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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聽 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聽 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 鈥渋nvestment鈥 that could be 鈥渞edeemed at any time鈥.
Gemini also advertised Genesis Capital as a 鈥渢rusted鈥 and 鈥渁ccredited鈥 partner with 鈥渁ppropriate risk ratios鈥 and a 鈥渉ealthy financial condition鈥.
At the same time, however, Gemini knew that Genesis Capital鈥檚 loan book was under-collateralised, and this was noted in Gemini鈥檚 internal risk reports.
In February 2022, this led Gemini to downgrade Genesis Capital鈥檚 estimated credit rating from BBB to CCC (鈥渏unk鈥 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鈥檚 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 鈥渟tructural hole鈥 in the company鈥檚 balance sheet.
But externally, the CEOs of Genesis Capital and DCG described the balance sheet as 鈥渟trong鈥, saying that the company had 鈥渟hed the risk and moved on鈥 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鈥檚 balance sheet as an 鈥渁sset鈥, 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鈥檚 (FCA) new crypto-asset promotion rules.
Last week, Binance鈥檚 promotions partner, peer-to-peer (P2P) lending platform Rebuildingsociety.com, was聽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聽 (ToS), removing its previous references to US dollar withdrawals.
As of Monday (October 16), Binance鈥檚 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 鈥淯S dollar funds鈥 that remain on the platform must be converted to 鈥渟tablecoin or other digital assets鈥 and withdrawn.
Due to the bankruptcy of Prime Trust, its former US banking partner, Binance鈥檚 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聽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聽 to do so, and in response he聽 an email from Binance informing him of difficulties 鈥渧erifying your Binance account鈥.
鈥淵ou are encouraged to complete verification in order to start trading and secure your account,鈥 the email added.
US senators demand action on Hamas crypto funding
Senators (D-MA) Elizabeth Warren and Roger Marshall (R-KS) have聽 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 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 鈥減rimarily used the stablecoin Tether鈥.
Undersigned by more than 60 senators, the letter asks the Biden Administration to respond by October 31.
