Jun 3, 2022 - Economy

CFTC sues Gemini over its 2017 bitcoin futures launch

Illustration of a gavel resting on a base made from bitcoin.

Illustration: Rae Cook/Axios

The Commodities Futures Trading Commission (CFTC) has sued the exchange, Gemini, over selling cash settled bitcoin futures products starting in 2017.

Why it matters: From the very beginning, Gemini has always positioned itself as the most pro-regulation, by the book actor in crypto. The fact that it's getting sued could represent a very aggressive signal from the Biden administration.

  • Gemini was founded by the Winklevoss brothers, who were part of the founding story of Facebook, known for its culture of "move fast and break things." By contrast, Gemini has always opted for a strategy of following the rules.

The details: The case hinges on assurances that Gemini staff made to the CFTC that its futures market could not be manipulated. Gemini announced its futures product on Dec. 8, 2017, basically at the crescendo of the initial coin offering-driven bull market of that year.

The complaint alleges that Gemini staff misrepresented how their business operates, withholding key information from regulators. It states:

"The false or misleading statements and omissions prevented the Commission from having a complete and true picture from which to evaluate whether, in what manner, under what conditions, and subject to what changes the proposed Bitcoin Futures Contract should be allowed to be listed or continue to be listed following self-certification."

According to the complaint, Gemini and the CFTC were in discussions from July to December of 2017, and that's when the misleading statements were made. It further contends that:

  • The futures product price was based on the Gemini Auctions system, which the company argued was not easily susceptible to manipulation.
  • This system was safe, Gemini staff argued, because all traders had to put up the needed money for trades up front, making it too capital inefficient to manipulate.
  • However, the CFTC shows evidence that Gemini was extending generous, uncollateralized credit lines to certain market makers, significantly lowering the cost of capital for some large participants.

The suit also goes into other aspects of how Gemini operated its market, which the CFTC says put the prices on its auction in jeopardy of manipulation which would also make its futures product subject to manipulation.

  • It found fault with Gemini's protections against self-trading (essentially, phony trading), how it represented its fee arrangements with market makers to CFTC staff and volume and liquidity on the exchange.
  • “This enforcement action sends a strong message that the Commission will act to safeguard the integrity of the market oversight process,” Gretchen Lowe, from the CFTC's enforcement team, said in a statement.

What they're saying: “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,” said a statement from Gemini shared with Axios via FTI Consulting.

Bottomline: The commission seeks a jury trial in pursuit of various kinds of relief, but the phrase in the CFTC's release that jumps is the "disgorgement of ill-gotten gains."

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