The collapse of FTX, a major cryptocurrency exchange, has put into question the stability of all exchanges. This doubt in the crypto space did not spare Gemini, considered to be one of the most regulated crypto companies in the US.
In November 2022, FTX was questioned about its balance sheets which mostly held FTT, its native token. Doubts that were planted in investors’ minds were further aggravated when Binance CEO Changpeng Zhao announced that it will be liquidating his exchange’s FTT holdings. This bad news prompted users to withdraw billions of dollars from FTX which eventually led to the crypto equivalent of a bank run.
The contagion from FTX’s bankruptcy affected all crypto companies both directly and indirectly. On November 10, Cameron Winklevoss, Gemini’s president and co-founder, assured investors that his company has no exposure to FTT tokens nor Alameda and FTX. He also said that all customer funds on Gemini are held 1:1 and can be withdrawn at any time.
On November 16, Gemini released a statement that Genesis Global Capital, LLC (Genesis), its partner in its Earn Program, will not be able to meet the service level agreement of five days for redemptions. Gemini also stated that they will be working with Genesis to help customers redeem their assets from the earn program as soon as possible. Crypto earn programs are the crypto equivalent of bank accounts. Customers deposit their digital assets into an exchange and receive interest in return.
The Gemini official Twitter account also made this information known to the public.
While Gemini itself did not hold any substantial exposure to FTX, its partner Genesis was not spared from the Fallout. For transparency, Genesis tweeted that it has $175 million in locked funds with FTX. They insisted that this setback did not affect their market-making activities.
But Genesis’s attempt to assure customers did not soothe customers’ failing confidence. On November 17, Genesis tweeted that they will be temporarily suspending redemptions, citing their inability to service withdrawal requests due to lack of liquidity
With Genesis’s apparent lack of ability to cater to their clients’ withdrawal requests, Gemini’s liquidity issue is also being questioned.
One Gemini client who withdrew his funds told Cryptonewsbytes, “I can not trust Gemini anymore, I am not sure if they will give my funds back if they file for bankruptcy. I had to do it to save my funds Better be safe than sorry.”.
Nansen, a blockchain analytics platform, tweeted on November 17 that $570 million was withdrawn from Gemini with an inflow of only $75 million. This huge asset outflow is an indicator of investors’ pessimistic outlook regarding the exchange.
Gemini Trust Company LLC is a New York Trust company regulated by the New York State Department of Financial Services (NYSDFS). The NYSDFS supervises and regulates the activities of nearly 3,000 financial institutions with combined assets of more than $8.8 trillion. Gemini was founded by Tyler and Cameron Winklevoss in October 2015.
Will the Winklevoss’s Company Weather the Crypto Storm
On paper, Gemini was created on top of solid foundations. According to the founders, the exchange has always prioritized the security of customers’ assets and all funds held by Gemini are available for withdrawal at any time.
Gemini is also proud of its adherence to regulations. The exchange is saying that they are following capital requirements and compliance standards set by New York Banking Law and the NYDFS.
Gemini is also the first crypto exchange to complete both SOC 1 Type 2 and SOC 2 Type 2 exams. SOC 1 evaluated the exchange’s design and implementation of financial operations and reporting controls. SOC 2 evaluated the exchange’s design and implementation of security, availability, and confidentiality controls.
The façade being shown by Gemini is nothing but a role model for the crypto space, but recent announcements seem to show some discrepancies. Gemini said that funds can be withdrawn anytime, but why are earn account holders having a hard time? They forgot to clarify that earn accounts are not held by Gemini but were instead handled by Genesis. This little lack of clarity was enough to crack Gemini’s good image.
Almost all crypto companies who folded this year insisted that there was enough liquidity and all funds were safe. These assurances lost value when crypto companies collapsed one by one. A little bad news is enough to convince jaded investors to pull out their digital assets from once-trusted exchanges. A big portion of the crypto community is now resorting to self-custody instead of trusting centralized exchanges.
Whether Gemini will follow in FTX’s footsteps is still not known. The collapse of another big exchange will drive the price of digital assets to new lows. We can only hope that Gemini recovers customers’ funds from Genesis. At the very least they should clarify the status of all of their assets going forward. They cannot afford another misstep that would not only affect Gemini itself but also the whole crypto space.
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