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Understanding Gemini Earn, the product at the center of the DCG-Gemini dispute

3 Mins read
Understanding Gemini Earn, the product at the center of the DCG-Gemini dispute

The last few days have witnessed an increase in the war of words between Gemini Trust founders Cameron and Tyler Winklevoss and their Digital Currency Group (DCG) counterpart, Barry Silbert.

Open letter to Barry Silbert

Cameron Winklevoss, the co-founder of the Gemini crypto exchange, recently took his spat with DCG founder and CEO Barry Silbert into the public arena when he addressed a strongly worded open letter to the Grayscale billionaire.

In the letter, Winklevoss accused Silbert of refusing to engage with him and his twin brother to find a resolution for paying back more than $900 million his company owes investors in the Gemini Earn program. 

Winklevoss claimed that Gemini had made numerous attempts to reach “a consensual resolution” to the conflict with DCG and Genesis regarding the return of customer monies but had instead been met with “bad faith stall tactics.” Additionally, he stated that DCG owes its subsidiary, Genesis, $1.675 billion, citing figures Silbert shared with investors in November 2022. This figure includes a $575 million loan due in May 2023 and a $1.1 billion promissory note due in June 2032 due to the crypto hedge fund Three Arrows Capital (3AC) failure.

But in a tweet rebuttal, Silbert disputed the framing surrounding the money owed by DCG to Genesis while also asserting that DCG had previously sent a proposal to both Gemini and Genesis for resolving the Earn standoff, to which it had yet to receive a response.

But what is Gemini Earn, and why has it caused so much consternation among these three crypto billionaires?

Breaking down Gemini Earn

Gemini’s Earn product is a high-yield account that provides customers with an annual interest rate of up to 8% on crypto deposits, depending on the assets held.

Gemini Earn interest rates. Source: Coin Central

The offering was announced in February 2021, making it a relatively new addition to the now-troubled cryptocurrency interest account niche. Gemini Earn initially offered up to 7.4% APY on more than 50 cryptos, including bitcoin (BTC) at 1.65%, ether (ETH) at 2.05%, and DAI and Gemini Dollar (GUSD) at 7.4%, among others.

According to the company, Earn paid the interest by making user deposits available as loans to corporate borrowers. Gemini charged no collateral for these loans; the company conducted thorough background checks, regular asset evaluations, and comprehensive risk assessments on its corporate creditors.

Gemini also didn’t provide insurance for funds used in the Earn program. This is how they put it in their own words:

Loans made through our program may not be secured. As a lender, you understand that you may have exposure to borrower credit risk. Borrowers are not required to post collateral to you or us; however, they may require collateral to secure loans they make.

How things fell apart

Since its inception, Gemini has had one principal lending partner for its Earn product, Genesis Global Capital. The company is a subsidiary of Barry Silbert’s venture capital firm, Digital Currency Group, which used it to jump onto the crypto lending phenomenon that started during the pandemic.

Since then, crypto lenders have become the de facto banks of the crypto world, luring retail customers with double-digit interest rates in exchange for crypto deposits. According to the Genesis website, the company had nearly $3 billion in total active loans at the end of the third quarter of 2022. Genesis also advanced $130.6 billion in crypto loans and traded $116.5 billion in assets last year.

But things came to a head when the company made several bad loans, including a $2.4 billion facility to the defunct crypto hedge fund 3AC and $175 million to Sam Bankman-Fried’s Alameda Research, which FTT tokens had collateralized. 

Following the collapse of Alameda Research and the consequent loss in the value of FTT tokens, Genesis was forced to suspend redemptions and new loans, including funds belonging to Gemini Earn customers, due to a liquidity crunch. In response to Genesis’ move, Gemini likewise suspended Earn’s withdrawals while reaching out to Genesis to find a way out of the problem.

Genesis had earlier sought a billion-dollar loan from Binance and Apollo, alleging that it would be forced to file for bankruptcy without the fresh injection of capital.

Several Earn investors did not make matters any easier when they filed a class-action lawsuit against Gemini and its founders, Tyler and Cameron Winklevoss, alleging the crypto exchange sold them an interest-bearing product without registering it as a security.

The investors claimed that Gemini failed to honor their redemptions, effectively wiping out all their assets in the Earn program. They also claimed that if the Gemini Earn product had been duly registered, investors would have received information that would have allowed them to assess better the risks involved.

For now, the back and forth between Silbert and the Winklevoss twins continues. Still, if an amicable solution is found later, Gemini Earn customers risk losing their investments.

To resolve the liquidity issues at Genesis and DCG and establish a path for asset recovery, the New York-based company has turned to financial services firm Houlihan Lokey. The exchange also stated last week on its website that it’s still working with Genesis and DCG “with the utmost urgency” to resolve the crisis.

However, Cameron Winklevoss has also asked Silbert to undertake to resolve the crisis by Jan. 8 publicly but has yet to make any mention of potential consequences or future actions if Silbert doesn’t comply.

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