Krypto: Gemini responsible for BlockFi failure

A class-action lawsuit has been filed against the founders, two administrators and the Gemini exchange platform by an investor who froze around $2 million in funds with failed crypto lender BlockFi.

Responsibility of Gemini crypto exchange to BlockFi

Cryptocurrency trading platform BlockFi Inc. is facing a proposed class action lawsuit in the U.S. District Court for the District of New Jersey.

The lawsuit alleges that the company’s founders and two other directors, along with their alleged partner Gemini Trust Co. shall be held liable for digital assets lost in BlockFi’s investment accounts.

The plaintiff, Trey Greene, alleges that the unregistered “BlockFi interest-bearing accounts” meet the definition of securities, and that BlockFi has been one of the largest suppliers and sellers of unregistered securities in the form of interest-bearing accounts to residents of the United States and other countries.

Tyler Winkevoss’ Gemini previously held custody of the crypto holdings of BlockFi’s clients through its custody services and is accused of misrepresenting the availability of those funds to clients.

“Gemini knew of, and consented to, materially false and misleading statements about the status, security and availability of Plaintiff’s and class members’ assets at Gemini and the risk of loss. Gemini provided materially false and misleading information to BlockFi for use in marketing the BIAs [BlockFi interest accounts].”

Gemini is charged with breaching the Exchange Act, but was not included in the other charges.

The lawsuit against BlockFi

The alleged failure to register BlockFi’s investment accounts as securities with the US Securities and Exchange Commission (SEC) could have serious consequences for investors who have lost their digital assets.

BlockFi’s investment accounts allow users to earn interest on their cryptocurrencies by lending them to institutional figures.

The company promises high returns on these accounts, which apparently appeared to be backed by its own balance sheet and insurance policies.

However, lending cryptocurrency carries risks, including the possibility of default by borrowers or loss of digital assets due to security breaches.

The lawsuit alleges that BlockFi misrepresented the risks associated with its investment accounts and failed to disclose material information to investors.

The complaint also alleges that BlockFi committed financial fraud by offering unregistered securities to the public. The plaintiff seeks to represent a class of all investors who suffered losses due to BlockFi’s alleged misconduct.

“The unregistered securities sold by the defendant BFI [BlockFi] on behalf of BlockFi was marketed and sold through a steady stream of material misrepresentations and omissions by Prince and Marquez over several years and through periodic misrepresentations by defendant Gemini.”

BlockFi has denied the allegations and said it will vigorously defend itself against the lawsuit. The company also stated that it believes the investment accounts are not securities and therefore not subject to SEC regulation.

The outcome of the lawsuit could have significant implications for the cryptocurrency industry.

Should the court find that BlockFi’s investment accounts are securities, it could lead to greater regulatory scrutiny of cryptocurrency trading platforms and could also lead to other cryptocurrency companies facing similar lawsuits.

In recent years, the SEC has taken an increasingly active role in regulating the cryptocurrency industry.

In 2019, the SEC issued guidance on the application of federal securities laws to digital assets, clarifying that certain types of cryptocurrencies and tokens may be considered securities under US law.

However, the regulatory framework for cryptocurrencies remains uncertain, and there is still much debate about the appropriate level of regulation.

Some argue that too much regulation can stifle innovation and growth in the industry, while others argue that more regulation is needed to protect investors from fraud and misconduct.