The U.S. Securities and Exchange Commission (SEC) and Gemini Trust Company, owned by billionaires Tyler and Cameron Winklevoss, have reached an agreement in principle to settle a lawsuit regarding the Gemini Earn crypto lending program. The SEC alleged that Gemini and Genesis Global Capital, another crypto firm, offered unregistered securities through the Gemini Earn program.

The Gemini Earn program, which operated between February 2021 and November 2022, allowed investors to lend their crypto assets to Genesis in exchange for promised interest payments. The SEC argued that these arrangements constituted unregistered securities offerings, violating federal securities laws. The agency claimed that investors lacked crucial information about the program and suffered significant harm as a result. In November 2022, Genesis halted withdrawals from Gemini Earn due to liquidity issues following market volatility.

Under the terms of the settlement, Gemini has agreed to implement structural changes to its lending operations to ensure compliance with the SEC's interpretation of the Howey Test, which defines an investment contract. Gemini will revise its lending programs to eliminate elements that could be construed as offering returns based on the efforts of a third party. The firm will also conduct periodic audits of its lending activities to verify continued compliance. Gemini will establish a compliance oversight committee to monitor lending activities and ensure transparency. The firm will also submit quarterly reports to the SEC detailing its lending programs, with particular attention to risk management and investor protections.

The agreement resolves a key issue in the SEC's ongoing efforts to regulate the cryptocurrency industry. The SEC's stance is that crypto assets and related services should be classified as investment contracts under the Howey Test, requiring registration and compliance with federal securities laws. Experts suggest that this settlement could set a precedent for other crypto exchanges and lending platforms offering similar services. The resolution underscores the SEC's determination to apply existing securities regulations to emerging financial technologies.

In a related development, Genesis and its affiliates filed a settlement agreement with the SEC in bankruptcy court in January 2024. According to the terms, the SEC will receive an allowed general unsecured claim against the bankruptcy estates of Genesis and its affiliates in the amount of $21 million.

This settlement marks a significant step in the SEC's regulatory approach to digital asset lending. It signals a new era for crypto regulation and clarifies how digital asset platforms should operate under U.S. securities law.