Mobile phone with Gemini: Buy Bitcoin Instantly logo on screen close up with website on laptop. Blurred Gemini website background. Los Angeles,California, USA - 27 October 2019, Illustrative Editorial

CFTC targets Gemini exchange for lying about wash trades, market-maker loans

Gemini stands accused of lying to U.S. federal regulators about market-makers wash trading to artificially goose the cryptocurrency exchange’s trading volume.

On Thursday, the Commodity Futures Trading Commission (CFTC) filed a complaint in federal court against New York-based Gemini Trust Company LLC 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.”

Gemini is run by Cameron and Tyler Winklevoss, the Harvard rowing twins made (in)famous as Mark Zuckerberg’s hapless foils in The Social Network. The brothers founded Gemini in 2014 and it seems they had real difficulty ensuring their crypto craft stayed within its regulatory lane.

According to the complaint, the questionable activity dates to the latter half of 2017, as Gemini was preparing to launch its BTC futures product and was seeking the CFTC’s approval. Among the CFTC’s primary concerns was whether the fledgling exchange had sufficient volume to ensure it wouldn’t be “readily susceptible to manipulation.”

In March 2017, the U.S. Securities and Exchange Commission (SEC) had rejected Gemini’s application for an exchange-traded product, citing the exchange’s lack of sufficient trading volume. Around this time, the CFTC’s complaint states that Gemini “took various steps to increase trading volume and liquidity,” some of which appear to have been of the ‘whatever it takes’ variety.

For instance, despite telling the CFTC that Gemini was a “full reserve” exchange that required fully “pre-funded” transactions, two individuals—identified only as ‘Gemini Principal-1’ and ‘Gemini Principal-2’ (ahem)—made unsecured loans involving “thousands of Bitcoin” with interest rates as low as 1% to market-makers to “induce increased trading” on the exchange.

Some of these loans “included terms explicitly requiring the recipient customer to maintain certain trading volumes” on the exchange. Gemini chose not to disclose the existence of these loans to the CFTC, continuing to insist that all trades on the exchange were fully pre-funded.

Gemini also failed to disclose that it gave “advances” or “credits” of both fiat currency and digital assets to select customers. One example involved $400,000 credited to a market maker in 2016 so they could participate in that day’s Gemini Bitcoin Auction, the mechanism that determined the price by which the futures product was settled. Gemini later debited this “quick operational advance” from the market maker’s account following that day’s auction. Another such advance involved 750 Bitcoin and the customer wasn’t debited until three months later.

Tools of the trade

In mid-2017, Gemini also assured the CFTC that it “prohibited” self-trading aka self-crossing, in which a trader controls both ends of a trade. Gemini said this prohibition formed part of the exchange’s efforts to “promote the integrity of the auction price and discourage manipulative conduct.”

But the CFTC noted that as late as May of that year, Gemini “did not effectively prohibit self-trading” and in fact lacked “any technological means to prevent self-trading.” The CFTC added that self-trading occurred “from the inception” of the site’s auctions, including one day in December 2016 in which “approximately 70% of the total auction trading volume resulted from a single auction participant trading with itself.”

Gemini staff showed little interest in stopping these shenanigans, basically leaving it up to the market-makers to police themselves. The complaint cites an internal message from ‘Gemini Principal-1’ to several staff in November 2017 that offloads responsibility for the self-trading, saying “it’s really up to the MMs … MMs are grownups, they can figure it out.”

Only the poor pay retail

Gemini’s capacity for twisting the truth also extended to the rebates it offered its market-makers. In July 2017, Gemini told the CFTC that “trading fee rebates encourage participation” by its market-makers. One month later, after the CFTC requested details on these perks, Gemini backpedaled, telling the CFTC it had “no specifically defined” program for market-makers, that all market participants enjoyed the same public trading fee program.

Once again, Gemini was caught with its pants on fire, as records showed the exchange offered special fee rebate incentives and “fee overrides” to market-makers “at more favorable terms than those on the public fee schedule.” For the month of August 2017, one Gemini customer reaped over $90,000 via these rebates.

The CFTC also concluded that Gemini’s rebate incentives were “exploited by customers to engage in collusive, non-bona-fide, wash, or self-trading,” with the exchange itself occasionally falling victim. At one point, Gemini discovered that certain customers had “generated millions of dollars of fee rebates over a period of weeks essentially by trading large volumes among themselves.” Gemini subsequently fired two staffers who’d arranged or approved the rebates and the exchange spent “millions of dollars” trying to claw back these perks through civil litigation.

Someone’s been hit with an oar once too often

As a result of the numerous antics listed in the complaint, the regulator is seeking “disgorgement of ill-gotten gains, civil monetary penalties, injunctions relating to registration and trading, and an injunction against further violations of the Commodity Exchange Act.”

On Thursday, Gemini released a defiant statement saying it was looking forward to defending its honor in court, citing the company’s “eight-year track record of asking for permission, not forgiveness, and always doing the right thing.”

Cameron Winklevoss went further, tweeting from his personal account that he “might respond to this nonsense when I have some time” but his current priority was seeing the Top Gun Maverick movie. His brother Tyler offered an only slightly more measured response, saying “we obviously disagree with this lol.”

Prominent exchanges like FTX have of late expended significant time and energy trying to butter up the CFTC, sensing that the regulator might treat them better than the SEC, whose chairman Gary Gensler has deplored the lack of investor protection in a sector “rife with fraud and abuse.” Thursday’s legal action suggests the CFTC may not prove to be the soft touch the crypto bros hoped they were.

In February, Bloomberg reported that the SEC was probing Gemini and a handful of other crypto luminaries for offering consumers high-yield digital asset lending products without registering them as securities.

The axe falls

Gemini is definitely not starting this month off on the right foot. Hours before the CFTC filed its complaint, Gemini announced that it was laying off 10% of its 1,000-strong workforce. The announcement claimed that the market had entered a “contraction phase that is settling into a period of stasis” aka “crypto winter.” The situation has been “further compounded by the current macroeconomic and geopolitical turmoil.” That, and their legal bills are set to spike.

Gemini rival Coinbase (NASDAQ: COIN) had its own labor-related news on Thursday, announcing that the hiring pause it imposed following its disastrous Q1 financial performance was being followed by “more stringent measures to slow our headcount growth.” This includes rescinding “a number of accepted offers,” an about-face that the company insists “is not a reflection on the highly talented people we had extended job offers to.”

We have no idea whether Coinbase CEO Brian Armstrong rowed crew during his higher education stint. What we can say for certain is, much like the Winklevii’s Gemini, his business increasingly seems to be headed upstream without a paddle.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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