The New York Department of Financial Services plans to announce later today a settlement with Genesis Global Trading, a subsidiary of the major crypto conglomerate Digital Currency Group.
After an investigation found significant failures in Genesis's anti-money laundering and cybersecurity programs, the trading firm agreed to surrender its BitLicense, cease operations in New York, and pay an $8 million fine.
"Genesis Global Trading's failure to maintain a functional compliance program demonstrated a disregard for the Department’s regulatory requirements and exposed the company and its customers to potential threats," said Superintendent Adrienne Harris in a statement shared with Fortune.
Rise and fall
Founded in 2015, Digital Currency Group helped lead crypto's growth in the U.S., fueling bull markets with its lending practice Genesis Global Capital and its asset manager, Grayscale. Genesis Global Trading, a distinct entity from Genesis Global Capital focused on providing trading services to institutional and accredited investors, served as a crucial arm of the digital asset empire.
DCG was also at the center of crypto's collapse in 2022, drawing regulatory scrutiny from both state and federal agencies. Genesis's lending practice worked with failed firms including the hedge fund Three Arrows Capital and Sam Bankman-Fried's Alameda Research, spurring its own bankruptcy in early 2023. Genesis later faced lawsuits from the Securities and Exchange Commission and the Office of the New York Attorney General for allegedly offering unregistered securities.
While Genesis Global Trading was not included in the bankruptcy and was not a named party in the lawsuits, it still suffered from the parent company's broader setbacks. In September, the firm announced it would shut down its over-the-counter trading platform in the U.S.
Genesis Global Trading also was the only DCG entity to hold a BitLicense in New York. DFS is notably the only U.S. regulator at both the state and federal levels to offer a comprehensive crypto supervisory framework, with Genesis receiving its license in 2018.
The DFS settlement comes amid increased discussion in New York over how to handle crypto regulation. As Fortune reported in December, DFS approved a program called Gemini Earn for a separate BitLicense holder, the Winklevoss-led Gemini. The Genesis lending arm served as the counterparty for the investment vehicle, which collapsed amid the failures of Three Arrows Capital and Alameda in 2022 and became the target of lawsuits from the SEC and New York's attorney general.
Staffers in New York Attorney General Letitia James's office, after she proposed legislation in May to expand her office's purview, have pointed to Gemini Earn's failure as evidence of shortcomings within DFS. This week, New York Comptroller Thomas DiNapoli—a supporter of James's legislative proposal—released a report questioning the efficacy of the state's BitLicense program.
In a statement shared with Fortune, a DFS spokesperson said that Harris initiated an internal assessment of the department's virtual currency unit after arriving in September 2021, adding that the comptroller's review "identified the same areas for improvement that the Superintendent began remediating in 2021 before the audit."
Although James's office has brought actions against two BitLicense holders—Gemini and the trading platform Coin Cafe—DFS has largely managed to prevent the collapses endemic to the crypto industry through the supervision of its licensees. In January 2023, DFS reached a $100 million settlement with Coinbase over failures in its compliance program, although Coinbase was not required to forfeit its BitLicense.
'Significant failings'
According to a consent order shared with Fortune, DFS conducted two examinations of Genesis—one from May 2018 through March 2019, and another from April 2019 through March 2022. After finding deficiencies in the firm's anti-money laundering and cybersecurity programs in the first examination, DFS subsequently found Genesis had directed "little effort or resources" to addressing those deficiencies despite significant growth in Genesis's business. After initiating an enforcement investigation, DFS found that Genesis had violated its virtual currency and cybersecurity regulations.
The department determined that Genesis didn't complete a risk assessment that met its requirements until mid-2022, meaning it never had proper controls in place to address the "high inherent risks" of certain products. Genesis also didn't make sufficient disclosures to its customers, including details like the amount and type of transactions, and it failed to document anti-money laundering policies that would identify unusual or suspicious transactions. The firm also didn't designate an anti-money laundering officer to oversee compliance.
In its second examination, DFS found that suspicious activity reports, or SARs, filed by Genesis did not meet its standards and that no SARs were relayed to Genesis's board of directors until the summer of 2022. Genesis also did not conduct enhanced screening of employees and third-party service providers, which is required by the Treasury Department.
DFS also found Genesis's cybersecurity practices to be insufficient. The board of directors didn't annually review and approve its practices, and it failed to protect sensitive data and nonpublic personal information.
As part of the settlement, Genesis agreed to pay a fine of $8 million, with the relatively low amount reflecting Genesis's cooperation during the investigation and efforts to update its programs. Still, Genesis agreed to cease all operations in New York and surrender its BitLicense.
"Genesis had taken substantial measures to address these historical deficiencies and is pleased to resolve this matter," a spokesperson said in a statement shared with Fortune. "The entity ceased operations in September 2023 and Genesis is in the process of voluntarily winding it down for business reasons."
