New York Attorney General Letitia James upped the battle against Digital Currency Group (DCG) for alleged crypto fraud. Her office is now seeking restitution in the staggering amount of $3 billion, leading media reported. The office filed an amended lawsuit last week, accusing DCG, its subsidiary Genesis Global Capital, and Gemini Trust of defrauding almost a quarter of a million investors. Previously, the office was seeking "only" $1 billion.
Core crypto fraud allegations are the same
DCG, Gemini, and Genesis are accused of cheating investors and hiding losses of over $1 billion. The scope of their purported crimes has expanded, with the lawsuit claiming there were many more victims than reported earlier. This implies the crypto fraud scheme went beyond Gemini's Earn program, which relied on funds from Genesis.
Gemini's exchange program is down, according to their website, which states that no user interfaces or trading are available.
"Expansive" crypto fraud, deceit
The Attorney General's office stated that Genesis "conned" many investors directly, which went to show how expansive the crypto fraud and deceit had been. With a much higher number of victims, the claimed financial losses are correspondingly more excessive, too.
What will happen if they go to court?
Basically, the Attorney General of New York can try to win the restitution claim against DCG, and DCG can try to defend itself. If the office wins, DCG may be ordered to pay a sum of money to the government as restitution for damages or losses incurred due to its actions. This could involve compensation for financial harm, such as crypto fraud, regulation breaches, etc.
The government might move to seize assets if it's determined DCG's actions involved illegal gains or unlawfully acquired assets, as in the case of crypto fraud. They can seek court orders or injunctive relief against the company, requiring it to stop carrying out certain activities, rectify harm caused, or comply with specific regulations.
DCG might face additional court-imposed penalties and fines to deter it from perpetrating crypto fraud in the future.
The government can impose regulatory sanctions, such as stricter oversight. This happened to Binance, which subjected itself to a supervisory regime effective in the next five years.
As part of court proceedings or a settlement, the government might require DCG to disclose publicly information about its crypto fraud related to the restitution claim and admit wrongdoing.
Finally, restitution claims can result in criminal charges or civil lawsuits against DCG, its CEO Barry Silbert, other executives, or its accomplices, potentially leading to fines, convictions, or even a prison term.
What can DCG do?
DCG has vehemently denied the allegations, claiming the changed lawsuit was groundless, and its only purpose was to generate media attention. They pledge to fight the case and maintain they never carried out crypto fraud.
DCG could present evidence to undermine or refute the claims they misled investors and committed crypto fraud. This may involve demonstrating its actions were lawful, they were not taken as described, or DCG was not responsible for the harm clients bore.
DCG can claim a statute of limitations, which sets a time limit for legal action. If the government filed the claim after the statute of limitations expired, DCG can ask to have the claim dismissed.
DCG can argue that there is insufficient proof they committed crypto fraud or that the harm claimed by the government is exaggerated.
They can assert legal defenses such as intervening cause, risk assumption, and others recognized under applicable law. This will defeat the claim or at least mitigate liability for crypto fraud.
Finally, DCG can try to reach a settlement with the government to resolve the restitution claim without engaging in a lengthy court battle or admitting wrongdoing. A settlement may involve agreeing to take corrective measures or pay a reduced amount of restitution for crypto fraud. This is a likely scenario and perhaps one reason the government extended its claim – to have more leverage against the potential defendant.
Bankruptcy protection despite committing crypto fraud
In addition, there's bankruptcy protection for Genesis Global, DCG's unit that bears the brunt of crypto fraud accusations. Genesis filed for Chapter 11 bankruptcy early last year, citing over 100,000 creditors and liabilities of up to $10 billion. In February 2023, DCG and the creditors agreed that the parent company would turn Genesis's equity over to them or sell the unit. Some creditors walked away from the deal two months later.
Soon after that, DCG missed a $630 million payment to Gemini, its potential crypto fraud codefendant, whom it owed $1.65 billion at the time.
What happens to the market?
When a company goes bankrupt, its stock typically becomes worthless, and investors lose all of their money. The company must sell off its assets to pay creditors back, leaving nothing for shareholders.
However, the company's partners tend to be able to keep all of their assets regardless of the crypto fraud accusations. They don't have to give up any of their savings or salaries, property shares, or other high-value possessions. Chapter 11 bankruptcy allows a bankrupt firm to restructure its debts. Companies like Texaco, GM, and Marvel Entertainment came back stronger from bankruptcy, among others.
What's more, Genesis Global is just one subsidiary. DCG also has Grayscale Bitcoin Trust (GBTC), a pioneer in launching a Bitcoin ETF. This company has never been implicated in crypto fraud. A number of hedge funds invested heavily in GBTC in the time running up to the SEC's approval of the fund. They bought shares in GBTC between 2021 and 2023, wagering on skyrocketing prices once the spot bitcoin ETF was greenlighted.
Grayscale had been trying to convert its Bitcoin trust into an ETF for eight years prior to the approval. In 2022, it even sued the SEC for rejecting its new application.
Crypto fraud is not behind us, but crypto winter could be
After a long, brutal crypto winter, culminating in a bloodbath in the crypto market in 2022, there are signs of an extended rally. Bitcoin's market cap, or the value of all the Bitcoin in circulation, has topped $1 trillion for the first time since late 2021. The premiere crypto also broke past $51,000, a big win.
Crypto spring has several implications for investment portfolios, as does the effect of the upcoming Bitcoin halving. Either way, the crypto fraud case against DCG & Co. might not have the disastrous impact on the market that pessimists anticipated.
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