Gemini Crypto Exchange Operator Sued Over Role In Bitcoin Futures Product

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, although Gemini executives met directly with regulators to answer questions about the exchange’s operations and whether trades during the critical window could be manipulated.

Gemini misled the CFTC 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.

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.

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”.

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 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.

Write to Dave Michaels at dave.michaels@wsj.com and Alexander Osipovich at alexander.osipovich@dowjones.com

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Gemini Crypto Exchange Operator Sued Over Role In Bitcoin Futures Product


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