Week In Crypto: Winklevoss Twins Embroiled In $1bn Criminal Fraud Case

Three major crypto companies are charged with defrauding customers of $1bn, Binance walks a compliance tightrope in the UK, US and Russia, and the US Senate cracks down on crypto payments to Hamas.

The Office of the Attorney General of New York has filed criminal charges against US crypto firms Gemini, Genesis and Digital Currency Group (DCG).

The three companies are accused of engaging in a two-track scheme to defraud 230,000 investors of $1bn, and to conceal the fraud using deceptive accounting practices.

The charges in the complaint date back to February 2021, when Gemini, a crypto exchange founded by prototype Facebook creators Tyler and Cameron Winklevoss, launched staking service Gemini Earn.

Funds invested in Gemini Earn were managed by Genesis Capital, the lending arm of Genesis, a crypto exchange for institutional investors.

Gemini is accused of misleading investors about the safety and legality of Gemini Earn and the solvency of Genesis Capital.

Genesis Capital and its parent companies, Gemini and DCG, are accused of losing $1bn of Gemini customer funds.

The prosecution has bundled the two alleged frauds into a single complaint, but refers to them separately as the Gemini Scheme and the DCG Scheme.

The mis-selling of Gemini Earn

From February 2021 to November 2022, Gemini advertised the Earn product as a low-risk and highly liquid “investment” that could be “redeemed at any time”.

Gemini also advertised Genesis Capital as a “trusted” and “accredited” partner with “appropriate risk ratios” and a “healthy financial condition”.

At the same time, however, Gemini knew that Genesis Capital’s loan book was under-collateralised, and this was noted in Gemini’s internal risk reports.

In February 2022, this led Gemini to downgrade Genesis Capital’s estimated credit rating from BBB to CCC (“junk” grade).

According to the complaint, Genesis Capital even reported to Gemini that loans it had issued had failed to meet its own internal risk criteria.

Losing $1bn in a crypto downturn

The DGC Scheme dates back to June 2022, when one of Genesis Capital’s largest borrowers, crypto hedge fund Three Arrows Capital (3AC), defaulted on billions of dollars in loans.

The loss took place as the crypto markets nose-dived following the collapse of TerraUSD, an algorithmic stablecoin, and Celsius, a crypto lending platform.

Internally, Genesis Capital described the loss as creating a “structural hole” in the company’s balance sheet.

But externally, the CEOs of Genesis Capital and DCG described the balance sheet as “strong”, saying that the company had “shed the risk and moved on” from the 3AC loss.

As per the complaint, the two CEOs then came up with a scheme to conceal the loss from investors and creditors.

Using a ten-year promissory note agreement, DCG agreed to pay $1.1bn to Genesis Capital with 1 percent interest.

The promissory note was then entered into Genesis Capital’s balance sheet as an “asset”, but DCG never made any of its scheduled repayments.

The prosecution is seeking restitution of all damages related to the alleged fraud.

Some investors, including a 73-year-old grandmother from New York, lost their entire life savings in Gemini Earn.

Binance under pressure in UK, US and Russia

This week, Binance has made significant changes to its UK and US businesses, and has been accused once again of faking its withdrawal from Russia.

On Monday (October 16), Binance suspended the onboarding of new customers in the UK, in an effort to comply with the Financial Conduct Authority’s (FCA) new crypto-asset promotion rules.

Last week, Binance’s promotions partner, peer-to-peer (P2P) lending platform Rebuildingsociety.com, was ordered by the FCA to cease offering itself as a third-party promotions approver.

As an unregistered firm, Binance must now partner with a different registered firm that is authorised to approve promotions on behalf of third parties.

In the meantime, Binance said it will launch no new products or services in the UK, and existing users must complete an investor declaration and appropriateness assessment to continue using the exchange.

No more US dollars for Binance US users

In the US, Binance has updated its Terms of Service (ToS), removing its previous references to US dollar withdrawals.

As of Monday (October 16), Binance’s new ToS dictates that customers who continue to use the exchange agree that they have no way to withdraw US dollars in fiat currency.

Instead, any “US dollar funds” that remain on the platform must be converted to “stablecoin or other digital assets” and withdrawn.

Due to the bankruptcy of Prime Trust, its former US banking partner, Binance’s new ToS also notes that US dollars that remain on the exchange are no longer covered by the Federal Deposit Insurance Corporation (FDIC).

From Russia with deception?

Finally, following an investigation by an online research team, Binance is facing renewed claims that it faked its withdrawal from Russia.

Jakal Intel, an open source for corporate due diligence investigations, attempted to sign up to CommEx, the one-day-old exchange to which Binance sold its Russian business.

An investigator from Jakal Intel used an image of a false ID to do so, and in response he received an email from Binance informing him of difficulties “verifying your Binance account”.

“You are encouraged to complete verification in order to start trading and secure your account,” the email added.

US senators demand action on Hamas crypto funding

Senators (D-MA) Elizabeth Warren and Roger Marshall (R-KS) have written to the Treasury and the White House this week, demanding action to prevent Hamas from accessing cryptocurrency.

Between August 2021 and June 2023, Warren and Marshall said that Hamas and its armed wing, Palestinian Islamic Jihad (PIJ), are believed to have raised more than $130m in cryptocurrency.

The senators asked whether this figure is consistent with the estimates of the Biden Administration, and what steps are being taken to prevent additional funds reaching Hamas.

In August, as noted in the letter, Israel seized 67 Binance accounts owned by the PIJ, and these accounts “primarily used the stablecoin Tether”.

Undersigned by more than 60 senators, the letter asks the Biden Administration to respond by October 31.