New York investigates Gemini over FDIC insurance claims
New York regulators are investigating Gemini over “false and misleading” claims the Winklevoss-owned exchange had made about whether client funds are insured by the government.
The New York Department of Financial Services (NYDFS) said Gemini’s communications with Earn customers contained ambiguous terminology that their GUSD stablecoin deposits are protected by the Federal Deposit Insurance Corporation (FDIC) coverage.
Gemini customers said that the exchange failed to distinguish the FDIC status of its own bank deposits and customers’ high-yield program. In other words, those statements implied that FDIC insurance was available for Gemini Dollar (GUSD) holdings, while the agency does not insure brokerage accounts.
Dennis Kelleher, the president of Better Markets, told Axios that he believes Gemini’s intention was to mislead. “Everybody knows the value in terms of investor comfort and confidence in something that is FDIC insured. The goal in using language like this appears to be to “get legitimization” and provide “false comfort” to people to convince them to keep their money with the company,” he added.
Under the Federal Deposit Insurance Act, it’s prohibited to use the FDIC’s name or logo to imply customer funds are government insured when they are not. The agency also has the authority to assess civil money penalties against anyone “implying that an uninsured product is FDIC–insured or knowingly misrepresenting the extent and manner of deposit insurance.”
The FDIC ramped up its efforts to police crypto firms that may be misleading investors on whether their funds enjoy a government backstop. It has issued cease and desist letters to five crypto firms, including bankrupt FTX and Voyager Digital, to stop making similar misleading statements. Later, the FDIC urged banks dealing with crypto companies to ensure that their customers are aware of what types of assets are government-insured.
Gemini is being sued by investors over the sale of its interest-bearing crypto products. In a class-action complaint filed in the U.S. District Court for the Southern District of New York, some investors accused Gemini and its founders of fraud and violations of the Exchange Act.
The complaint alleges that Gemini’s Earn program didn’t register its high-yield products as securities in accordance with U.S. securities law. The filing highlights that the exchange promoted annual interest rates of up to 7.4% on crypto deposits, which was higher than rates for short-term, investment-grade, fixed-income securities or bank savings accounts.
The lending unit of Gemini suspended redemptions and new loans in November due to the collapse of FTX crypto exchange. The move raised questions about the health of Gemin’si program that holds more than $900 million in customer money. The Earn accounts were frozen after its main lending partner, Genesis Global Capital, enacted a similar freeze before going bankrupt.
