(Bloomberg) -- The signs of a full-blown crisis were everywhere. Bitcoin was in free fall, hedge fund Three Arrows was blowing up and the fates of several high-profile crypto lenders were suddenly in doubt.

Yet as panic spread like wildfire last June, the Winklevoss twins, founders of the Gemini crypto exchange, hit the road with their rock band, Mars Junction. With Tyler on vocals and Cameron on guitar, they belted out hits like Don’t Stop Believin,’ appearing untroubled as other firms — propped up by easy money, rampant speculation and possibly even fraud — crumpled one after the next.

And why not? The brothers, who turned their erstwhile Facebook millions into crypto billions, were bona fide believers who survived previous downturns. With Gemini, they set out to prove to the world they were the ones investors could trust. Throughout the summer, they stood behind their own lending product, Gemini Earn — which raked in billions in deposits with interest rates up to 8% — even as trouble began to engulf their sole Earn partner, Genesis Global.

Yet two months after Genesis suddenly halted withdrawals and forced the twins to pause redemptions on Earn accounts, it’s harder than ever to believe their customers will recoup the $900 million that is still stuck in limbo.

“The Winklevoss brand is severely tarnished,” said Aaron Brown, a crypto investor who writes for Bloomberg Opinion.

On Tuesday, Cameron Winklevoss accused Barry Silbert, whose company owns Genesis, of defrauding Gemini Earn customers and called on his company’s board to remove him, deepening the acrimony between the onetime business partners. In a separate notice to Earn customers, Gemini said it terminated their loan agreements with Genesis, a move that officially ends the Earn program and requires Genesis to return all outstanding assets immediately.

In an interview on Tuesday, Cameron Winklevoss said he and his twin brother are “working around the clock to find a resolution for all Earn users.” He added that “we believe in this space. This is a painful episode, but everybody is looking ahead.”

‘Publicity Stunt’

Digital Currency Group, the parent company that owns Genesis, responded to Tuesday’s letter by calling it “another desperate and unconstructive publicity stunt from Cameron Winklevoss to deflect blame” and that it is “preserving all legal remedies in response to these malicious, false, and defamatory attacks.”

A Genesis spokesperson said the firm was disappointed that Gemini was “waging a public media campaign,” but that it remains focused on finding a solution to a “very complex process” and that it would take more time.

Silbert himself couldn’t immediately be reached for comment. Last week, he refuted accusations of any mismanagement in response to an earlier Winklevoss letter.

The predicament is a humbling comedown for the 41-year-old crypto entrepreneurs, whose fortunes and reputations rested on the proposition they were the grownups who could tame the crypto frontier for the wider world. The episode has raised questions about whether their seemingly unwavering belief in crypto left Gemini, and their customers, unprepared for the worst.

Gemini launched its Earn product in February 2021, offering investors a way to earn interest that far exceeded rates on traditional bank accounts. It did this by letting depositors lend out their crypto to Genesis, which in turn lent those coins out at even higher rates to big crypto traders making leveraged bets.

Limited Liability

Crucially, Gemini didn’t lend out the funds itself, instead acting solely as an agent between Earn customers and Genesis. In August 2021, Gemini announced that Earn accounts surpassed $3 billion.

While troubles with Gemini Earn spilled into the open in November, inside the company, questions about its risk management arose much earlier.

Since early 2021, employees have urged the twins to find more counterparties to help insulate Gemini and its customers if Genesis ever ran into trouble, according to a person familiar with the matter. That never happened, partly because it proved to be difficult to find other counterparties that met Gemini’s risk and regulatory requirements, said the person, who isn’t authorized to speak publicly. Gemini declined to comment about its diversification plans for Earn counterparties.

Before taking the Earn product down from its website, Gemini said accredited borrowers in Earn (i.e. Genesis) were “vetted through our risk management framework which reviews our partners’ collateralization management process.” The company also said it reviewed its partners’ cash flow, balance sheet and financial statements “on a periodic basis.”

Winklevoss Faithful Have a Big Problem in Genesis Halt

By September, two big crypto firms, Celsius and Voyager Digital, had gone bust; BlockFi, a lending outfit the Winklevosses invested in, was careening toward bankruptcy; and the once-booming industry seemed all but dead.

According to a report last week by the Information, the twins decided to formally end the Earn product that month, but it meant negotiating with Genesis and figuring out what likely would have been a time-consuming plan to unwind the accounts and return money to its customers. Gemini declined to discuss the report when asked by Bloomberg.

In Limbo

Publicly, Gemini still marketed Earn and stood behind the product. Then, in November, Sam Bankman-Fried’s FTX empire shocked the crypto world by filing for bankruptcy.

Gemini Earn customers have been left in limbo ever since.

At the outset, the Winklevoss twins counseled patience from Earn customers and pledged to work with Genesis to recoup their money. Now, the situation has devolved into an ugly spat.

In his latest letter dated Jan. 10, Cameron Winklevoss accused Silbert, his company Digital Currency Group, and its Genesis unit of repeatedly misrepresenting Genesis’s financial position. On Jan. 2, Winklevoss slammed Silbert in a separate open letter for “bad faith stall tactics” and intermingling money within DCG.

In response to the earlier letter, Silbert said in the tweet that DCG delivered a proposal for resolving the dispute to Winklevoss’s advisers on Dec. 29, but had received no reply.

What happens next is anyone’s guess. But in the midst of all the finger-pointing and recriminations, this much is clear: There’s plenty of blame to go around.

The twins, by suggesting through Gemini’s marketing that Earn accounts were similar to FDIC-insured savings accounts but with much higher rates. Genesis, by overextending itself making risky loans (to the now-bankrupt Three Arrows, for example) with other people’s money. And of course, Earn users themselves, by ignoring the very real possibility they could lose all their money.

Gemini Users Are Fed Up. One Is Taking On the Winklevoss Twins

Gemini’s customers could potentially face years of uncertainty. Unlike bank depositors, Earn users would be considered unsecured creditors in the event of a Genesis bankruptcy. Last week, a bankruptcy judge ruled that Celsius owned the coins that customers deposited in the crypto lender’s interest-bearing accounts. Meanwhile, investors whose funds were stuck on Mt. Gox when the crypto exchange went bust in 2014 have yet to see any money.

For now, Earn customers are left to nurse their grievances on Reddit, Telegram and other online platforms. Some have have brought a class-action lawsuit against Gemini, while many others have sought arbitration.

As for the Winklevoss twins, it appears they have ample resources if they choose to backstop Gemini.

Backed by their early Bitcoin investments, they are currently worth nearly $6 billion, according to Bloomberg. They own 70% of Gemini, which is still expected to make several hundred million in revenue this year, said a person familiar with the matter, who asked for anonymity because the information is private. Gemini declined to comment on its financials or the twins’ stake.

They started New York-based Gemini in 2014, with a focus on strict adherence to regulation and compliance — a stance that may have protected them from the worst of crypto’s excesses, even as it likely held back growth when overseas exchanges flourished. 

“They are playing the long game,” said Campbell Harvey, a finance professor at Duke University. “Often with new innovation, there’s a shakeout. The flawed models are expunged, risk management practices are improved, and some clear winners emerge.”

Regardless, the Earn crisis has left Gemini a much diminished player in a vastly diminished global market.

Great Expectations

Back in 2020, Tyler Winklevoss said Bitcoin would reach $500,000, while likening the dollar to toilet paper. Bitcoin’s price has crashed since then, falling more than 60% to about $16,800, while the total value of the cryptocurrency market is down even more.

While global rival Binance has consolidated power in recent months, Gemini has lost customers. Never one of the biggest exchanges, its share of global crypto trading has shrunk to 0.16% from 0.45% a year ago, according to data compiled by researcher CryptoCompare.

Gemini announced it was laying off 10% of its staff in June to reduce expenses. This month, Bloomberg reported that Noah Perlman, Gemini’s chief operating officer, left the firm. That’s a stark contrast to headier days, when the twins raised $400 million in late 2021 that valued Gemini at more than $7 billion.

“The Winkle-bros will need to weigh the tradeoff between how much they care about their future reputation versus their financial liabilities,” said John Griffin, a finance professor at the University of Texas at Austin. “Much of that may depend on how deep their pockets are outside of crypto.”

For Terminal Subscribers: Find the latest crypto market prices at CRYP and the biggest crypto news at TOP CRYPTO.

--With assistance from Vildana Hajric and Kenneth Hughes.

©2023 Bloomberg L.P.