Cryptocurrency exchange Gemini has taken legal action against the bankrupt crypto lender Genesis Global Holdco, filing an adversary proceeding in the Southern District of New York Bankruptcy Court on October 27. The dispute revolves around the fate of 62,086,586 shares of the Grayscale Bitcoin Trust (GBTC), which were used as collateral to secure loans extended to Genesis by 232,000 Gemini users through the Gemini Earn Program. This collateral is currently valued at nearly $1.6 billion.
Gemini claims to have received $284.3 million from foreclosing on the collateral for the benefit of its Earn users. However, Genesis has contested this action, preventing Gemini from distributing the proceeds. Genesis has proposed using the initial value of the collateral, which exceeded $800 million, to determine the deficiency claim of the Earn users, rather than the foreclosure value. This move, if approved, would free up hundreds of millions of dollars for distribution to other creditors.
The suit argues that Gemini bore the market risk related to the initial collateral for the Earn users following foreclosure and, therefore, only Earn users are entitled to any gains resulting from taking on that risk.
Furthermore, the legal action alleges that Genesis’ parent company, Digital Currency Group (DCG), transferred additional collateral to Genesis with the sole purpose of immediate onward distribution to Gemini for the benefit of the Earn users. Genesis, however, is seeking to allocate the collateral for other purposes, which Gemini contends is in violation of their agreement.
The suit asserts that a determination that adheres to the terms of the Security Agreement, recognizing Gemini’s proper foreclosure on the initial collateral and the Earn users’ rights to the additional collateral, would facilitate the return of over $1 billion in digital assets that Genesis has withheld from the Earn users for almost a year.
Gemini Earn users constitute a significant portion of Genesis’ creditors, accounting for 99% of the total, and their claims represent 28% of all claims by value.
Genesis filed for bankruptcy in January and had previously suspended withdrawals in November 2022, impacting the Gemini Earn program. In July, Gemini had filed a lawsuit against DCG and its CEO Barry Silbert, accusing them of fraud related to the Earn program. Both companies are also defendants in a case brought by the United States Securities and Exchange Commission, which alleges that Gemini Earn offered unregistered securities. Additionally, the New York Attorney General, Letitia James, sued Gemini, Genesis, and DCG, asserting that the Earn program defrauded its users, including 29,000 New Yorkers, and that Gemini was aware of Genesis’ risky financial condition.
