A Billion-Dollar Fraud In Plain Sight

Ed Zitron 10 min read

Back in November 2022, I tried to warn everybody that something bad was coming at the scale of an FTX, something that would almost exclusively harm US investors, and I was sadly right.

In February 2021, Gemini (one of the largest and most respected US cryptocurrency exchanges) began its “Earn” program, an “interest-earning” program where users could feed their cryptocurrency into Gemini’s coffers and “earn interest for any period of time…[and] also redeem their crypto at any time.” Gemini, a “New York-based Trust company with security protocols on par with those offered by top financial institutions,” would generate this interest by working with “institutional borrowers,” partners who had been vetted through Gemini’s “risk management framework.”

As a result, customers deposited somewhere between $700 million and $1 billion of funds into Earn, believing that Gemini was offering something akin to an interest-generating savings account. After all, Gemini had “institutional partners” (plural), and Gemini “vetted” said partners’ “collateralization management process.” The suggestion was that Gemini had diversified its risk (after all, an archived version of the Gemini Earn page from 2021 said that Gemini worked with accredited third-party borrowers including Genesis), and thus any particular lender failing wouldn’t be the end of the world.

This was, of course, not the case.

Genesis was wrapped up in the FTX disaster, quickly going from saying they had no material exposure to FTX, to saying they had $7m in exposure, to saying that they had $175 million in exposure, to saying that they needed to freeze customer withdrawals and new loans entirely and also they would likely be going bankrupt. This was in part due to Genesis having two billion dollars in 3 Arrows Capital, which left a multi-billion dollar hole in Genesis’ balance sheet that it papered over with a $1.1 billion promissory note from its holding company (Digital Currency Group) due in 2032. This maneuver never appeared to involve the conveyance of any actual money, seemingly existing only to pretend that Genesis had another $1.1 billion on the books.

DCG had also borrowed $575 million from Genesis, which it (Genesis) is now suing DCG (the company that owns Genesis) for as part of their bankruptcy proceedings.

This is the company that the identical Water Brothers — otherwise known as the Winklevoss twins — and Gemini had run through their “risk management framework.” And despite allegedly reviewing the “collateralization management process” that Genesis underwent, it hadn’t diversified at all, putting over a billion dollars of customer funds into Genesis, money which is now most assuredly gone.

Over the last year, the Winklevosses and Barry Silbert, CEO of Digital Currency Group (and technical owners of Genesis) have engaged in an embarrassing public back-and-forth where the Water Brothers attempt to frame themselves as victims of a scam, rather than bad actors acting badly. As I said back in January, they could have yanked the funds from the Gemini Earn program when it was revealed that Genesis loaned $2.4 billion to Three Arrows Capital in July of 2022.

Unless, of course, they didn’t believe they’d be able to.

On October 19, 2023, New York Attorney General Letitia James filed a massive fraud suit against Gemini, Genesis Global Capital, and Digital Currency Group, alleging a conspiracy to mislead customers and cover up over a billion dollars of losses. The AG’s office found that the twin brothers named Cameron and Tyler Winklevoss had misled investors about the risks associated with Genesis, and that Genesis not only failed to disclose its losses, but took steps to actively hide them from their clients and the public.

The NY AG’s suit is damning and shows that Gemini was aware of the rotten condition of Genesis from the launch of the program, with “Gemini’s internal risk analyses [showing] that Genesis Capital’s loan book was undercollateralized” and that only a year into the program, Gemini revised its estimate of Genesis Capital’s credit rating from investment grade (BBB) to non-investment or junk grade (CCC). Genesis also routinely reported to Gemini from May 2022 through November 2022 that it had failed its own internal loan book risk assessments, to the point that in July 2022, “a Gemini board member compared Genesis Capital to Lehman Brothers prior to its collapse.”

Gemini decided it would terminate the Earn program on September 2, 2022, but only decided to inform Genesis that it would do so on October 13, 2022. It continued sending customer funds to Genesis throughout this period until an indeterminate time, failing to let customers know the program was fully terminated until January 2023 (though it froze withdrawals in November 2022).

They knew. Two American billionaires put a billion dollars of customer funds into deeply questionable lender’s hands, then proceeded to obfuscate the risks involved. They claimed that Genesis had “appropriate risk ratios” and a “healthy financial condition” as recently as November 14, 2022, a full month after it had formally terminated their agreement with Genesis. To quote myself from January:

This is not a casual fling with a risky asset class. It is a near-billion-dollar swindle of, to quote Cameron Winklevoss: “…a single mom who lent her son’s education money to you…a father who lent his son’s bar mitzvah money to you…A husband and wife who lent their life savings to you…a school teacher who lent his children’s college funds to you.”

Cameron and Tyler Winklevoss — as well as Barry Silbert — have defrauded investors at a similar scale to Sam Bankman-Fried. They convinced customers that they were putting money into an interest-generating account, tricking them into believing that this was a stable, risk-managed investment, one that was continually liquid (“withdraw your assets instantly”), as opposed to the reality that Cameron and Tyler Winklevoss knowingly funneled customer funds into an unstable, undercollateralized lender. They intentionally and repeatedly misled customers, claiming to an Earn investor on June 27 2022 that they, periodically, would “conduct an analysis of [their] partners’ cash flow, balance sheet, and financial statements to ensure the appropriate risk ratios and healthy financial condition of [their] partners,” and that said partners were “vetted through a risk management process,” heavily implying that said process would protect their customers.

Where’s Your Ed At is a free newsletter, but if you like my work and want to kick me a few dollars, you can do so here.

Like reading Where’s Your Ed At? Perhaps you’d like to join There’s Your Ed At, our Discord Chat Room? You can find it at or at this link. It’s free, and a great place to talk with other readers (and me, of course).

And don’t forget to listen to 15 Minutes In Hell, The Where’s Your Ed At Podcast. You can find it on Apple Podcasts, Spotify, or find the RSS link here.

And on October 20, 2022 — months before Earn formally shuttered — DCG’s CEO Barry Silbert met with Cameron Winklevoss and told him that Gemini was Genesis Capital’s largest and most important source of capital, and that they couldn’t withdraw Earn customers’ funds without bankrupting the firm. Cameron and Tyler Winklevoss not only deceived customers, but turned their assets into a load-bearing part of Genesis’ balance sheet so that they could funnel them into billions of dollars of loans into FTX. And they’ve spent the best part of the year playing the victim with pathetic open letters to Barry Silbert demanding the return of funds they knew were gone, claiming that Silbert “hid in his ivory tower” and that he should “take responsibility…and do the right thing” as Cameron and his brother continued to mislead the world about what actually happened.

While I’d never refer to the Winklevosses as victims, one cannot ignore how thoroughly fraudulent Barry Silbert’s empire had become. On January 24, 2022, Genesis Capital loaned $100 million to DCG on an unsecured basis, due July 24, 2022, only for DCG to tell them that they “literally [did not have the money].” Silbert’s solution was to “re-paper” delaying its due date by 10 months to May 2023 — and it appears it was never actually paid back, along with several other loans that were either unpaid or paid back in shares of the Grayscale Bitcoin Trust, another Silbert-owned enterprise. According to Sam Bankman-Fried’s testimony during his own criminal fraud and conspiracy trial, Silbert begged SBF for help, which he declined to provide despite Genesis having loaned FTX billions of dollars in the past (which trustees agreed to settle for a puzzling $175 million).

And one can absolutely see where they misled Gemini. ‘The $1.1 billion promissory note from DCG to Genesis was marked as “$1.1 billion in receivables from related parties” with no designation of what it was or how it was amortized. But one cannot ignore the fact that Gemini knew something was up. In a March 5, 2021 email to an Earn investor, Gemini claimed that Genesis was “only lending assets deposited into Earn to institutional borrowers in an overcollateralized way,” a statement that an internal risk management employee tried to correct to “collateralized, but not necessarily overcollateralized.” Gemini never sought to correct a Coindesk article from February 2021 that claimed, and I quote, that “the [Genesis’] loans are overcollateralized.”

In May 2021, Gemini’s risk management team “determined that Genesis Capital was “highly leveraged,” with an over 95% debt-to-asset ratio, and that “Genesis …has low liquidity…[and that] the business is just able to cover its short-term obligations.” By August 2021, Gemini Earn had placed $3 billion of customer assets in Genesis’ hands.

This is one of the largest and most gratuitous acts of negligence in the history of finance, a craven and deliberate swindle that flowed through every vein of the organization. Gemini intentionally and repeatedly misled customers into investing in an undercollateralized and risky lender by dressing their fraud in the trappings of conventional retail banking. Gemini was aware and continually reminded of how unstable and disorganized Genesis was, and how risky its customers’ assets were — and yet it continued to hype the scheme in the hopes that nothing would ever change.

Cameron and Tyler Winklevoss are villains, and while they didn’t outright steal customer funds, they intentionally and willfully misled customers into Genesis Capital, an unstable and recklessly-managed lender. They were fully aware of these dangers, yet chose to launch a program that their own risk management team believed was riskier than other partners that Gemini had considered for Earn, saying in February 2022 that Genesis’ financials were “weaker with a high leverage ratio and low liquidity ratio,” and that a market downturn would mean that a 50-60% default rate for Genesis was an “appropriate assumption.” The risk management team repeated this language several times, and it took until May 2022 for Cameron Winklevoss to personally ask for a “1-pager on the risk profile” of Earn and Genesis — and whether Earn “adequately compensated” Gemini “for the risk.”

And having read the entire NYAG suit, I cannot find a single instance of concern for the hundreds of thousands of people that Gemini failed, despite its pledge to uphold “the highest level of fiduciary obligations.” The Winklevosses represented their position as the trusted stewards of the digital currency industry, claiming to live by a policy of asking for permission rather than forgiveness as they brazenly funneled billions of customer funds into a lender that they clearly didn’t trust. They continually rambled about being licensed and regulated by the New York Department of Financial Services, which means absolutely nothing, as Gemini Earn deposits were being loaned to Genesis per the terms of Gemini Earn’s agreement.

The Winklevosses, the so-called “self regulators” of crypto, built a reputation as the trustworthy party in a lawless industry, only to use it as a means to make a paltry $22 million in agent fees and $10 million in commission from a situation that will likely lead to creditors losing 40% to 50% of their holdings (creditors are expecting to receive a mere 35% of their holdings from now-bankrupt “crypto bank” Voyager), and that’s if they ever see them again.

The River Styx

Now the Winklevosses have filed an “adversary proceeding” against Genesis in bankruptcy court seeking to “recover $1.6 billion in value for the benefit of Earn users” in an attempt to paper over their financial mismanagement. On August 15, 2022, Gemini accepted 30,905,782 of Grayscale Bitcoin Trust shares as collateral for Earn, valued at around $15 at the time (somehow taking on what they call an “initial collateral” stake over a year after the program started), worth around $463 million, which the WInklevosses decided to foreclose upon on November 16 2022, selling GBTC when its price was around $9 a share — a confusing move that left them with $284.3 million, or roughly 64.1% of the original value.

The Winklevosses are claiming that they should be considered “owed” the difference between the $284 million and the amount owed to Earn’s creditors. Genesis argued that it didn’t give them $284 million — it gave them 30,905,782 of GBTC, and that the collateral should be valued at the price of GBTC today, which would value the stake at $800m. In essence, the Winklevosses rushed to sell these shares for effectively no reason, potentially flaunting basic foreclosure rules, and Genesis’ argument is that they shouldn’t have to make up the difference. Curiously, Gemini was meant to receive another 31,180,804 shares of GBTC on November 10, 2022 — Genesis simply didn’t send it.

Both of these parties are wretched scum and in a just society would rot in the depths of our worst jails. Under the terms of Genesis’ reorganization plan under bankruptcy, Earn users would be considered Class IV unsecured creditors, getting paid out behind Genesis’ institutional creditors, secured creditors, and priority claims, which is why Genesis has paid $175 million to FTX’s bankruptcy as single mothers wait to retrieve their sons’ college funds. I do not believe any of these people ever see their money again, and if they do, it’ll be pennies on the dollar.

There is some hope, in the form of the NY AG’s suit. The relief requested by the Attorney General includes a demand for the defendants to make restitution of all funds to investors, and specifically and permanently seeks to enjoin the defendants (including but not limited to Gemini) from any business related to just about anything related to securities or commodities within/from New York. There is a chance — though it’s uncertain and will take time — that the result of this lawsuit ends with the Winklevosses (and Barry Silbert) both paying their victims back and never being allowed to interact with the financial industry again.

Until that happens, and even if it does, you should remember the names of Cameron and Tyler Winklevoss, not as identical boat boys or victims of Mark Zuckerberg, but as the billionaire architects of a billion-dollar fraud.

They were not “surprised” by anything happening — they were continually aware of the risk of how they had invested their customers’ money, and chose both to continue risking said funds while telling customers that their funds were safe.

While Sam Bankman-Fried’s fraud is more salacious, it is not significantly more gratuitous than that of Barry Silbert and the Winklevoss twins. Both parties in this suit are disgraceful pieces of shit, ones that should be reminded every day of the real cost of their greed, ignorance, and outright iniquity.

These are modern-day robber barons that, unlike Bankman-Fried, will likely avoid any jail time or real consequences for their actions, because they know that while stealing is illegal, there is no true punishment for a rich man’s recklessness.

More from Ed Zitron's Where's Your Ed At

Empty Laughter

Amongst the sludge of AI-powered everything at last week’s Consumer Electronics Show, a robbery took place. “Dudesy —” allegedly a
Ed Zitron 15 min read

Welcome to Where's Your Ed At!

Subscribe today. It's free. Please.

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to Ed Zitron's Where's Your Ed At.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.