In a legal tussle at the intersection of cryptocurrency and regulation, Gemini, the American cryptocurrency exchange, has taken a formidable stance against the Securities and Exchange Commission (SEC). In a move to dismiss the ongoing lawsuit, Gemini has filed a reply memorandum in the US District Court for the Southern District of New York.

The SEC’s lawsuit contends that Gemini Earn, a platform that lets users lend out their crypto assets in exchange for interest payments, violated regulations by offering unregistered securities. However, according to the court document filed on August 18, Gemini has alleged that the SEC is unable to clearly define the nature of the alleged unregistered security.

The Unregistered Securities Question

Central to Gemini’s defence is the notion that the SEC’s argument lacks consistency. The company points out that the regulator has oscillated between labelling the Master Digital Asset Loan Agreement (MDALA) and Gemini Earn program as the alleged security.

Gemini’s responses encapsulate its conviction that simplicity should guide the resolution of the lawsuit. The crypto asset exchange suggests that instead of delving into complex analyses, the court should pose straightforward questions.

Similar views were expressed by Jack Baugham, the Founding Partner of JFB Legal representing Gemini, who pointed out on X platform the SEC’s shifting stance throughout the legal proceedings. Baughman remarked that the SEC’s evolving definition of the securities in question undermined its credibility.

Unravelling the Allegations

The SEC's accusations stem from the unregistered sale of securities through the Gemini Earn program. The regulator argued that this unregistered offering reportedly garnered billions of dollars from hundreds of thousands of retail investors, raising concerns about investor protection. According to the charges filed in January, the critical factor that drew regulatory attention was the alleged lack of registration of the securities associated with the program.

In November 2022, Genesis, the partner in the lending program, announced its inability to permit investors to withdraw their crypto assets due to a shortfall of assets caused by market volatility . This left approximately USD $900 million in investors’ assets from 340,000 participants of the Gemini Earn program in limbo.

In July, Finance Magnates reported that Gemini had sued Digital Currency Group (DCG) and its CEO, Barry Silbert, over their alleged involvement in Genesis’ debts. According to Gemini, its users participated in the Gemini Earn Program, lending their crypto assets to Genesis for profit.

Additionally, the lawsuit alleged that DCG and Silbert misrepresented the security of the lending process, leading users to suffer financial harm. However, the DCG responded to the lawsuit, dismissing it as a ‘publicity stunt’.

In its dismissal motion, DCG stated that it had no direct operational involvement with Gemini’s Earn program. On August 10, DCG argued that Gemini actively encouraged its customers to participate in this program and that the exchange represented itself as a sophisticated market participant that had thoroughly vetted Genesis.