The United States Securities and Exchange Commission (SEC) has charged Digital Currency Group (DCG) and former Genesis CEO Soichoro “Michael” Moro for allegedly misleading investors regarding the financial stability of Genesis following the collapse of Three Arrows Capital (3AC).
Misrepresentation and Financial Penalties
In a statement, Sanjay Wadhwa, acting director of the SEC’s enforcement division, accused DCG and Moro of presenting “a misleadingly rosy picture” of Genesis’s financial health. According to the SEC’s January 17 filing, both parties agreed to pay civil penalties totaling $38.5 million. DCG is responsible for $38 million, while Moro will pay $500,000.
Neither DCG nor Moro admitted to or denied violations of the Securities Act of 1933 as part of the settlement agreement.
Genesis and the 3AC Collapse
The charges are the latest development in Genesis’s legal and financial troubles. Genesis filed for Chapter 11 bankruptcy protection in January 2023, largely due to significant losses incurred from 3AC’s 2022 default.
Three Arrows Capital’s collapse sent shockwaves through the cryptocurrency industry, deeply impacting firms like Genesis that were exposed to the hedge fund. Before its downfall, 3AC had invested approximately $570 million in 10.9 million locked LUNA tokens. Following the Terra ecosystem’s crash in May 2022, the value of 3AC’s LUNA investment plummeted by over 99%, leaving it worth just $670 in June 2024.
Ripple Effects Across the Crypto Industry
By June 16, 2022, 3AC failed to meet margin calls and began liquidating assets to repay creditors. On June 27, 2022, a court in the British Virgin Islands ordered 3AC to liquidate its remaining assets. That same day, Voyager Digital, a now-defunct brokerage, issued a notice of default to 3AC for its inability to repay a loan of 15,250 Bitcoin.
The collapse of 3AC triggered widespread instability across the cryptocurrency sector, exposing vulnerabilities in firms that depended on the hedge fund’s solvency.
Genesis’s Reassurances Under Scrutiny
In the wake of 3AC’s collapse, former Genesis CEO Moro assured investors that the company was actively addressing its exposure to the failed hedge fund. “We previously stated in June that we mitigated our losses with respect to a large counterparty who failed to meet a margin call,” Moro wrote in a July 2022 social media thread.
However, the SEC’s charges allege that these reassurances misrepresented the financial reality of Genesis, leading to the settlement announced this week.
A Significant Moment in Crypto Regulation
The SEC’s actions underscore the increasing regulatory scrutiny over the cryptocurrency industry, particularly in the wake of high-profile failures like 3AC and Genesis. This settlement signals a broader effort to hold companies accountable for transparency and compliance within the volatile crypto landscape.
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