The SEC had in January this year filed a lawsuit against the two companies, alleging that they sold unregistered securities through Gemini’s earn program.
In response, the two companies have filed a document at the at the United States District Court for the Southern District of New York on Friday, May 26. The document says that the SEC has no legal grounds to claim the earn product was a sale of unregistered securities since it was a lending service and did not involve the sales of any tokens.
“Specifically, the SEC claims that the MDALA—which was entered into as a prerequisite to participation in the Earn program—is itself the unregistered security. This has no basis in law or fact. Further, the Complaint never explains how, when, or where the MDALA was supposedly sold, or on what terms,” the document states.
The two companies are therefore demanding dismissal of the lawsuit for two reasons. First, the program wasn’t an investment contract or security note that qualifies as “security” under federal law. Secondly, the SEC has failed to prove that the MDALA was sold to anyone, even if it adequately pleaded that it was a security.
“Accordingly, there was no requirement that any party register it with the SEC, and so there was no violation of Section 5. This point is discussed in detail in Genesis’ motion to dismiss the Complaint, and Gemini incorporates Genesis’s arguments in that regard,” the document further argued.
SEC Crypto Crackdown
Crypto companies have come under intense pressure from the SEC and other regulatory bodies in the US this year. The commission through its chair person Gary Gensler, has argued that all cryptocurrencies except bitcoin are securities.
Based on this assumption, any crypto company that involves trading of crypto tokens is considered a securities exchange, and the commission now claims that Gemini and Genesis sold unregistered securities to investors.
This kind of crackdown has caused many crypto companies to relocate from the country, while more are considering it. Gemini itself has launched a derivatives trading platform outside of the US because local regulation forbids such trading.
Some lawmakers have argued that such crackdowns can lead to complete paralysis of the crypto industry and all its innovation, which is not healthy for the country’s economic growth.
Even though there have been outcries from crypto companies suggesting a lack of regulatory clarity, the SEC has on many occasions claimed that there is adequate regulatory guidance available for the industry as it is.
Other Lawsuits Against SEC
Gemini isn’t the first to file a lawsuit against the SEC. Coinbase, another US-based crypto giant also filed a lawsuit last month challenging the SEC to provide regulatory guidance.
Asked to respond to the suit, the commission said that coming up with the kind of regulation Coinbase demands takes time, and there’s sufficient regulatory guidance at the moment.
Coinbase has also launched an offshore derivatives trading platform, just like Gemini. Its CEO Brian Armstrong had much earlier stated that the company was open to the idea of relocating from the US should regulatory approach remain unchanged.
Coinbase also recently entered conversations with regulators in UAE about increasing its presence in the region.