The Commodity Futures Trading Commission sued Gemini Trust on Thursday, alleging that employees at the cryptocurrency exchange misled the agency when the company was evaluating a potential bitcoin futures contract.
Filed in a New York federal court, the complaint claims that Gemini violated the Commodities Exchange Act for making “false or misleading statements and omissions” to CFTC staff through in-person interviews, presentations materials, and documents in July and December 2017.
Doing so “undermines the CFTC’s work 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,” said Acting Director of Enforcement Gretchen Lowe in the statement.
The futures contract was “significant,” the complaint said, because it would have been “among the first digital asset futures contracts listed on a designated contract market.”
Founded by Tyler and Cameron Winklevoss in 2015, the New York-based exchange was one of the earliest players trying to list the first exchange-traded fund that held spot bitcoin. In March 2017, it also made a run at launching trading for Bitcoin futures contracts through a partnership with Chicago Board Options Exchange (CBOE). The filing does not state whether the lawsuit is connected to the partnership.
According to the complaint, the false or misleading statements included assessing the size, liquidity, and number of market participants using both Gemini’s exchange and its bitcoin auction.
In particular, Gemini asserted all its transactions were “pre-funded,” making a bitcoin futures product less susceptible to manipulation “because it increased traders’ cost of capital,” therefore made “improper trading conduct more expensive for malicious actors.”
During those statements, Gemini did not mention that it permitted certain Gemini customers to obtain personal “unsecured” loans amounting to “thousands of bitcoin” from an entity controlled by two unnamed Gemini principals to facilitate trading volume on its exchange, according to the complaint.
The firm also did not mention it had offered customers advances of credit in fiat currency and crypto assets as well as “bespoke fee rebates” to certain customers.
In light of those accusations, the CFTC is seeking “disgorgement of ill-gotten gains, civil monetary penalties, injunctions relating to registration and trading, and an injunction against further violations according to a press release from the CFTC.
In a request for comment, a Gemini spokesperson said: “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.”
The lawsuit follows a blog post published earlier Thursday by Gemini founders Tyler and Cameron Winklevoss, noting the company is cutting “approximately 10% of its workforce,” citing the crypto market’s recent sell-off, or “crypto winter,” as well as “the current macroeconomic and geopolitical turmoil.”
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.