Gemini, a cryptocurrency exchange, has initiated an adversary proceeding against the insolvent crypto lender, Genesis Global Holdco, in the Southern District of New York Bankruptcy Court on October 27th. The primary concern of this proceeding is the fate of the 62,086,586 shares of Grayscale Bitcoin Trust (GBTC), which were utilized as collateral to secure loans granted by Gemini’s 232,000 users to Genesis through the Gemini Earn Program. The current value of this collateral is approximately $1.6 billion.
According to the lawsuit, Gemini has retrieved $284.3 million by foreclosing the collateral to benefit its Earn users. However, Genesis has contested this move, blocking Gemini from disbursing the proceeds. Furthermore, Genesis has proposed to consider the initial value of the collateral, which exceeded $800 million, to assess the deficiency claim of the Earn Users, instead of the foreclosure value. Should the foreclosure value exceed the initial value, Genesis would release hundreds of millions of dollars for distribution to other creditors:
“But it was Gemini who shouldered the market risk linked to the Initial Collateral for the Earn Users’ benefit post-foreclosure. Hence, it’s logical that only Earn Users should reap the benefits resulting from Gemini taking on that risk.”
Additionally, the lawsuit accuses Digital Currency Group (DCG), Genesis’ parent company, of transferring additional collateral to Genesis with the sole aim of subsequent distribution to Gemini for the Earn Users’ benefit. In contrast, Genesis aims to utilize the collateral for other purposes. Gemini contends:
“Affirming the terms of the Security Agreement, acknowledging Gemini’s legitimate foreclosure on the Initial Collateral, and upholding the Earn Users’ rights to the Additional Collateral would enable the return of over $1 billion in digital assets that Genesis has improperly withheld from Earn Users for nearly a year.”
Gemini Earn users constitute 99% of Genesis creditors, their claims accounting for 28% of all claims by value, as per the lawsuit. Genesis filed for bankruptcy in January after halting withdrawals in November 2022, adversely affecting the Gemini Earn program. In July, Gemini filed a fraud lawsuit against DCG and its CEO, Barry Silbert, in connection with the Earn program.
Both entities are defendants in a case by the United States Securities and Exchange Commission, which alleges that Gemini Earn was involved in offering unregistered securities. New York Attorney General Letitia James has also filed a lawsuit against Gemini, Genesis, and DCG, claiming the Earn program deceived its users, including 29,000 New Yorkers. James argued that Gemini was cognizant of Genesis’ precarious financial state.
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