Crypto Shadow Banking: Gemini Sues Digital Currency for $1.3 Billion

Crypto shadow banking is our industry’s biggest secret, where billions are borrowed & lent on an un-collateralized basis.

The billions of dollars raised by crypto shadow banks from retail & professional investors fueled the spectacular bull run in 2021 that took Bitcoin from $10'000 to above $69'000.

Crypto shadow banks engaged in borrowing & lending but are not licensed banks, hence falling outside the requirements of fully licensed banks, which have capital reserves to cover losses from bad loans or available liquidity in case of a bank run.

With the promise of high-interest rates, many platforms (Genesis, Celsius, BlockFi, Voyager & FTX) managed to attract billions of AUM from professional and retail investors, creating a massive supply of capital.

The demand for debt was infinite during the crypto bull run, and all those cryptos got lent out further to the world’s biggest crypto companies (Three Arrows Capital Pte Ltd, Alameda Research, etc).

Gemini created a shadow-bank-like high-yield investment product called Earn, giving clients 7.4% per annum for lending them crypto-currencies.

Gemini managed to raise more than $1.3 billion from its clients through the Earn product.

Gemini would send the customers' funds to Genesis, the world's biggest crypto shadow bank, which would lend out further those funds to now-bankrupt crypto companies Three Arrows Capital Pte Ltd, Alameda Research, and alike.

Gemini is now trying to recover locked funds from its Earn program, by suing Digital Currency Group, the parent company of Genesis.

The lawsuit states that Genesis lied about its "robust risk-management" and "vetting process" of the crypto companies, which received $1.3 billion from Gemini's Earn clients.

Even when Genesis was "massively insolvent" and was hiding a billion-dollar hole in its balance sheet, it kept encouraging Gemini to continue its Earn product.

Both Gemini and Genesis have been sued by U.S. Securities and Exchange Commission because the US regulator claims Earn was an unregistered securities offering.

The saga around the bankrupt crypto shadow banks continues and until we as an industry resolve these issues, we can expect the ongoing nuclear crypto winter to continue.