The New York State Department of Financial Services (NYDFS) fined cryptocurrency exchange Gemini Trust Company $37 million over alleged compliance failures related to lapses in safety and soundness.
As part of a settlement, Gemini committed to return at least $1.1 billion to customers of its “Earn” program through bankruptcy proceedings for Genesis Global Capital, the NYDFS announced in a press release Wednesday. Gemini will also contribute $40 million to the Genesis bankruptcy for the benefit of Earn customers.
In January 2023, the Securities and Exchange Commission charged Gemini and Genesis for failing to register their joint crypto lending product Earn. Months prior, the fallout from the collapse of crypto exchange FTX had a cascading effect on the industry and forced Genesis to lock customer accounts because of a lack of liquidity. It filed for bankruptcy shortly following the announcement of the SEC’s complaint.
The details: Launched in February 2021, Earn was an “unsecured lending program that enabled Gemini customers to loan their virtual currency to the program’s lending partner, [Genesis], and receive interest in return,” according to the NYDFS’s consent order.
Gemini marketed the program as a safe and secure way for customers to earn high interest rates—up to 13 percent annually for certain coins—on their virtual currency, per the NYDFS.
However, as a limited purpose trust company in the state of New York, Gemini failed to comply with certain anti-money laundering (AML) laws, including customer due diligence or know your customer requirements, the NYDFS alleged.
The company failed to follow the Treasury Department’s Office of Foreign Assets Control guidance for the virtual assets industry because of a lack of Bank Secrecy Act and AML controls related to IP verification and virtual private networks, per the consent order.
Additionally, the NYDFS alleged unsafe and unsound practices because of noncompliance with the department’s capital and liquidity requirements, failure to conduct proper audit reviews as required by its supervisory agreement, and weaknesses in management oversight that led to the enterprise risk management committee and finance team failing to “sufficiently report the operational and financial risks facing Gemini to the board of managers compliance and risk management committee.”
Compliance considerations: Gemini engaged a third-party management consultant approved by the NYDFS to “conduct an assessment of and report upon Gemini’s governance and management effectiveness,” per the consent order.
Within 30 days of the order, Gemini is required to submit to the department how it will implement recommendations contained in the assessment.
Company response: In a blog update, Gemini thanked the NYDFS for its role in the settlement, which “delivers a coin-for-coin recovery for Earn users,” it said.
“As responsible stewards of the crypto ecosystem, we know that our customers value the ability to hold their digital assets through the ups and downs of crypto market cycles,” the update stated. “Being able to return assets on a coin-for-coin basis to our customers was critical for us.”
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