Shrapnel from the collapse of the crypto exchange FTX is hitting a straitlaced New York service provider that holds hundreds of millions of dollars’ worth of Canadian companies’ crypto investments, testing its internal controls and the effectiveness of its regulators.

That provider is Gemini, which has told customers using one of its offerings, a savings-account-like service called Gemini Earn, that they can’t withdraw their deposits because its “lending partner,” a separate crypto company named Genesis, has paused withdrawals.

Gemini Earn makes its returns for customers by lending deposited crypto through “accredited third-party borrowers including Genesis, who are vetted through a risk-management framework which reviews our partners’ collateralization management process.”

“We are working with the Genesis team to help customers redeem their funds from the Earn program as quickly as possible,” Gemini said in a corporate statement on Nov. 16. “We will provide more information in the coming days. … This does not impact any other Gemini products and services.”

In August, Genesis CEO Michael Moro resigned and the company laid off 20 per cent of its staff after the crypto hedge fund Three Arrows Capital went bust, taking with it a reported US$2.3 billion of Genesis’s money.

Then on Nov. 10, the day before FTX filed for bankruptcy protection (and two days after it stopped customer withdrawals of their holdings), Genesis said in a tweet that it had about US$175 million in a locked trading account with FTX. FTX’s bankruptcy filings have revealed that Genesis’s money might not be there; if any of it is, it’s trapped until the court figures out what to do with the wreckage.

This week, Genesis has been fighting a battle for liquidity, despite an infusion of US$140 million from its parent company. To preserve itself, it has stopped lending and suspended withdrawals from its lending arm, including by Gemini customers wanting to get their Earn deposits out.

This is what “contagion” can look like in financial services: When one failure begets others, sometimes in unexpected places.

Gemini Earn is a different function from the one Gemini provides to Canadian investment platforms including Wealthsimple and Coinberry. For those companies, Gemini maintains their crypto holdings in the virtual version of a bank vault.

Under Canadian securities law, the country’s financial institutions have to put their assets under the care of a qualified custodian. Until recently, Gemini was the only company Canadian authorities had approved to offer the service for cryptocurrencies, providing the virtual equivalent of a vault holding stock certificates or gold reserves and guaranteeing that they really exist and are safe.

Besides Wealthsimple and Coinberry, Gemini does this for companies such as Evolve, Ninepoint and Purpose, which offer exchange-traded funds that invest in crypto. Investors buy and sell shares of the funds through more traditional markets like the Toronto Stock Exchange, but the ETFs’ digital assets sit in Gemini’s virtual vault.

Purpose lists assets of $772.4 million in five crypto-based ETFs, as of Wednesday. Evolve has just over $99 million in three ETFs. Ninepoint’s Bitcoin ETF had more than US$17 million in bitcoins at the end of the trading day Wednesday.

Gemini didn’t reply to an inquiry from The Logic on Thursday—American Thanksgiving—about how its business units are separated, what would happen if Genesis can’t find the liquidity it’s seeking, or whether Canadian or other foreigners’ assets would be treated differently from American holdings, if Gemini itself were to fail.

Without exception, the Canadian crypto players that answered questions from The Logic (all but Evolve and Purpose, though Purpose has made a public statement) said they have faith in Gemini’s custodial services.

“I think that there’s always a risk of contagion whenever a big company in any industry collapses,” said Alex Tapscott, managing director of digital assets for Ninepoint. “And already, you’re starting to see some of the knock-on effects of [FTX], but it’s too early to say just how far it’s going to spread and what kind of impact it’s going to have long term.”

But Ninepoint is confident that whatever happens to Genesis, it won’t reach Gemini’s custody services, he said.

Unlike FTX, which had components registered in a smattering of jurisdictions around the world, Gemini (run by Tyler and Cameron Winklevoss, from early Facebook history) is a U.S. company with a subsidiary that is a custodian chartered under New York State’s banking law and overseen by the state’s Department of Financial Services. That gives Ninepoint a great deal of reassurance, Tapscott said.

“We’re very comfortable with Gemini,” said Tapscott. “We’ve received assurances from them, but we also wouldn’t work with them unless we already knew from the outset that they were licensed and regulated, that they met all of the OSC’s requirements—which is obviously extremely important in the regulated market—and that we thought they were a good partner.”

Wouldn’t Gemini have said much the same thing about Genesis?

“I certainly can’t comment on the relationships between Gemini and Genesis or what conversations they may or may not have had,” Tapscott said. “Our custody is in a trust account, which is separate by law, legally, from the assets of the firm. … Our assets are not embroiled in this situation.”

Purpose Investments published a note on Nov. 17 saying it also believes in Gemini’s custody service: “The fiduciary and the legal relationship between Gemini and Purpose is such that in an unlikely event of a Gemini insolvency, Purpose’s crypto funds’ custodied assets are not held on Gemini’s balance sheet but held in trust solely for the benefit of Purpose’s funds.”

Matthew Burgoyne, co-chair of the digital assets and blockchain group at Osler, Hoskin & Harcourt in Calgary, confirmed that this is essentially correct. However, any companies with digital assets held in custody by Gemini would have to go to court to get them released, he said.

“There would be a period, while they’re waiting for a court order, where they really don’t have access to those assets,” Burgoyne said. “There would definitely be an extra step.”

Coinberry president Adam Garetson emphasized the distinction between Gemini’s units.

“Gemini Custody is a separate legal entity to Gemini Exchange,” he wrote in an email. “We are monitoring the situation with Gemini Earn to evaluate the impact, if any, to Gemini Custody. We have been communicating with Gemini Custody and will continue to monitor the situation, but are not taking steps to change custodian[s] at this time.”

Wealthsimple spokesperson Juanita Leon confirmed in an email: “Gemini Trust Company is one of the cold-storage custodians we use,” and pointed The Logic to Gemini’s statement saying that although deposits in its Earn program are caught up inside Genesis, no other Gemini products or services are affected.

As for whether Wealthsimple has considered changing custodians, she wrote, “That isn’t the type of thing we would talk about publicly now or in the future.”