When someone starts a business they come under various obligations. This is something that many folks forgot in the crypto world in the rush to get rich before crypto winter. Some folks are still paying the price for sloppy business dealings or fraud. What are the obligations of a crypto business? How are some crypto businesses now paying a price for forgetting this part of doing business? These thoughts came to mind as we were reading about a lawsuit regarding Gemini and DCG defrauding customers of $1.1 billion.
Gemini and DCG Fraud Allegation Update
A lawsuit filed by the State of New York alleges that Gemini Trust Co. and DCG (Digital Currency Group) defrauded customers of more than a billion dollars. The gist of the matter is that the defendants in this case did not adequately advise investors of crypto-lending program risks back in 2021. This was at the time that crypto investments were plummeting and crypto businesses were scrambling to keep from losing everything. Specifically, nearly two-thirds of the third-party loans by Gemini and DCG were to one business entity which was also in trouble, the Alameda Research arm of FTX. What crypto businesses were trying to prevent was an old fashioned run on the bank in which customers and investors all want their money back and all at the same time. When there is not enough ready cash on hand to pay off those who want out, the business collapses. Lying about one’s financial situation at such times is fraudulent, illegal.
It is noteworthy that Gemini, FTX, and the Genesis arm of DCG are currently suing each other and claiming that the others were the ones who did wrong.
The Obligation of Due Diligence
When you invest money with a business and they say that they are going to handle your assets in a businesslike manner, you expect them to do just that. One of the issues in the Gemini and DCG matter is that some of the invested money was with Three Arrows Capital, a crypto entity whose collapse started the cascade of business failures in crypto. Despite assurances that they were auditing the companies to whom they had been loaning crypto assets, there was no such audit for two years during which time Three Arrows went under.
Obligation of Telling the Truth to Investors
When you invest your money with someone you expect them to be truthful in regard to the safety of what you invested. In this case, Gemini gave no warnings to its investors even while its Chief Operating Officer took his $100,000 investment with him as he left the company to work for Binance. Meanwhile, Genesis created a promissory note for $1 billion which conveniently covered up their losses. Genesis failed to tell anyone that this was essentially pretend money, much like FTX moved money to its Alameda Research arm and showed it as assets in both parts of the company.
The Obligation of an Investor
There were lots of shenanigans going on in crypto as it collapsed under the weight of crypto winter. There was a lot of sheer stupidity that led up to crypto’s problems, the worst of which was the fanciful belief that crypto would just keep going up forever. Nevertheless, going back to the time of the Roman empire we have the saying, caveat emptor, let the buyer beware. The buyer is ultimately responsible for checking out the suitability and viability of an investment. If something seems just too good to be true it probably is and the investor ought to forego the investment. What we are seeing now is the government stepping in with regulations in an attempt to make the crypto arena safer for investors. These efforts may well make the whole system more rigid as well. Henceforth, crypto business obligations will have the force of law as opposed to the force of morality behind them.