Crypto exchange Gemini not at fault for collapse of Earn lending program, arbitrator says

Gemini Space Station scored a legal victory earlier in August after an arbitrator found the crypto exchange did not mislead users and was not at fault for the collapse of its Earn lending program.

The claim was filed in late 2024 by a user of the digital asset firm's lending program Earn. However, there was insufficient evidence that Gemini had lied to its customers or neglected to do due diligence with Genesis Global Capital, its main lending partner, according to the ruling viewed by CNBC.

"To succeed in a claim for negligent infliction of emotional distress, a claimant must prove: (i) a breach of a duty owed to the claimant; (ii) emotional harm; (iii) a direct causal connection between the breach and the emotional harm; and (iv) circumstances providing some guarantee of genuineness of the harm," the Aug. 12 ruling said. "In the instant case, Claimant offered no evidence of an actual or perceived threat to his physical safety."

Instead, the arbitrator pointed to Genesis, which was run by Digital Currency Group Barry Silbert, alleging "massive" fraud on its part. Silbert is facing several multibillion-dollar lawsuits accusing him of defrauding investors. Last year, DCG agreed to pay the Securities and Exchange Commission $38.5 million for misleading investors.

"The scope of the Silbert / DGC / Genesis fraud was massive, and until the fraud was discovered by Gemini, it went undetected by Genesis' & DCG's auditors, as well as by various regulatory authorities," the arbitrator said.

Silbert and DCG did not respond to CNBC's request for comment.

Launched in 2021, Earn allowed users to reap up to 7.4% annual yields on their cryptocurrencies by lending them out. Under the program, Gemini lent the assets to institutional borrowers, using Genesis as its intermediary.

However, Gemini halted withdrawals from its Earn program in November 2022, angering some of its more than 300,000 users. The move came shortly after Genesis paused new loan originations and redemptions due to a liquidity crunch it faced amid the crypto market downturn that year.