Cameron and Tyler Winlos are two entrepreneurs best known for suing Mark Zuckerberg accusing him of stealing their idea that eventually turned into Facebook. By 2014, they had moved on and shifted their attention to the world of cryptocurrencies by opening up their own crypto exchange called Gemini Gemini was a massive success, attracting tens of billions of dollars of customer deposits. This allowed each of the winkl Vos twins to achieve an estimated net worth in excess of $3 billion. Not as much as Zuckerberg, but still nothing to sneeze at.

Gemini marketed itself as a regulated and trusted way to buy and hold cryptocurrencies. This was a huge selling point for new investors who were intimidated by the wild west of the digital assets. They spent heavily on marketing, always emphasizing their commitment to compliance. and Trust Gemini was going to play by the rules and act in the best interest of its customers.

Gemini leveraged the Goodwill with its customers to launch a crypto lending platform called Gemini Earn in early 2021, which offered customers yields as high as 7.4% on stable coins. Gemini partnered with another company called Genesis Capital to lend out billions of dollars of user funds to institutional borrowers. As it turned out, Genesis lent billions of dollars to weird crypto hedge funds, including Three Arrows Capital in Alam research Shortly after the collapse of FTX Genesis went bankrupt and Gemini halted all customer withdrawals for their Earn program over 200,000 Gemini Customers lost access to over $1 billion of funds as a result. In many cases, the money they deposited into Gemini Ear represented their entire life savings.

This has caused a massive legal Fallout with the winkl Vos twins accusing their lending partner Genesis of defrauding them. but are the Winlos twins themselves innocent in September of 2023? New York Attorney General Leticia James who has recently been cracking down hard against crypto fraud, filed a lawsuit accusing both Gemini and Genesis of orchestrating a highly sophisticated scheme to defraud their customers. In today's video, we'll take a deep dive into the Gemini Earn disaster and try to figure out who. Bears Culpability The crypto disasters of the past few years have shown a spotlight on how dangerous money management can be.

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Use the link in the description to skip the weight list. Today, in 2020 and 2021, a number of crypto lending platforms like Blocky and Celsius gained significant market share by offering high yields on crypto deposits. The winkl Vos twins realized that if Gemini wanted to maintain its market share, it would need to hop on the bandwagon and offer their own crypto lending product. At the time, Gemini was only a crypto exchange and they had no experience in lending.

If they wanted to launch a lending product quickly, they needed to partner with someone who had the expertise to lend out billions of dollars of crypto at high yield in low risk. They decided to partner with a company called Genesis Capital which was owned by a parent company called the Digital Currency Group or Dcg. For short, Dcg is owned by a man named Barry Silbert, who many people at the time called the king of crypto. Dcg created Genesis as essentially a crypto focused Investment Bank which helps hedge funds and other institutional investors gain exposure to cryptocurrencies.

They had been doing this for years and have relationships with dozens of crypto hedge funds who' be interested in borrowing crypto. These Crypto Hedge funds might want to borrow various cryptocurrencies to conduct complex trading strategies. If they post collateral greater than the value of the crypto, they are borrowing. the risk of the lender losing money should be very low.

This is called an over collateralized loan. Interest rates are determined by supply and demand. Given that over collateralized loans are less risky, more lenders are willing to lend, which pushes the interest rate down. An under collateralized loan is more risky and thus lenders are less willing to lend pushing the interest rate up.

These are the fundamental rules of lending. The interest rate you can charge is directly related to the risk of the borrower defaulting. There's no way around this. In February of 20121 Gemini publicly announced their partnership with Genesis to offer the Earn Lending program.

The money that customers invest into Gemini Earn will be lent to Genesis which will in turn lend it to end borrowers. Gemini Marketed Earn as a lowrisk, highly liquid investment that can be redeemed within 5 days. Gemini Claimed that they carefully vetted Genesis to make sure that they can maintain appropriate risk ratios with a healthy Financial condition to minimize the chance of default. Specifically, Gemini's head of Risk claimed that he had verified that Genesis's loans were over collateralized.

Why would anyone borrow money at such high interest rates when they had to post collateral greater than the amount they're borrowing. According to the New York Attorney General, many of Genesis's loans were not over collateralized in the first quarter of 2021, the same quarter that Gemini Ear was launched. Genesis only had collateral for 87% of its outstanding Loans the level of collateralization fluctuated from quarter to quarter, reaching as low as 61% in the first quarter of 2022. It was never above 100% in an effort to generate enough yield.

Genesis scraped the bottom of the Barrel in terms of who they lent money to. For example, they lent to the now defund crypto hedge funds three Aros Capital and Alam Research: The loans were under collateralized and the collateral was often cryptocurrencies with questionable value. Crap started to hit the fan in June of 2022, when three arrows Capital defaulted on billions of dollars of loans Lo to Genesis The collapse of 3ac was huge news in the crypto world, and the fact that Genesis had lent money to the hedge fund was widely reported in the media. However, the exact extent of the losses was unknown.

Most media Outlets reported the losses to be in the range of hundreds of millions of dollars. In reality, the losses were close to $1 billion. The CEO of Genesis Capital at the time was a man named Michael Morrow Genesis Capital was owned by a parent company called the Digital Currency Group or Dcg, which was headed by Barry Silber After the 3ac collapse, Michael Morrow and Barry Silbert knew that they had a big problem. They now had a massive hole in their balance sheet.

If Genesis's creditors, including Gemini N decide to call in their loans, the company could go bankrupt. So they came up with a plan. The most important thing was to quell fears in the market and prevent their creditors from panicking. So Michael Morrow took to Twitter saying that Genesis has mitigated its losses with a large counterparty who failed to meet a margin call.

He was obviously referring to three Arrows Capital. Importantly, he said that no client funds were impacted. This is because Genesis's potential loss is finite and can be netted against their own balance sheet. What he's saying is Genesis has a big enough equity position to cover the 3ac loss and still have sufficient assets to make good on all of their liabilities including their liabilities to Gemini related to the Earn program.

As it turned out, this was not true Genesis didn't have nearly enough money to cover the 3ac laws. About a month later, Michael Morrow put out another tweet saying the parent company Dcg has assumed certain liabilities of Genesis related to the 3ac losses. So what does this even mean? Dcg gave a promisory note to Genesis Capital agreeing to pay them $1.1 billion. 10 years later, interest would acre at the rate of 1% per year.

Dcg didn't have $1.1 billion and it's unclear how they would ever come up with such a large amount of money. but Genesis was able to recognize this IOU as an asset on their balance sheet. This covered the losses that they suffered from 3ac. They B basically created an asset out of thin air.

Remember that Gemini n was marketed as highly liquid and could be redeemed within 5 days. There is nothing liquid about the Dcg. No. Genesis was already insolvent if you exclude the $ 1.1 billion IOU from Dcg.

When Alam defaulted in November of 2022, they were completely screwed and did not have the funds to meet customer withdrawals including from Gemini's Earn program unable to redeem their loans from Genesis Gemini halted all withdrawals for their own customers. They left over 200,000 Gemini customers holding the bag for over $1 billion worth of crypto that had been lent to Genesis This was clearly a huge disaster for the Winlos Twins. The fact that their customers lost $1 billion greatly damaged Gemini's carefully cultivated image as a trustworthy crypto exchange. It also opened them up to the potential for legal liability.

It thus became imperative for the Winkl Vos twins to shift the blame away from themselves and towards Genesis and its parent company, Dcg. In July of 2023, they filed a lawsuit against Dcg and its CEO Barry Silber accusing them of defrauding Gemini The lawsuit mainly focuses on the nature of Genesis's lending arrangements and specifically their lending relationships with three. Aros Capital It's important to note that Digital Currency Group owned many Crypt related companies in addition to Genesis Capital. Of particular importance is their ownership of Grayscale Investments a crypto asset management company.

Grayscale's main product is an ETF called Grayscale Bitcoin Trust or Gbtc. Gbtc is a closed-ended fund that owns Bitcoin The rationale for the fund is that it serves as a way for investors to gain exposure to Bitcoin without the trouble of buying and taking custody of Bitcoins directly. Grayscale charged a 2% management fee on the value of the Bitcoin held by Gptc. Thus, Dcg had an incentive to grow the assets under management of Gbtc as much as possible so that they could collect more fees.

Accredited investors could buy Bitcoin on the open market and give them to Grayscale in exchange for shares in Gptc. Up until early 2021, Gptc traded at a premium PR to the value of the Bitcoin Because there are so many investors who wanted to gain exposure to Bitcoin through an exchang traded product. However, there is a six-month lockup period in which the investor is not allowed to sell their Gptc shares. This is to prevent the investors from immediately dumping their shares and taking the price.

This created an Arbitrage opportunity for crypto hedge funds. They could borrow Bitcoin and hand it over to Grayscale in exchange for Gptc shares. As long as Gbtc maintains its premium to net asset value for the next 6 months, they can sell their Gbtc shares and pay back their Bitcoin loan, pocketing the premium. As a result.

One of the biggest Traders employing this arbitrage strategy was three arrows: Capital They borrowed $2.3 billion of Bitcoin from Genesis and converted them to Gbtc. This was an extremely lucrative arrangement for Dcg. Genesis Profited by charging interest on the Bitcoin loans and Grce scale, charged a 2% management fee on the Bitcoin deposited into Gbtc. As a result of multiple hedge funds employing this leveraged arbitrage strategy, Gbc's assets swelled and great Great Scale generated over $600 million of management fees in 2021 alone.

Infinite money machines such as Gbtc Arbitrage are never sustainable in the long run. They always collapse eventually and the more leverage is built up in the system, the more spectacular that collapse will be. As hedge funds minted more and more shares of Gptc, the supply increased. At the same time, demand was decreasing as more and more brokerages started allowing customers to buy Bitcoin directly.

buying Bitcoin directly allows investors to avoid the exorbitant 2% management fee charged by Gbtc. The increase in Supply and decrease in demand caused the premium to collapse and eventually turned into a discount. This was a major disaster for three. Euro Capital They had borrowed billions of dollars of Bitcoin in exchange for Gbtc.

Now that the price of Gbdc was trading at a discount, even if they liquidated their entire position, it wouldn't be enough to cover their Bitcoin loans. Over the course of 2021 and 2022, 3ac incurred huge losses as the value of their Gptc shares declined. They also made some other disastrous Investments which culminated in them going bankrupt in June of 2022. We made a video about this last year: Linked In The description below Genesis lost more than $1 billion from the 3ac default, which was greater than the value of its own equity.

In other words, Genesis was insolvent. We've already talked about the $ 1.1 billion IOU from Dcg, which was meant to compensate for this loss. This IOU was basically an accounting gimmick. If Genesis tried to sell it, it would almost certainly sell for only a small fraction of its face value.

But Genesis recognized it on their balance sheet at face value to give the illusion that they were solvent. The terms of the IOU were not disclosed to the public. In fact, the only thing that Genesis publicly disclosed was that Dcg had assumed certain of Genesis's liabilities related to 3. AC It doesn't get more vague than that.

On July 6th, 2022, a Gemini employee called up Genesis to ask them what's what. In response, a Genesis employee sent Gemini an email to reassure them that everything was fine. The email contained a balance sheet which Gemini now claims was fraudulent. In the balance sheet, Genesis claims that they had $10.7 billion worth of assets and $10.6 billion of liabilities.

This gave them Equity of $92 million. Their debts were 115 times their equity, which is a dangerous leverage ratio by almost any standard. but at least they were solvent, at least according to this balance sheet. This balance sheet pacified Gemini's concerns for a time, but a few weeks later, they contacted Genesis again, wanting more detail details.

Specifically, they wanted to know about the $2.1 billion of so-called other assets that were listed within Genesis's current assets. What exactly were these assets? On July 28th, 2022, a Genesis employee emailed them a response. He or she said the other assets include $500 million of Altcoins, $500 million of grayscale shares, and $1.1 billion in receivables from related parties. According to Gemini, this is a Smoking Gun The $1.1 billion from related parties is the IOU from Dcg.

We now know that the IOU had a duration of 10 years and a crude interest at just 1% per year. A current asset is something that can be converted into cash within one year. It is therefore ridiculous and fraudulent to classify it as a current asset. It is also ridiculous to record it at face value, given the low interest rate and questionable creditworthiness of Dcg.

The alleged misrepresentations didn't end there. In a separate report provided to Gemini. Genesis claimed that the average duration of its loan was 54 days. This is mathematically impossible.

Even if all of Genesis's other loans had durations of zero days. The 10e IOU from Dcg would push the average duration to 723 days. The lawsuit further alleges that not only did Genesis lie to Gemini about its Financial condition, it also directly lied to Gemini's customers. Every time a Gemini customer began using the earn program, they had to agree to a Master loans agreement with Gemini and Genesis up until the collapse in November of 2022, new customers were signing up on a near daily basis in the master Loans agreement.

Genesis claimed that it is not insolvent in reality Genesis was insolvent starting in June of 2022 following the 3ac default. Thus, between June and November of 2022, Genesis defrauded Gemini earned customers by claiming it was solvent when in fact it was not. This is a story from the winkl: Vos Twins Gemini was a victim of Genesis and Dcg's fraud. While this may be true, just because Genesis defrauded Gemini doesn't automatically mean that Gemini itself is innocent.

It does appear to be the case that Gemini received faulty information from Genesis. But according to the New York Attorney General, the information Gemini did have should have been more than enough to raise alarm bells in February of 2022 well before the 3ac default. Gemini employees were already concerned about Genesis's Financial Health based on the financial statements they were provided. While Genesis was not raid by any ratings agencies, Gemini did their own analysis and concluded that Genesis would likely have a junk rating.

Specifically, they estimated that in the event of a broad Market downturn, Genesis had a 50 to 60% chance of default in May of 2022 Senior: Gemini Executives including the winkl Vos twins held private discussions of whether or not they should terminate the Earn program. They ultimately decided to keep it going in July of 2022. Gemini's risk team concluded that if Genesis's debt was publicly traded, it would likely trade at a yield greater than 14% This was almost double the 7% yield that they were paying to Gemini earn customers. Basically, the Earn program was a bad deal.

Customers were not being adequately compensated for the high risk of default in or around. July of 2022. Cameron Winlos attended a meeting of Gemini's board of directors Cameron Expressed concerns that Genesis's borrowers may be lying about their financial condition. A separate board member commented that Genesis's high debt to equity ratio was similar to that of Leman Brothers Before the financial crisis, a third board member raised concerns about the billions of dollars that Genesis lent to Alam Research by August of 2022, nearly 60% of Genesis's entire loan portfolio was lent to Alam.

To make matters worse, most of the collateral Fe these loans took the form of Ftt. FTX is native cryptocurrency. In October of 2022, Gemini finally decided to terminate the Earn program. The reputational damage that Gemini would suffer in the event of a default was greater than the fees that they collected by operating the program.

So they sent Genesis a letter demanding that they return all user funds within 30 days. This caused Barry Silbert to freak out. He knew that Genesis was insolvent and they didn't have the cash on hand to make good on Gemini's withdrawal request. On October 20th, he had a meeting with Cameron Winlos where he convinced him to give an extension.

He said that they needed more time to unwind their complex loan portfolio. The extension proved disastrous as 1 month later Genesis collapsed. With that being said, even if Winlos refused to Grant an extension, it was already too late because Genesis simply didn't have the money. The main main takeaway is that throughout 2022, Gemini Senior Management including the winkl Vos twins knew that Genesis was extremely risky and the Earn program was likely a bad deal for customers.

yet they continued to tout their rigorous vetting process and told customers that Genesis was a trusted partner. All the while, Gemini was earning millions of dollars of fees as new customers continued to deposit money into the Earn program. Also, Gemini's marketing themselves as being a regulated and trustworthy exchange was misleading. Gemini is indeed regulated as a money transmitter, but they are not registered to sell.

Securities. The Earn program was almost certainly a security, as it was an investment of money with the expectation of profits from the efforts of Genesis's lending activities. So, in addition to the New York lawsuit, both Gemini and Genesis are currently being sued by the SEC for selling unregistered Securities For complex cases like this, it's easy to get bogged down in the technicalities of everything going on behind the scenes, but it's important to never forget about the real harm suffered by the victims. Shortly after withdrawals were frozen, a customer messaged Gemini asking quote: are you going to be able to give us our money anytime soon I have been crying all day I am 73 years old and without that money I am doomed unquote when Gemini ear collapsed.

over 200,000 victims had over $1 billion locked in the platform. In many cases, this was their life savings. to dat, not a single one has received a penny. All right guys, that wraps it up for this video.

What do you think about Gemini earn? Who do you think Bears the most responsibility? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.