The Commodity Futures Trading Commission sued the crypto firm owned by billionaire Winklevoss brothers on Thursday, claiming it misled regulators in an effort to win approval for bitcoin futures in 2017. .
Gemini Trust Co. provided bitcoin prices to Cboe Global Markets Inc.,
which launched a bitcoin futures product in December 2017. An auction hosted by Gemini determined how the bitcoin contract would be settled on the last day before expiration, ensuring a close connection between the futures contracts and the bitcoin market itself. same.
The CFTC lawsuit amounts to an attack on one of the crypto industry’s best-known brands, accusing the company of using undisclosed inducements to trade goose during a significant period of the day . The alleged efforts to boost trading volumes were not disclosed to the CFTC, the agency said, although Gemini executives met directly with regulators to answer questions about the exchange’s operations and whether the trades during the critical window could be manipulated.
Gemini misled the CFTC in 2017 about how the auction works, including whether traders should fully fund their bets or could borrow to make more trades, the CFTC said. The regulator sought to gather this information before the contract was launched to ensure that it would not be susceptible to manipulation.
The CFTC lawsuit against the operator of one of the largest U.S. crypto exchanges shows how regulators are increasingly intervening in a market that has grown without the federal safeguards that govern U.S. capital markets. It is remarkable to target a cryptocurrency company that has presented itself as a stalwart of regulation, claiming that it favors formal rules for the market.
The CFTC lawsuit seeks to impose a derivatives trading ban on Gemini, as well as bar the company, its employees and owners from participating in derivatives markets overseen by the federal agency. He also seeks a fine and asks Gemini to refund any profit made illegally. Gemini said it plans to fight the CFTC’s allegations in court.
“Gemini has been a pioneer and supporter of thoughtful regulation since day one,” the company said. “We have eight years of experience asking permission, not forgiveness, and always doing the right thing. We can’t wait to prove it definitively in court.
Before the CFTC filed its complaint, Gemini told the regulator it disputed many of the allegations, saying the CFTC had not sought information it claimed was withheld, according to a person familiar with the litigation. Gemini also said the information was not material, meaning it was not material to the regulator’s understanding of the auction process and the proposal to launch bitcoin futures.
The CFTC did not assert in its lawsuit that investors were harmed by Gemini’s alleged misconduct. And while the agency said Gemini employees knew or should have known that some statements were misleading, it did not accuse them of willful misconduct.
Bitcoin futures were highly anticipated by traders in 2017 when the price of the world’s most valuable digital coin began to skyrocket. But Chicago-based Cboe ended its futures contract in 2019 after its volumes lagged those of a rival bitcoin futures contract offered by Cboe competitor CME Group. Inc.
A Cboe spokeswoman declined to comment.
Under US law, derivatives exchanges “self-certify” new futures contracts, meaning they don’t need to get an explicit green light from the CFTC before launching. As part of the process, exchanges must declare that they have controls to guard against price manipulation. The CFTC has emergency power to halt trading of new contracts, but it rarely used this power. The system gives exchanges wide latitude to design new products to market.
“Making false or misleading statements to the CFTC in connection with a futures product certification undermines the CFTC’s work to ensure the financial integrity of all transactions,” said Gretchen Lowe, acting chief financial officer. under the CFTC, announcing the trial Thursday.
As part of its explanation of why its bitcoin auction was not easily manipulated, Gemini told the regulator that traders should fully fund their positions. The CFTC, however, wrote in its lawsuit filed in Manhattan federal court that a company controlled by two Gemini insiders provided unsecured loans to traders “to facilitate transactions on the Gemini Exchange, including in the Gemini Bitcoin Auction”. The insiders are Cameron and Tyler Winklevoss, the person familiar with the matter said.
Gemini also advanced hundreds of thousands of dollars to traders to get them to participate in the auction, the CFTC said.
Gemini’s funding efforts conflicted with what it told regulators, the CFTC said. Requiring merchants to fully fund their business would make “inappropriate business conduct more costly for malicious actors,” the agency wrote in its complaint.
Gemini believes the funding requests are wrong because traders’ positions have always been fully funded, regardless of where the money came from, the person said.
Gemini also told the CFTC that it has measures to prevent self-trading, in which a company acts as both buyer and seller in the same transaction, when in fact self-trading could perform at Gemini on occasion, the CFTC said. Self-trading can give a misleading picture of trading volume at an auction and lead to manipulative conduct, the regulator said.
Gemini insiders sometimes ignored the risk of occasional self-dealing, according to the lawsuit. Around November 2017, a month before the futures contract was launched, a Gemini customer asked about a tool that would prevent a person’s buy and sell orders from crossing during the auction.
In response, the Gemini insider wrote in an internal post that large traders could control this risk for themselves. They are adults, “they can understand,” the person wrote. The CFTC lawsuit did not identify the insider by name.
The lawsuit says two Gemini employees approved millions of dollars in trading fee rebates for certain participants who traded higher volumes. Gemini had told the CFTC that it did not offer special discounts to some customers but not others, according to the lawsuit.
He also did not disclose to the CFTC that he terminated the two employees, one of whom met with the CFTC about the futures contract, according to the lawsuit. Gemini insiders believed at the time that the employees were untrustworthy, the CFTC claimed.
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Gemini Crypto Exchange Operator Sued Over Role In Bitcoin Futures Product
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