SEC moves against Genesis and Gemini for cryptocurrency earnings programs

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What happened

The Securities and Exchange Commission (SEC) charged crypto exchange Gemini and crypto lender Genesis last week with selling unregistered securities. The Gemini Earn program had allowed users to earn interest by lending their cryptocurrencies through Genesis. However, Genesis blocked withdrawals on its platform last year, leaving approximately 340,000 Gemini Earn customers unable to access approximately $900 million in assets.

So

It’s unclear whether the move will help Gemini Earn customers get their money back. But for cryptocurrency investors, the dangers of cryptocurrency lending platforms have never been more apparent. Whichever crypto exchange you use, if you’re earning interest, make sure you understand where that money is coming from.

The SEC is pursuing lawsuits against several cryptocurrency lenders on the grounds that these interest-bearing accounts are a type of security. There are strict rules on how securities can be bought and sold, enforced by the SEC. These include fully informing investors of the risks involved, which the SEC says Gemini and Genesis have not done.

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When you put your money into an interest-bearing savings account, there are rules about what the bank can do with your funds. There are also protections against bank collapse, such as FDIC insurance. For stock brokers, the Securities Investor Protection Corporation (SIPC) protects investors against company bankruptcy. While some crypto platforms have third-party insurance and some US dollar deposits are covered by FDIC insurance, many assets on crypto platforms are unprotected.

“The recent collapse of cryptocurrency lending programs and the suspension of the Genesis program underscore the critical need for platforms offering securities to retail investors to comply with federal securities laws,” said Gurbir S. Grewal, division director application of the SEC.

Tyler Winklevoss, one of the founders of Gemini, responded to the SEC on Twitter. He said Gemini has been in talks with the SEC about the Earn program for more than 17 months. “They never raised the prospect of any executive action until AFTER Genesis suspended withdrawals on Nov. 16,” he said.

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To start

Now what

When you invest in cryptocurrencies, there isn’t as much collateral as you would get with traditional finance. Know that there are major differences between the following crypto accounts, and each offers different levels of risk:

  • Custody Wallets: If you leave your goods on the platform where you bought them, they will usually be held in a safekeeping wallet. If the platform fails, your account may be blocked and you may not be able to access your money. In fact, your funds could get stuck in bankruptcy proceedings.
  • Stake Accounts: Some cryptocurrencies, known as proof-of-stake cryptocurrencies, pay rewards to token holders who agree to peg their coins to secure the blockchain. There are several ways to stake cryptocurrencies, but staking is often a safer way to earn rewards than lending cryptocurrencies.
  • Loan-earnings accounts: The idea behind cryptocurrency lending is to take the middleman out of lending. Essentially, you lend your cryptocurrency directly and receive interest. Unfortunately, it is not always clear what risks one takes with one’s assets or to whom one lends them.
  • Unattended wallets: This is a type of crypto wallet that you control. Unlike a custody wallet, you are responsible for your funds and there is no risk of loss if your trade collapses. That said, there is a steep learning curve and if you lose your password or seed phrase, you could also lose access to your cryptocurrency.

Don’t assume your funds are safe. Instead, consider moving your assets into a cryptocurrency wallet you control, or at least removing them from cryptocurrency lending schemes. The volatility of cryptocurrencies is risky enough without adding the risk of platform failure.

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