TD₿: Green Eggs and Ham: Decentralized Finance: The Good, The Bad, And The Ugly by Allen Farrington and Anders Larson
TL;DR The current iteration of DeFi is both culturally and technically doubling down in the wrong direction, but the underlying ideas remain laudable.
Hey Bitcoiners,
Yesterday afternoon, the SEC sued Genesis and Gemini for offering unregistered securities via its interest-bearing accounts through the Gemini Earn program.
SEC Chairman Gary Gensler tweeted out this cringe video that explained the SEC’s recent actions.
The SEC is arguing that Gemini and Genesis violated investor-protection laws by not providing proper disclosures and failing to register the product with the SEC.
This shouldn’t be too much of a surprise for those that have been paying attention. Just last year, crypto lending platform, BlockFi, paid a $100 million penalty for offering its BlockFi Interest Accounts, which look a whole lot like the Gemini Earn product.
This comes as 340,000 Gemini Earn users are unable to withdraw their funds due to the authorized borrower of the Gemini Earn program, Genesis, blowing up as a result of handing loans to counterparties like Three Arrows Capital and Alameda Research. (oops!)
This serves as another reminder that these crypto yield products are full of risks. In hindsight, the yields on Gemini Earn were way too low for the amount of risk these users were taking by parking their funds there. You have to ask yourself, where does the yield come from?
Short answer — the users were the yield. It has become clear that the Earn product was a user acquisition strategy where Gemini could herd users into the product, collect an agent fee, and give the users’ funds to Genesis to use to gamble with. Now, it is Gemini’s clients who can’t access their funds and have potentially lost their life savings.
Allen Farrington and Anders Larson wrote an excellent piece that digs into the dangers of crypto yield products, and how the idea of DeFi is sound, but the current iteration is NOT IT. (11/25/22)
The last thing I’ll say about this is I find the timing of the SEC’s action here mindboggling. They had known about Gemini Earn for months. A person could not walk down a street or take the subway in NYC without seeing a Gemini Earn advertisement.
And yet the SEC decided to sue them now!? Just as 340,000 Gemini users cannot access their funds because a counterparty blew up? How is tacking on a lawsuit right now constructive for these retail investors? Why didn’t this happen months ago?
Some believe that this is more of a logistical issue and the SEC just doesn’t have enough staff or resources to go after these things. I hear that, but to do it now in the midst of this DCG/Genesis/Gemini mess, it seems like the SEC is doing this not to protect investors, but instead to save face.
Remember — the SEC desperately wants everyone to forget that less than a year ago, Gary Gensler was taking personal meetings with Sam Bankman-Fried. What was the nature of those conversations?
Because what it looks like is the SEC was getting cozy with an unregulated, offshore, Bahamian Ponzi scheme, FTX, to perhaps create a regulatory moat for them, and now they are suing a highly regulated US-based exchange, Gemini, at a time when they are trying to get their users’ funds back from an effectively insolvent counterparty.
This is in no way an endorsement of Gemini and its offering of an unregistered security. I am merely being critical of the questionable actions and timing of the SEC. These are things that make me go, hmmm. 🤔
In the end, the main takeaway from all of this is the same lesson many have learned throughout 2022, Counterparty risk can kill you, and the easiest way to eliminate counterparty risk is to take self-custody of your bitcoin.
Tick tock next block,
Sam Callahan
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