Crypto exchange Gemini and bankrupt digital asset lender Genesis Global Capital have jointly filed a motion to dismiss a lawsuit from the U.S. Securities and Exchange Commission (SEC) against the former’s Earn program.
According to a document filed at the United States District Court for the Southern District of New York on Friday, May 26, Gemini and Genesis insisted that the SEC has no basis in law to describe the Earn product as the sale of unregistered securities, as it was a crypto asset lending service.
Gemini and Genesis Ask Court to Dismiss SEC Lawsuit
Recall that the SEC filed a complaint against Gemini and Genesis in January for allegedly selling unregistered securities to retail investors in the U.S. through the Gemini Earn program.
The program, launched in December 2020, was shut down earlier this year after Genesis halted withdrawals and could no longer pay interest to Gemini’s clients due to insufficient liquid assets stemming from the crypto market’s downturn. The fate of the hundreds of thousands of Gemini investors owed over $900 million by Genesis remains unknown as the latter filed for Chapter 11 bankruptcy protection in January.
The SEC alleged that Gemini and Genesis bypassed disclosure requirements created to protect investors and violated federal securities laws.
“Notwithstanding the unambiguous nature of the MDALA, and the limitations on how it could be used, the SEC seeks to turn the Earn program into something it was not: the sale of unregistered securities. While the SEC suggests that application of the federal securities laws is obvious here, the Complaint is a novel attempt to expand their scope beyond any reasonable reading of the relevant statutory language,” Gemini and Genesis said.
A Commercial Agreement, Not an Investment Contract
The defendants further insisted that the Master Digital Asset Loan Agreement (MDALA) for the Gemini Earn program was not an investment contract. The agreement was never sold or offered for sale, could not be traded on any secondary market, did not involve the transfer of title of any asset, and did not require any lending or borrowing by anyone.
Gemini and Genesis argued that the MDALA was a commercial agreement not covered by Section 5 of the Securities Act, which requires the sale of or offer to sell a security.
The crypto entities told the court that allowing the SEC to proceed with the case would mean ignoring the Securities Act’s “plain meaning.”