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A federal judge in Connecticut has revived a fraud claim against Digital Currency Group, founder Barry Silbert, and other defendants tied to the collapse of Genesis Yield, and has cleared the way for an appeal that could determine whether crypto yield products count as securities under U.S. law.
The ruling, issued by the U.S. District Court for the District of Connecticut, keeps the DCG fraud claim alive as investors seek damages over the collapse of Genesis Yield and sets the stage for the U.S. Court of Appeals for the Second Circuit to potentially establish a precedent for crypto lending across the United States.
The latest decision marks a significant development in the long-running DCG fraud claim, which stems from the collapse of Genesis Yield, a crypto lending platform that allowed customers to earn interest on deposited digital assets.
Judge Stefan Underhill reinstated a common-law fraud claim under New York law against Digital Currency Group, Barry Silbert, and other defendants after investors invoked the Class Action Fairness Act to preserve their state-law claims. However, the court left intact its earlier dismissal of several other state-law allegations.
Consumer protection claims brought under the laws of California, Florida, and New York remain pending, while claims under Illinois, Kansas, Nevada, and Texas law were dismissed. At the same time, the federal securities claims connected to the DCG fraud claim will continue moving through the courts.
Unlike federal securities claims, the revived fraud allegation focuses on whether company executives knowingly made misleading statements, whether investors relied on those statements, and whether those statements directly caused financial losses.
The ruling does not determine liability but allows plaintiffs another legal avenue to pursue damages as litigation continues.
Perhaps the most significant aspect of the ruling extends well beyond the DCG fraud claim itself.
Judge Underhill granted an interlocutory appeal, allowing DCG, Barry Silbert, and DCG President Mark Murphy to ask the Second Circuit Court of Appeals to review whether Genesis Yield should legally be classified as a security.
That question sits at the heart of the DCG fraud claim and could influence how crypto lending products are regulated nationwide.
Earlier this year, Underhill concluded that Genesis Yield qualified as a security by applying two longstanding U.S. Supreme Court legal standards: the Howey Test and the Reves Test.
The Howey Test determines whether an investment constitutes an investment contract, while the Reves Test evaluates whether financial notes or borrowing instruments should be treated as securities.
Crypto yield products often blur the distinction between investment products and traditional loans. Customers deposit digital assets expecting interest, while firms pool those assets and lend them to institutional borrowers.
Judge Underhill acknowledged that courts have reached different conclusions when applying decades-old securities laws to emerging crypto products.
“The judges have arrived at different conclusions in dealing with the existing regulations regarding the application of long-standing securities laws to crypto products.” — Judge Stefan Underhill, U.S. District Court for the District of Connecticut.
If the Second Circuit accepts the appeal, its decision could become one of the first authoritative appellate rulings governing crypto yield products, potentially affecting exchanges, lenders, investors, and regulators across the United States.
The underlying DCG fraud claim traces back to the financial collapse of Genesis during the crypto market turmoil of 2022.
According to investors, DCG and Barry Silbert continued portraying Genesis as financially stable even after its balance sheet had significantly weakened.
The lawsuit alleges that Genesis’ financial troubles accelerated after hedge fund Three Arrows Capital defaulted on roughly $1.1 billion in obligations in June 2022. Plaintiffs further claim that DCG attempted to mask those losses by replacing the impaired debt with a 10-year promissory note issued by DCG.
Genesis suspended customer withdrawals in November 2022 following the collapse of FTX before filing for Chapter 11 bankruptcy protection in January 2023.
DCG has consistently rejected the allegations.
“Baseless.” — Digital Currency Group, describing the allegations against the company.
The company has also stated that it intends to vigorously defend itself against the DCG fraud claim and related litigation.
The Connecticut lawsuit represents only one of several legal actions arising from Genesis’ collapse, but the DCG fraud claim could ultimately have the broadest regulatory impact.
In January 2025, the U.S. Securities and Exchange Commission announced that DCG and former Genesis CEO Soichiro “Michael” Moro agreed to pay $38.5 million to settle allegations relating to statements about Genesis’ financial condition. DCG agreed to pay $38 million, while Moro agreed to pay $500,000, without admitting or denying the SEC’s findings.
Commenting on that enforcement action, the SEC emphasized the importance of transparency during periods of market stress.
“It is vital that companies and their officers speak truthfully to the investing public, especially in times of financial instability or turmoil.” — Sanjay Wadhwa, then Acting Director, SEC Division of Enforcement.
Separately, New York Attorney General Letitia James expanded her civil fraud lawsuit against Genesis, DCG, and Gemini, increasing alleged investor losses from $1 billion to more than $3 billion.
According to the attorney general’s office, more than 230,000 investors were affected. Genesis later agreed to settle for $2 billion, while litigation against the remaining defendants continues.
Primary Source: U.S. District Court for the District of Connecticut (Judge Stefan Underhill ruling).
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