As crypto cratered, Gemini spoke to customers about FDIC insurance

As the cryptocurrency market imploded last year, Gemini Earn customers repeatedly asked the company if their assets were safe. Some of Gemini’s responses, reviewed by Axios, emphasized ties to the Federal Deposit Insurance Corporation.

Why is this important: Customers say it led them to believe their accounts were insured by the government agency. They weren’t.

• It was a bit confusing. Some 340,000 Earn clients now have nearly $1 billion in assets frozen on the platform. It is not clear if they ever get it back.
• Gemini’s partner, a crypto lender called Genesis, is now bankrupt. And both companies are facing the Securities and Exchange Commission charges to offer unregistered titles via Earn.
• The New York state agency that regulates Gemini is investigating the company, Axios has learned. An agency spokesperson said they could not comment on ongoing investigations.

The big picture: Federal law prohibited anyone to “imply that an uninsured product is FDIC insured or knowingly misrepresent the scope and terms of deposit insurance”.

• In correspondence with Earn customers reviewed by Axios, Gemini’s discussion of FDIC insurance appeared to refer to the company’s deposits at outside banks — not its own products. But customers said they didn’t appreciate the distinction. Additionally, the security claims relate to its stablecoin, GUSD – but not the Yield Earn product itself.
• Current and former FDIC officials told Axios that while the language used by the FDIC Gemini is misleading, it is unclear whether it actually violates the law.
• “Is that sleazy? Sure,” former FDIC senior counsel Todd Phillips said of Gemini’s communications to clients citing the agency. “Is that illegal? I do not know. I can’t really say. (Phillips now runs a public policy consulting firm in Washington, DC)

For memory : In response to an inquiry from Axios, Gemini declined to comment.

• As recently as January 10, the company sent an email to Earn customers stating that it was working to release their funds: “Returning your assets remains our top priority and we continue to operate with the utmost great urgency,” read one of the emails.
• And in response to a lawsuit from Earn’s customers, also filed Jan. 10, Gemini points out that they should have known about the risks. “Among other things, by enrolling in the Gemini Earn Program, the claimants acknowledged that their assets were leaving Gemini’s custody and that they were at risk of ‘TOTAL LOSS’.

The backstory: Crypto was meant to be an alternative to the traditional financial system – but building on one of the bank’s signature regulatory foundations has helped Gemini earn customer trust.

• Its Earn product looked like a savings account. Investors invested funds – either their own cryptocurrency or paid dollars for Gemini’s stablecoin, GUSD – and were told they would earn up to 8% APY.
• Gemini hasn’t said explicitly that its Earn program, or GUSD, is directly insured by the FDIC. Instead, on his website in a section titled “FDIC Assurance,” Gemini says GUSD is at least partially backed by dollars that can be held in FDIC “eligible” accounts at three banks: State Street, Signature, and Silvergate. (None of these banks provided further details to Axios.)

Gemini used similar language in a July 24, 2022 email to investor Earn Manohar Venkataraman, a New York-based IT consultant. Venkataraman had asked about the security of his GUSD. “I’ve seen references to FDIC policyholders,” he wrote.

• The response he received two days later seems like a standard answer by Gemini Customer Service: “All fiat currencies held by Gemini to exchange your GUSD are held by our partner financial institutions in a secure account and are eligible for FDIC insurance.”
• At the time, Venkataraman was reassured. “It sounded like they were saying they would make all the money.” But now? “It’s quite obviously misleading,” said Venkataraman, who has around $40,000 of GUSD frozen with Gemini Earn. “I thought they were as good as dollars.”

Another email from customer service In response to a 24-year-old Gemini Earn investor who was concerned about his GUSD, it read: “GUSD reserves are held by Gemini in US FDIC-insured bank accounts and money market funds holding short-term treasury bills.

• “The cash portion of these GUSD reserves may be eligible for FDIC ‘pass-through’ insurance for Gemini customers, should a bank holding the US dollar deposit portion of the GUSD reserves default.”
• “So to answer your question, the risk of holding GUSD is minimal, and in the unlikely event of a problem/problem, your funds stay safe” [emphasis ours].
• The investor works in the investment bank and requested anonymity because he is embarrassed to have fallen into the trap. He says the emails “reassured” him at the time.

Ian McCray, a truck driver in Syracuse with about $17,000 in savings in Gemini Earn, said he thought Gemini Earn was FDIC insured when he started investing in November 2021. He saw the term all over Gemini’s website, he said, and “it felt like it was safe, literally.”

The plot: Not every client we heard from believed their funds were FDIC-backed. Some simply trusted the owners of Gemini, Cameron and Tyler Winklevoss, the twins made famous by the movie “The Social Network.”

• Their high profile – and some customers’ perception that the twins knew what it was like to be treated unfairly – meant the company was less likely to be a scam, investors said.
• Others were reassured because Gemini was regulated by New York State; something the company touted advertisements on billboardstaxis and New York Times.

What they say : Dennis Kelleher, president of Better Markets, a nonprofit that advocates stricter regulation, says he thinks Gemini’s intention was to mislead. “Everyone knows the value in terms of comfort and investor confidence in something that is FDIC insured.”

• The purpose of using language like this appears to be “to gain legitimization” and provide “false comfort” to people to convince them to keep their money in the business, he said. declared.

Zoom out: “The FDIC is fundamentally about maintaining public confidence in the banking system and the financial system,” FDIC Chairman Martin Gruenberg said in a statement. Brookings Event in October, where he explained that the agency had seen several instances of crypto companies giving customers the impression that they were protected by the government backstop.

• “And when serious misrepresentations are made about whether deposit insurance applies to a particular financial product, it really undermines and harms the very credibility of our deposit insurance system.”
• In August, the FDIC issued five cease and desist letters to crypto firms – including now bankrupt FTX, but not Gemini – demanding that they “refrain from making false and misleading statements about FDIC deposit insurance.”
• The agency would not comment on Gemini in response to an inquiry from Axios.

Be smart: Current and former FDIC officials say the inclusion of the word “knowingly” in a provision of the law that makes it illegal to misrepresent the existence of deposit insurance makes enforcement difficult.

• It must be proven that whoever made the statements intended to misrepresent the status or security of the funds.
• This means that the types of statements that crypto firms like Gemini have made to customers worried about FDIC insurance likely fall into a legal gray area.

To note: Nor is it clear how aggressive the FDIC has been in using its powers to crack down on those who imply they are covered by this gold standard of consumer protection.

• Since 2008, there has only been one public action against a company under the law, resulting in a fine of just $100,000, according to a report by the law firm Davis Polk (although there were over 150 non-public “informal resolutions”).

The bottom line: Earn investors are devastated. Many of these clients are looking for someone to blame in all of this – marketing, the belief in crypto more broadly, regulators. Many also look within and say they should have known better.

Were you an Earn customer or a Gemini employee? We would love to hear your story. E-mail: [email protected] or [email protected] We are also on Signal.