Gemini Crypto Exchange Operator Sued on Role in Bitcoin Futures Product

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The Com­mod­i­ty Futures Trad­ing Com­mis­sion on Thurs­day sued the cryp­to com­pa­ny owned by the billionaire

Winklevoss 

broth­ers, say­ing it mis­led reg­u­la­tors as part of an effort to gain approval for bit­coin futures in 2017.

Gem­i­ni Trust Co. pro­vid­ed bit­coin pric­ing to

Cboe Glob­al Mar­kets Inc.,


CBOE 2.78%

which launched a bit­coin futures prod­uct in Decem­ber 2017. An auc­tion run by Gem­i­ni deter­mined how the bit­coin con­tract would set­tle on its final day before expi­ra­tion, ensur­ing a tight link between the futures and the mar­ket for bit­coin itself.

The CFTC’s law­suit amounts to a broad­side against one of the cryp­to industry’s best-known brands, accus­ing the com­pa­ny of using undis­closed incen­tives to goose trad­ing dur­ing an impor­tant peri­od of the day. The alleged efforts to boost trad­ing vol­umes weren’t revealed to the CFTC, the agency said, even as Gem­i­ni exec­u­tives met direct­ly with reg­u­la­tors to answer ques­tions about the exchange’s oper­a­tions and whether trad­ing dur­ing the crit­i­cal win­dow could be manipulated. 

Gem­i­ni mis­led the CFTC in 2017 about the way the auc­tion worked, includ­ing whether traders would have to fund their bets ful­ly or could bor­row to do more trad­ing, the CFTC said. The reg­u­la­tor sought to gath­er such infor­ma­tion before the contract’s launch to ensure it wouldn’t be sus­cep­ti­ble to manipulation.

The CFTC’s law­suit against the oper­a­tor of one of the biggest U.S. cryp­to exchanges shows how reg­u­la­tors are increas­ing­ly inter­ven­ing in a mar­ket that has devel­oped with­out the fed­er­al guardrails that gov­ern U.S. cap­i­tal mar­kets. It is notable for tar­get­ing a cryp­tocur­ren­cy com­pa­ny that has adver­tised itself as a stal­wart for reg­u­la­tion, say­ing it favors for­mal rules for the market.

The CFTC’s law­suit seeks to impose a deriv­a­tives-trad­ing ban on Gem­i­ni, as well as bar­ring the com­pa­ny, its employ­ees and own­ers from par­tic­i­pa­tion in deriv­a­tives mar­kets over­seen by the fed­er­al agency. It also seeks a fine and asks Gem­i­ni to pay back any ille­gal­ly earned prof­its. Gem­i­ni said that it plans to fight the CFTC’s alle­ga­tions in court.

“Gem­i­ni has been a pio­neer and pro­po­nent of thought­ful reg­u­la­tion since day one,” the com­pa­ny said. “We have an eight-year track record of ask­ing for per­mis­sion, not for­give­ness, and always doing the right thing. We look for­ward to defin­i­tive­ly prov­ing this in court.” 

Before the CFTC filed its law­suit, Gem­i­ni told the reg­u­la­tor that it dis­put­ed many of the alle­ga­tions, say­ing the CFTC didn’t seek the infor­ma­tion it claims was with­held, accord­ing to a per­son famil­iar with the dis­pute. Gem­i­ni also said the infor­ma­tion was imma­te­r­i­al, mean­ing it wasn’t impor­tant to the regulator’s under­stand­ing of the auc­tion process and the pro­pos­al to launch bit­coin futures. 

The CFTC didn’t claim 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 cer­tain state­ments were mis­lead­ing, it didn’t accuse them of inten­tion­al misconduct. 

Bit­coin futures were hot­ly antic­i­pat­ed by traders in 2017, when the price of the world’s most valu­able dig­i­tal coin began to sky­rock­et. But Chica­go-based Cboe pulled the plug on its futures con­tract in 2019 after its vol­umes lagged behind those of a rival bit­coin futures con­tract offered by Cboe’s crosstown competitor,

CME Group Inc.

A spokes­woman for Cboe declined to comment.

Under U.S. law, deriv­a­tives exchanges “self-cer­ti­fy” new futures con­tracts, mean­ing they don’t need to get an explic­it green light from the CFTC before the launch. As part of the process, the exchanges must declare they have con­trols to guard against price manip­u­la­tion. The CFTC has emer­gency author­i­ty to halt trad­ing of new con­tracts, but it has rarely used that pow­er. The sys­tem gives exchanges wide lat­i­tude to engi­neer new prod­ucts to trade. 

“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 CFTC Act­ing Enforce­ment Director

Gretchen Lowe

in announc­ing the law­suit Thursday. 

As part of its expla­na­tion for why its bit­coin auc­tion wasn’t eas­i­ly manip­u­lat­ed, Gem­i­ni told the reg­u­la­tor that traders would need to fund their posi­tions ful­ly. The CFTC wrote in its court com­plaint filed in Man­hat­tan fed­er­al court, how­ev­er, that a com­pa­ny con­trolled by two Gem­i­ni insid­ers made unse­cured loans to traders “to facil­i­tate trad­ing 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 had told reg­u­la­tors, the CFTC said. Requir­ing traders to fund their activ­i­ty ful­ly would make “improp­er trad­ing con­duct more expen­sive to mali­cious actors,” the agency wrote in its complaint. 

Gem­i­ni believes the fund­ing claims are wrong because traders’ posi­tions were always ful­ly fund­ed, regard­less of where the mon­ey came from, the per­son said. 

Gem­i­ni also claimed to the CFTC that it had mea­sures to pre­vent self-trad­ing, in which a firm acts as both the buy­er and the sell­er in the same trans­ac­tion, when in fact self-trad­ing could occur at Gem­i­ni on occa­sion, the CFTC said. Self-trad­ing can paint a mis­lead­ing pic­ture of the trad­ing vol­ume in an auc­tion and lead to manip­u­la­tive con­duct, the reg­u­la­tor said. 

Gem­i­ni insid­ers were some­times dis­mis­sive of the risk of occa­sion­al self-trad­ing, accord­ing to the law­suit. Around Novem­ber 2017, a month before the futures con­tract 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 mes­sage that big traders could police that risk for them­selves. They are grown-ups, “they can fig­ure it out,” the per­son wrote. The CFTC’s law­suit didn’t iden­ti­fy the insid­er by name. 

The law­suit says two Gem­i­ni employ­ees approved mil­lions of dol­lars in trad­ing fee rebates for cer­tain par­tic­i­pants who trad­ed in high­er vol­umes. Gem­i­ni had told the CFTC it didn’t offer spe­cial rebates to some cus­tomers but not oth­ers, accord­ing to the lawsuit. 

It also didn’t reveal to the CFTC that it had fired the two employ­ees, one of whom had met with the CFTC about the futures con­tract, accord­ing to the law­suit. Gem­i­ni insid­ers believed at the time that the employ­ees weren’t trust­wor­thy, the CFTC alleged.

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

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