In a recent development, crypto exchange Gemini has filed a lawsuit against the crypto platform Genesis Global about the ownership of shares in the Grayscale Bitcoin Trust (GBTC). 

Per the lawsuit, the exchange is seeking a determination from a federal judge to establish that Genesis has no right to over 60 million GBTC shares pledged as collateral for loans made by its users. Gemini argues that these shares should not be used to repay other creditors of Genesis.

Gemini Seeks Court Determination To Secure Over 60 Million GBTC Shares

According to the lawsuit filed on Friday, October 27, 2023, the exchange entered into a security agreement with Genesis. Genesis allegedly promised to deliver 62,086,586 GBTC shares in two tranches as collateral to secure loans made by Gemini users. 

Notably, the value of the collateral is currently estimated at nearly $1.6 billion, which would fully secure the claims of all the Gemini users. However, the company alleges that Genesis has “taken actions to harm” its users and hinder their collateral recovery.

Allegedly, these actions include challenging the validity of Gemini’s foreclosure on a portion of the collateral, halting the delivery of the remaining collateral to the company, and proposing a reorganization plan that would divert value away from its users to other creditors.

Genesis is now seeking to use the current value of the collateral instead of the proceeds from the exchange’s foreclosure to determine the deficiency claim of Gemini users. The exchange argues that only its users should be entitled to any gain resulting from the risk it assumes.

Court Declaration On Collateral Ownership

Gemini also highlights that Genesis’s proposed plan of reorganization distributes the liquidated value of the collateral to other general unsecured creditors, rather than to Gemini users as originally intended.

Given these developments, the exchange requests that the court declares that it properly foreclosed on the initial collateral and that the amount to be set off against the deficiency claim should be the foreclosure value. 

The US-based company also seeks a declaration of its secured interest in the additional collateral or that Genesis holds the additional collateral in constructive trust for the benefit of Gemini users.

Per the filing, Gemini has repeatedly requested confirmation from Genesis regarding transferring the additional collateral, but Genesis has not responded or completed the transfer. 

The exchange founded by the Winklevoss twins seeks a judgment from the court to address these issues and enable the distribution of the collateral proceeds to the company’s users. Gemini lawyers stated:

It is time to resolve these issues so that Genesis may move forward with a reasonable plan of reorganization and Gemini may distribute the proceeds of the Collateral to Earn Users. 

The Earn program allowed users to earn interest on their cryptocurrency holdings. However, following Genesis’ bankruptcy protection filing, a halt has been placed on all withdrawal requests, leaving users unable to access their funds.

Featured image from Shutterstock, chart from TradingView.com