.
“The unregistered securities sold by Defendants BFI [BlockFi] on behalf of BlockFi were marketed and sold through a steady stream of material misrepresentations and omissions by Prince and Marquez over several years and through intermittent misrepresentations by Defendant Gemini.”
BlockFi has denied the allegations and said it will vigorously defend itself against the lawsuit. The company also stated that it believes its investment accounts are not securities and therefore not subject to SEC regulation.
The outcome of the lawsuit could have significant implications for the cryptocurrency industry.
Should the court find that BlockFi’s investment accounts are securities, it could lead to greater regulatory scrutiny of cryptocurrency trading platforms and could also lead other cryptocurrency companies to face similar lawsuits.
In recent years, the SEC has taken an increasingly active role in regulating the cryptocurrency industry.
In 2019, the SEC issued guidance on the application of federal securities laws to digital assets, clarifying that certain types of cryptocurrencies and tokens could be considered securities under US law.
However, the regulatory framework for cryptocurrencies remains uncertain, and there is still much debate about the appropriate level of regulation.
Some argue that too much regulation could stifle innovation and growth in the industry, while others argue that more regulation is required to protect investors from fraud and misconduct.