(Bloomberg) -- Every time that Eric Asquith has opened up his Gemini crypto exchange account over the past month, he’s been greeted with the same message: “Pending.”
Asquith, a 41-year old lawyer based in Boxford, Massachusetts, held $1 million in Gemini Trust Co.’s Earn product, attracted by the potential for generating as much as 8% in interest on his holdings. In mid-November, though, founders Tyler and Cameron Winklevoss suddenly halted redemptions after a key partner, Genesis Global, became ensnared in the crypto contagion caused by the implosion of Sam Bankman-Fried’s FTX.
By one account, roughly $700 million in costumer money is tied up in the Earn program, a kind of product — widely used throughout crypto — that had all the trappings of a high-yield savings account but few of its safeguards. The hopefuls are staying patient, confident the Winklevoss twins will help them recoup their savings. The pessimists are cutting their losses, expecting that most — perhaps, all — of their funds, which were lent out to Genesis, are gone.
Then there are people like Asquith, who are willing to fight Gemini to get their money back. On Tuesday, Asquith filed an arbitration claim against Gemini and Genesis. “I thought it was my best chance to advocate for myself and get a place in line at the table,” he said. “I don’t have faith that these companies are going to do the right thing.”
Asquith alleges that Gemini breached its contract with him and committed fraud. He’s demanding access to his funds, which total $1,052,036 as well as interest, reimbursement of expenses and “emotional distress damages,” according to the claim.
Gemini and Genesis both declined to comment.
However, the Earn program’s most recently available terms and authorization agreement — which users signed before lending their money out to Genesis — makes clear their crypto will not remain in Gemini’s custody and that Gemini is solely an agent of the loan agreement between the customer and the borrower (i.e. Genesis). The first item on page 1 also states, in all-caps:
“YOU ACCEPT THE RISK OF LOSS ASSOCIATED WITH LOAN TRANSACTIONS, UP TO, AND INCLUDING TOTAL LOSS OF YOUR AVAILABLE DIGITAL ASSETS.”
In other words, don’t think this is an FDIC-insured bank savings account, and you could lose all your money if the borrower can’t pay up. Versions of the agreement viewed by Bloomberg dating back to 2021 all contained similar statements.
Asquith, who says he doesn’t recall how Gemini presented all the legalese when he signed up for Earn earlier this year, argues that Gemini’s slick online marketing and the Winklevosses’ reputation for wanting to play by the rules lulled him into what he how recognizes as a false sense of security.
The terms of the agreement, with all the attendant risks, should have been more prominently displayed, according to Asquith.
“It should have been front and center,” he said. “If that were there, there would have been no way I would have ever signed up for it.”
Other Earn customers are nursing similar grievances. In one Telegram chat group, roughly a hundred users have gathered to vent and discuss the prospects of bringing a class-action lawsuit. (Earn customers typically sign agreements entering into binding arbitration in the event of a dispute.)
The problem, as Asquith and other users see it, is that they viewed Gemini as a trustworthy platform — an aura partly rooted in the reputations of its well-known founders, Tyler and Cameron Winklevoss. The twins marketed their company as a regulated exchange with state licenses and noted that it is subject to bank examinations by the New York Department of Financial Services.
Gemini appeared to be relatively unscathed during much of crypto’s tumultuous year, which included some major blowups and bankruptcies and a downturn in prices. Even when FTX collapsed, the Winklevoss brothers seemed just fine. Gemini had no material exposure to FTX, according to a Nov. 14 email sent to users.
It did, however, have a tie-up with crypto broker Genesis, Gemini Earn’s main borrower. Genesis had exposure to Three Arrows Capital, which filed for bankruptcy earlier this year, as well as $175 million locked in an account on FTX. In mid-November, Genesis suspended redemptions and new loan originations. That prompted Gemini to halt redemptions from Earn — just two days after sending its reassuring email.
Since then, Gemini’s website has posted updates on “the process of finding a resolution for all Earn users to redeem their assets.” The page states that Gemini, “acting as agent on behalf of Earn users,” is working with Genesis as well as its parent company Digital Currency Group and DCG’s chief executive officer, Barry Silbert.
Two of the last four updates on the page have read: “No material update.” The most recent post came Tuesday and stated that Houlihan Lokey, the financial adviser for the creditor committee, presented a plan “to resolve the liquidity issues at Genesis and DCG.” The creditor committee anticipates an initial response this week, according to the post. Houlihan Lokey declined to comment on the matter.
Some Earn users remain hopeful that Gemini will resume withdrawals.
“I do still trust Gemini,” said Oscar Ramos, a 29 year-old professor living in Texas. Ramos hopes to recover a few thousand dollars from the platform. He says the pause in withdrawals “is a bump in the road” for Gemini. He continues to hold crypto on other platforms including Coinbase Global Inc. and Crypto.com.
For others, the situation raises concerns about crypto exchanges. When Gemini halted redemptions, William Engel, a 31 year-old living in New York, pulled the rest of his holdings off other exchanges. He now stores his crypto offline in a so-called cold wallet.
Engel is waiting on some $1,000 from Gemini Earn. He’s not too hopeful he’ll get any of it back.
“After all of this, it’s hard to have a lot of faith that it’ll get worked out,” Engel said. “I’m not holding my breath.”
©2022 Bloomberg L.P.