SEC and Crypto Exchange Ask Court to Pause Suit to "Explore a Potential Resolution"
Commentary by Eric Martin and Gage Raju-Salicki
The SEC and a crypto exchange Gemini asked the District Court for the Southern District of New York to "stay of all deadlines" in a case concerning the exchange's interest earning program.
In a letter to the Court, the parties requested a 60-day hold on the case and that all deadlines be pulled "to allow the parties to explore a potential resolution." The parties also said that "a resolution would conserve judicial resources" and proposed that a joint status report be submitted within 60 days after the entry of the stay.
The SEC sued the Gemini exchange and crypto lending firm Genesis Global Capital in January 2023, alleging they offered unregistered securities through the "Gemini Earn" program. In March 2024, Genesis agreed to pay $21 million to settle charges related to the lending program, but the enforcement case against Gemini has not been settled.
Commentary
This 60-day hold on litigation is similar to the stay Binance and the SEC jointly requested back in February, but this case is also of a different kind. Gemini's Earn product, per the SEC's complaint, "touted the profits investors could earn by investing their crypto assets with Genesis through Gemini Earn." Given that the main allegation in this case was only around the earn product, it presents a tougher securities question than, say, Ripple or the other exchange cases which have been settled or withdrawn.
The thorniness of the earn/yield issue also comes off the heels of a recent dust-up over a stablecoin legislation draft's prohibition on yield stablecoins (despite the fact that these mostly appear to derive their yield from treasuries and the like). As such, it’s more evident that there are certain concerns around earn products—even yield-bearing stablecoins, apparently—which, perhaps, has led to the Gemini joint litigation hold request rather than an outright withdrawal from litigation.
Commentary
SEC Crypto Task Force Chair Hester Peirce identified crypto-lending as an area to investigate, though noted that "participation in traditional securities lending programs, such as fully paid securities lending programs offered by broker-dealers, generally does not represent a new securities transaction or implicate Investment Company Act registration requirements." If so, perhaps these earn products are not as much of an issue.
The current lack of clarity from regulators and legislators alike suggests that crypto protocols should adopt a wait and see approach with regard to their own earn/yield products.