The US Commodity Futures Trading Commission (CFTC) yesterday sued the Gemini cryptocurrency exchange for making false and misleading statements in relation to a bitcoin futures contract launched in December 2017.
The CFTC regulates the US derivatives markets. Gemini was launched in 2015 by the Winklevoss twins, the former business partners of Facebook founder Mark Zuckerberg.
In 2004, the Winklevoss brothers sued Zuckerberg, claiming he stole their idea to create Facebook. The case was settled out of court.
In late 2017, near the peak of an earlier cryptocurrency bull market, market participants were racing to launch the first bitcoin futures contract.
A futures contract run by the CBOE futures exchange, using bitcoin prices from Gemini, was first to hit the market on December 10 that year, beating the launch of a competing contract from the Chicago Mercantile Exchange (CME) by ten days.
CBOE discontinued its bitcoin futures in March 2019, but the CME version continues to trade.
By contrast with the CME contract, which used a blended bitcoin price from four cryptocurrency exchanges, the CBOE futures contract used only Gemini as its price source, based on a daily auction of prices from market participants.
Gemini enabled its own clients to create a false market through collusive ‘wash’ trading
In December 2017 the CBOE wrote to the regulator saying it believed its new futures contract was not readily susceptible to manipulation.
Yesterday, however, the CFTC alleged that Gemini had breached its promise to run a fair and honest market in a number of ways.
Gemini, said the CFTC in its lawsuit, hid key facts regarding the track record, function, and reliability of its daily bitcoin auction.
Gemini also lied about a requirement for its clients to pre-fund all trades on the exchange, as well as hiding the fact it was lending its own money to clients to inflate the volume of bitcoin trading, said the CFTC.
Gemini also enabled its own clients to create a false market through collusive ‘wash’ trading and hid the extent of the fee rebates it offered clients to trade on the exchange, the regulator alleges.
The CFTC said in its lawsuit that it is seeking trading and registration bans, as well as fines.
In a press release, Gemini vowed to fight the allegations.
“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,” the firm said.
“I might respond to this nonsense when I have some free time”
On social media, the Winklevoss brothers were dismissive about the lawsuit.
“I might respond to this nonsense when I have some free time. But I dunno, maybe not, we’ll see. I’m pretty busy at the moment. For now, any extra time I have I will use to see Top Gun Maverick. I heard it’s awesome!” Cameron Winklevoss said on Twitter.
“Nuts! We obviously disagree with this lol. Will respond more fully when I have a minute. Busy building at the moment,” said his brother Tyler.
The CFTC’s case against Gemini mirrors similar allegations made against Coinbase last year.
In March 2021 the CFTC levied a $6.5m penalty on Coinbase for fictitious trade reporting in bitcoin and litecoin.
According to the CFTC, between January 2015 and September 2018 Coinbase had run two internal algorithms that often traded with each other, without disclosing the fact.
Such ‘wash trading’—the buying and selling of a financial instrument or contract for the express purpose of feeding misleading information to the market—is illegal in the US.
According to the CFTC, Coinbase reported its fictitious trading activity to the wider market. The manipulated bitcoin price fed the benchmark underlying the CME bitcoin futures contract, said the regulator.
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