SEC Cracks Down On Digital Currency Group: $38 Million Civil Penalty For ‘Misleading Investors’

The U.S. Securities and Exchange Commission (SEC) has initiated formal cease-and-desist proceedings against venture capital firm Digitalcurrency Group (DCG) for its alleged negligent conduct in connection with its subsidiary’s lending program. Genesis Global Capital (GGC).

The action arises from findings that the cryptocurrency group “misled investors” about the financial health of Genesis Global Capital during a “critical period” in mid-2022.

Genesis Global Capital’s financial problems

According to the Securities and Exchange Commission allegationsthe cryptocurrency group, founded in 2015 and headquartered in Stamford, Connecticut, has never registered with the SEC and has never registered any securities.

Genesis, a wholly-owned subsidiary of DCG founded in 2017, introduced a crypto asset lending program targeting retail investors. This program allowed customers to offer Bitcoin (BTC) and other cryptocurrencies in exchange for interest payments, which were generated by lending these assets to institutional borrowers.

In June 2022, GGC faced a major crisis when one of its largest borrowers, hedge fund Three Arrows Capital (TAC), defaulted on a $2.4 billion loan. the repercussions Defaults were severe, leaving GGC with collateral that was insufficient to cover the face value of the loan.

As the situation developed, the value of the guarantees continued to decline, which exacerbated Genesis Global Capital’s financial problems.

Despite the worrying developments, DCG executives have reportedly instructed staff to project an image of financial stability. On June 15, GGC publicly confirmed that its balance sheet was strong, a statement that DCG retweeted.

This assertion was “misleading”, according to the regulator, because it failed to account for the large unsecured exposure due to Three Arrows Capital’s default.

Subsequently, GGC’s CEO tweeted that the company had “de-risked” associated with a default, “further misleading investors” about GGC’s actual value. Financial condition.

Cryptocurrency Group’s $1.1 Billion Gambit

The regulatory agency also asserts that, in an attempt to create the appearance of financial stability, DCG issued a $1.1 billion promissory note to GGC, allowing the subsidiary to report… Positive equity on its balance sheet.

However, this financial maneuver was not disclosed to Genesis Global Capital investors, leading to further accusations of negligence against the cryptocurrency group.

The SEC concluded that the cryptocurrency group violated Section 17(a)(3) of the Securities Act, which prohibits conduct that constitutes fraud or deception in the offer or sale of securities.

The regulator determined that DCG’s actions constituted GGC’s negligent misrepresentation Financial healthmisleading investors during a crucial period.

As a result of these findings, the SEC imposed a civil penalty of $38 million against DCG. The Company must pay this amount within 14 days of the order date, with payment options including wire transfer or certified check.

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