Gemini Sues Genesis Global, its Former Partner, Over $1.6B in GBTC Shares

Gemini, a cryptocurrency exchange, has filed a lawsuit against its former partner, Genesis Global, regarding the collateralized 60 million shares of the Grayscale Bitcoin Trust (GBTC) linked to the Gemini Earn program.

Specifically, the shares were used as collateral to secure loans made by 232,000 Gemini users to Genesis through the Earn Program. That collateral is currently worth close to $1.6 billion.

The crypto exchange aims to take control of the GBTC shares to ensure the reimbursement of its Earn customers, who had their funds locked up during Genesis' freeze on withdrawals last year.

The lawsuit accuses Genesis of intentionally harming Earn users and delaying the recovery of their digital assets. It emphasizes the necessity of resolving these issues for Genesis to proceed with a viable reorganization plan and for Gemini to distribute the collateral proceeds to the affected customers.

According to the suit, Gemini has received $284.3 million from foreclosing on the collateral for the benefit of Earn users, but Genesis has disputed the action, preventing the exchange from distributing the proceeds.

Genesis has also proposed using the initial value of the collateral, which was more than $800 million, to determine the Earn Users’ deficiency claim rather than the foreclosure value. As the foreclosure value was greater than the initial value, Genesis would thus free up hundreds of millions of dollars for distribution to other creditors.

In addition, the suit alleges that Genesis’ parent company, Digital Currency Group (DCG), transferred additional collateral to Genesis “for the sole purpose of immediate onward distribution to Gemini for the benefit of Earn Users,” but Genesis is proposing to use the collateral for other purposes.

Gemini Earn users comprise 99% of Genesis creditors, and their claims represent 28% of all claims by value, according to the suit.

Both Gemini and Genesis encountered difficulties in 2022 after the collapse of the Three Arrows Capital crypto hedge fund and FTX led to Genesis' bankruptcy filing in January.

In September, Genesis and DCG proposed a plan to compensate Gemini Earn customers, aiming to make them "nearly whole." Additionally, both parties have united in their opposition to the U.S. Securities and Exchange Commission's (SEC) allegations that Earn functioned as an unregistered security, seeking the dismissal of an SEC lawsuit filed against the program in May.