The Commodity Futures Trading Commission (CFTC) has filed a federal lawsuit against the Winklevoss twins’ Gemini Trust Company, accusing the firm of lying to the regulator about the reliability of their platform and data, in order to inflate apparent trade volume and conceal the risks of price manipulation.
This follows on the heels of the company’s announcement it intends to lay off 10% of its staff, which came as a shock to the crypto industry.
The government’s accusations are stunning: secret private loans, facilitating rampant wash trading, manipulating prices and trade volumes, and disregarding safety and controls while directly misleading the CFTC.
The summary of CFTC allegations against Gemini:
- Two unnamed Gemini Principals provided private loans to customers with their own funds–to buy Bitcoin futures on Gemini in order to inflate transaction volumes and win regulatory approval.
- Gemini concealed that they would offer digital or fiat “credits” for some users on the platform, allowing these users to participate in Bitcoin Auctions, affecting the price of bitcoin, without using their own capital.
- Free trading credits were personally approved by one of two principals at Gemini.
- Wash trading was systematic, including periods where 70% of total trading volume was a single participant trading with themselves. This means that trading volume data reported by Gemini during this time were necessarily inflated, and known by the company to be unreliable.
- Gemini staff declined to implement wash trade prevention measures, deciding it was “too hard” and that market makers were “grownups, [who] can figure it out.”
- Gemini offered undisclosed “fee rebates” and other incentives to preferred users, allowing them to generate millions of dollars by trading with themselves, further skewing all reporting of Gemini’s total trading volume.
The requested consequences for Gemini by CFTC:
- Immediate permanent and total ban on the company, its employees, owners and anyone else affiliated, from:
- operating the Gemini business,
- trading commodities,
- owning or controlling any entity that trades commodities,
- raising or soliciting funds for the purpose of trading,
- applying for any activity requiring a registration with CFTC,
- and owning, operating, or controlling any organization that requires a registration.
The CFTC is also seeking:
- Disgorgement of profits, fees and proceeds from the operation of the Gemini platform.
- The payment of fines.
- Gemini Trust Company is a crypto exchange and auction founded in 2014 by the Winklevoss Twins, of controversial Facebook (now Meta) fame. It received a license to operate as an exchange in 2016.
- In 2017, the SEC rejected Gemini’s application for an exchange-traded product (likely a Bitcoin ETF) for, in part, insufficient volume on their exchange. A second application was rejected in 2018.
- Throughout 2017, Gemini met with the CFTC to “persuade the staff” as to the compliance of the Gemini Bitcoin Futures Contract.
- In December of 2017, Gemini’s Bitcoin Futures Contract began trading on the Chicago Board Options Exchange (Cboe).
- The Bitcoin Futures Product was priced using data from Gemini’s Bitcoin Auction on its platform.