The CFTC sued crypto exchange Gemini, owned by the Winklevoss twins, for “false or misleading statements and omissions” during meetings in 2017.

In a press release issued Thursday, June 2, 2022, the US Commodity Futures Trading Commission (CFTC) revealed it had taken Gemini to court for “making false or misleading statements of material facts or omitting to state material facts to the CFTC in connection with the self-certification of a bitcoin futures product.” (CFTC)

Gemini, as a pricing provider, partnered with Cboe Global Markets on the launch of a bitcoin futures product in December 2017.

Facts and background

During 2017, the CFTC was assessing whether the Bitcoin Futures Contract proposed by Gemini and Cboe would be susceptible to manipulation given that it was to be settled by reference to the spot bitcoin price on the relevant day as determined by an auction held on Gemini’s digital asset trading platform (Gemini Bitcoin Auction).

According to the CFTC, “the proposed Bitcoin Futures Contract was significant because it was to be among the first digital asset futures contracts listed on a designated contract market (DCM),” in this case the Cboe.

During the deliberations, which ran from July to December 2017, Gemini represented that it was a “full reserve” exchange and that all transactions were to be pre-funded by the market participants.

This pre-funding aspect supposedly “made the Gemini Exchange and the Gemini Bitcoin Auction, and thus the Bitcoin Futures Contract, less susceptible to manipulation because it increased traders’ cost of capital and made improper trading conduct more expensive to malicious actors.”

CFTC’s charge

However, the CFTC alleges that Gemini diluted the pre-funding aspect by loaning thousands of bitcoin to market participants, and in other cases, paid advances to some participants. The group also allegedly offered some participants special trading fee rebates, which were not available to all traders nor disclosed to the public. Allegedly, none of this was revealed to the CFTC.

“Gemini, directly and through the DCM, provided information to the CFTC concerning Gemini’s trading platform and the Gemini Bitcoin Auction, and certain statements and information conveyed or omitted by Gemini were false or misleading with respect to, among other things, facts relevant to understanding whether the proposed Bitcoin Futures Contract would be readily susceptible to manipulation.”

“As alleged in the complaint, Gemini personnel knew or reasonably should have known that such statements were false or misleading.”

Given the importance of the evaluation of the futures contract, the CFTC alleged that the false and misleading statements by Gemini undermined its efforts to “ensure the financial integrity of all transactions subject to the CEA, protect market participants, deter and prevent price manipulation, and promote responsible innovation and fair competition.”

Response from Gemini

Gemini said in a statement: “Gemini has been a pioneer and proponent of thoughtful regulation since day one. 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.”

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