Gemini is suing Genesis for using $1.6 billion worth of GBTC shares as Earn collateral.
In a legal showdown that unfolded within the courtrooms of the Southern District of New York Bankruptcy Court on October 27, cryptocurrency exchange Gemini launched an adversary proceeding against the bankrupt crypto lender, Genesis Global Holdco. The battle revolves around the destiny of a substantial 62,086,586 shares of Grayscale Bitcoin Trust (GBTC), which were initially deployed as collateral to secure loans granted to Genesis through the Gemini Earn Program, supported by a staggering 232,000 Gemini users. As of the present day, the assessed worth of this collateral stands close to a staggering $1.6 billion.
The lawsuit contends that Gemini successfully acquired $284.3 million by executing a foreclosure on this collateral, with the intention of distributing these funds for the benefit of the Earn users. However, Genesis has vehemently opposed these actions, effectively impeding Gemini from dispersing the accumulated proceeds.
Genesis, in its defense, has proposed an alternative approach. They advocate using the initial collateral value, which exceeded a substantial $800 million, as the basis for determining the deficiency claim for the Earn Users, rather than relying on the foreclosure value. This strategy would potentially liberate hundreds of millions of dollars for equitable distribution among other creditors. In their argument, Genesis emphasized that it was Gemini who bore the market risk associated with the Initial Collateral, following the foreclosure. Consequently, they argue that Earn Users should be the sole beneficiaries of any gains arising from Gemini’s assumption of this risk.
Furthermore, the lawsuit alleges that Genesis’ parent company, Digital Currency Group (DCG), executed the transfer of supplementary collateral to Genesis, exclusively for the immediate onward distribution to Gemini for the benefit of Earn Users. However, Genesis now seeks to repurpose these assets for other purposes. In rebuttal, Gemini asserts that a proper interpretation of the Security Agreement would confirm their rightful foreclosure on the Initial Collateral, recognizing Earn Users’ rights to the Additional Collateral. Such a determination would expedite the return of over $1 billion in digital assets, which Genesis has held in defiance of Earn Users for almost a year.
An interesting aspect to note is that Gemini Earn users constitute a substantial 99% of Genesis’ creditors, and their claims constitute an impressive 28% of the total claims by value, as per the lawsuit’s contentions.
Genesis initially filed for bankruptcy in January, a move that sent shockwaves throughout the cryptocurrency industry. Notably, the suspension of withdrawals, which occurred in November 2022, had significant implications for the Gemini Earn program. In a prior legal battle, Gemini had also taken DCG and its CEO, Barry Silbert, to court in July, alleging fraud associated with the Earn program.
Both Genesis and Gemini are currently defendants in a lawsuit initiated by the United States Securities and Exchange Commission, which asserts that the Gemini Earn program involved the offering of unregistered securities. New York Attorney General Letitia James added another layer of complexity to the legal proceedings by suing Gemini, Genesis, and DCG, citing fraudulent practices within the Earn program, which had a substantial New Yorker user base, totaling 29,000 individuals. James further emphasized that Gemini was fully aware of Genesis’ precarious financial state when executing the program.
Notably, Genesis Global Holdco has refrained from responding to inquiries from Cointelegraph as of the publication time. It’s worth mentioning that Grayscale is another entity under the umbrella of DCG ownership.
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