Gemini Crypto Exchange Operator sued over role in Bitcoin Futures product

The Commodity Futures Trading Commission on Thursday sued the cryptocurrency firm owned by billionaire Winklevoss brothers, claiming it misled regulators in an attempt to get bitcoin futures approved in 2017.

Gemini Trust Co. delivered Bitcoin price to Cboe Global Markets Inc.,

which launched a bitcoin futures product in December 2017. An auction approved 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.

The CFTC lawsuit is similar to an attack on one of the crypto industry’s most well-known brands, which accuses the company of using covert incentives to trade in goose for a significant period of the day. The alleged efforts to increase trading volume were not disclosed to the CFTC, although Gemini executives met directly with regulators to answer questions about stock market operations and whether trading in the critical window could be manipulated.

Gemini misled the CFTC about how the auction works, including whether traders should fully fund their bets or be able to borrow to make more trades, the CFTC said. The regulator sought to collect this information before the contract was launched, to ensure that it would not be susceptible to tampering.

The CFTC lawsuit against the operator of one of the largest U.S. cryptocurrencies shows how regulators are increasingly intervening in a market that has grown without the federal security measures that trade with U.S. capital markets. It is noteworthy to target a cryptocurrency firm that has presented itself as a regulator and claims to be in favor of formal market rules.

Gemini said it plans to combat the CFTC’s claims in court.

“Gemini has been a pioneer and supporter of thoughtful regulation since day one,” the company said. “We have eight years of experience in asking for law, not forgiveness, and always doing the right thing. We can not 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 currency began to skyrocket. But Chicago-based Cboe ended its futures contract in 2019 after its volumes lagged behind a rival bitcoin futures contract offered by Cboe competitor CME Group. Inc.

A spokeswoman for Cboe declined to comment.

Under U.S. law, derivatives exchanges “self-certify” new futures contracts, meaning they do not need to receive an explicit green light from the CFTC prior to launch. As part of the process, stock exchanges must declare that they have control to protect themselves against price manipulation. The CFTC has the emergency power to halt trading in new contracts, but it rarely used that power. The system gives stock exchanges a wide margin to design new products on the 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, CFO of CFTC, who announced the lawsuit on Thursday.

As part of its explanation for why its bitcoin auction was not easily manipulated, Gemini told the regulator that traders should fully fund their positions. However, the CFTC wrote in its lawsuit filed in the Manhattan Federal Court that a company controlled by two Gemini insiders granted 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 were in conflict with what it told regulators, the CFTC said. Requiring merchants to fully fund their business makes “inappropriate business conduct more profitable for malicious actors,” the agency wrote in its complaint.

Gemini also told the CFTC that it has measures to prevent self-trading, where a company acts as both buyer and seller in the same transaction, while self-trading can actually be carried out at Gemini sometimes, the CFTC said. Self-trading can give a misleading picture of trading volume at an auction and lead to manipulative behavior, the regulator said.

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

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