According to the report by CoinDesk, three Gemini customers filed a request for class action arbitration against Genesis Global Capital and its parent company, Digital Currency Group (DCG). They allege that Genesis breached its Master Agreement when it became insolvent in the summer of 2022 and failed to return all digital assets that belonged to claimants and other Gemini Earn users, as was required under the terms of the agreement.
The group claims that Genesis worked with DCG to hide its insolvency from customers and lenders like Gemini by exchanging $2.3 billion in debt owed to Genesis by collapsed hedge fund Three Arrows Capital for a promissory note due in ten years.
Furthermore, the claimants allege that Genesis’ Master Agreement has effectively created the unregistered sale of securities. The group will now seek revocation of the sale contract.
The class-action arbitrage, not to be confused with the class-action lawsuit, is an alternative to traditional litigation that was designed to be a quicker and less formal way to solve disputes out of courtroom. Instead of a judge or jury, the whole process takes place before the neutral third-party arbitrator or panel of arbitrators.
In most cases, each claimant participating in mass arbitration has to file an individual arbitration claim against the company, while in the case of a class action, only the lead plaintiff needs to file suit on behalf of other affected consumers. However, the decisions of the arbitrators are binding and can’t be appealed, which makes the process a quicker and less-expensive tactic for class-wide disputes.
For context, Genesis Global Capital, the lending unit of Genesis Trading, suspended redemptions and new loan originations on November 16, citing “extreme market dislocation and loss of industry confidence caused by the FTX implosion.” Following Genesis’ liquidity crisis, crypto exchange Gemini halted its Gemini Earn service, a high-yield product that offers investors up to 8% annual returns on crypto deposits. Genesis was Gemini’s primary lending partner and now owes Gemini Earn customers more than $900 million.
The said $900 million figure became the sticking point between Gemini’s co-founder Cameron Winklevoss and DCG CEO Barry Silbert when two execs took off to Twitter late Monday to exchange mutual accusations of lack of collaboration to resolve the dispute.
In an open letter to Silbert, Winklevoss accused DCG CEO of engaging in “bad faith stall tactics” and claimed that DCG and Genesis “are beyond comingled.”
"For the past six weeks, we have done everything we can to engage with you in a good faith and collaborative manner in order to reach a consensual resolution for you to pay back the $900 million that you owe, while preserving your business," the letter read. “We appreciate that there are startup costs to any restructuring, and at times things don’t go as fast as we would all like. However, it is now becoming clear that you have been engaging in bad faith stall tactics.”
Winklevoss added that Gemini tried to reach out to DCG on numerous occasions and suggested that Silbert was deliberately stalling the process. In a tweet response, DCG CEO refuted all accusations and claimed that his company sent a proposal to both Gemini and Genesis on December 29 but failed to receive any response.
“DCG did not borrow $1.675 billion from Genesis. DCG has never missed an interest payment to Genesis and is current on all loans outstanding; next loan maturity is May 2023,” Silbert tweeted.
In a letter closing, Winklevoss asked Silbert to “publicly commit to working together to solve this problem” by January 8, adding that the time is running out. Indeed, Gemini faces a potential class action lawsuit from investors who accuse the exchange of engaging in the sale of unregistered securities via its Earn offering.
"When Genesis encountered financial distress as a result of a series of collapses in the crypto market in 2022, including FTX Trading Ltd. (“FTX”), Genesis was unable to return the crypto assets it borrowed from Gemini Earn investors," the filing says, quoted by CoinDesk. "[Gemini] refused to honor any further investor redemptions, effectively wiping out all investors who still had holdings in the program, including plaintiffs."