Table of Contents
Four years ago, Gemini settled with the CFTC for some amusing and absurd conduct we described at the time as outrunning even the worst parts of finance. The short story is that Gemini ran a daily Bitcoin auction which, long ago, fed the daily settlement price for some long-dead Bitcoin futures. And the 2022 settlement was about government claims Gemini misled people, including the CFTC, on the workings of those auctions and a few other items. None of it had much economic impact but the conduct itself was well outside the kinds of misbehaviour one expects to find in normal finance. It was all quite entertaining.
Now there is some follow-on action in which Gemini and the CFTC are jointly trying to partially undo the 2022 settlement. The CFTC claims it would not have brought the 2022 action under current guidelines and that, along with a bunch of other oddness, leads the CFTC to want the whole thing undone. Well, not the whole thing. Notably, the government is not offering to refund the $5 million Gemini paid. The CFTC wants to undo everything except that.
Before going any further, recall that a nominee to run the CFTC was pressured by Gemini leadership to commit to doing something like this back in 2025. It is not 100% clear what subsequently happened. But we do know that person was discarded as a nominee, someone else was quickly slotted in and then confirmed and now we have this a few months later. There has also been a tremendous amount of noise around, and pressure towards, the CFTC with respect to a wide range of web3 issues.
There is obviously a cynical take on these events which may or may not match reality. And there is probably fascinating investigative reporting to do somewhere in the general area of these goings on. We are not going to dig into any of that here. Instead, we are going to use the latest documents to flesh out the old story and find a lot of new comedy along the way. Some mysteries from the 2022 filings are now resolved. In ways that would make bad fiction because they would be completely.
Filling Some Gaps
The original settlement included this amazing passage:
During the Relevant Period, in addition to not informing Commission staff of the existence of the bespoke or custom fee arrangement, Gemini did not inform Commission staff that it had chosen to suspend an employee who had been speaking for Gemini at the meetings or that Gemini Principal-1 and Gemini Principal-2 had formed the belief that this employee was not trustworthy.
We now have much more information. The employee in question was the COO and:
Gemini discovered that it was the victim of a sophisticated fraud scheme enabled by its own Chief Operating Officer (“COO”) and a subordinate. Without authorization, the COO and his subordinate authorized bespoke fee structures combining extremely low taker fees with large maker rebates for two institutional customers (“Customer A” and “Customer B”)—without obtaining preapproval from Gemini’s Chief Compliance Officer, as Gemini’s policies required.
This is amazing. Gemini's COO had been negotiating with the CFTC on something and then Gemini removed their COO for "dishonesty" (which they now seem to maybe call fraud?) and Gemini did not mention the details to the CFTC until much later. And that dishonesty formed part of the basis for the original regulatory action. Wow.
We know Gemini eventually told the CFTC because that second quote is from recent filings by the CFTC. And it seems the CFTC knew there was weird stuff going on for years because after that COO was fired they submitted whistle-blower filings to the CFTC covering a range of matters. According to the latest filings the government determined some of the whistle-blower claims were false. Some were also accurate.
So Gemini's long-ago COO has dishonesty issues with Gemini and the CFTC and then Gemini itself was not honest about what it did and knew in the same area when communicating with the CFTC. And the CFTC had some inside information about bad things at Gemini because the person doing some of the bad stuff became an unreliable, but not entirely worthless, CFTC whistle-blower. Wow again. This would make awful fiction.
Now step back for a moment and look at this situation dispassionately from the perspective of a regulator. The COO of an entity you supervise suddenly stops showing up to the meetings. The company provides no substantive color around this issue and keeps dealing with whatever else is on the table.
Then their ex-COO submits whistle-blower claims alleging fraudulent practices by their former employer. At this point you are pretty sure something bad is going on but have no idea what or who to believe. We do not get clarity on whether the whistle-blower filings explain the filer was the one undertaking the fraud without management's knowledge. Would that be better or worse? Who knows. This is a huge mess.
Then the latest filing tells us the CFTC determined some of ex-COO's information was false. In our experience it is normal for some information from whistle-blowers to turn out to be wrong and that is considered fine. Completely manufactured claims are a problem. But the government does not expect perfection in every whistle-blower filing. And nothing in the documents suggests especially egregious conduct in the whistle-blowing process.
It is, of course, fairly common for folks involved in fraud to leave a company with fraud issues and then talk to the government about that fraud as a whistle-blower. None of those people is perfect and this case does not sound exceptional on that front. The government even has rules and procedures around when you can and cannot get paid for whistle-blowing fraud you were adjacent to or involved in. This bit, strange though it may sound, is actually the most normal part of the entire insane episode.
At this point you have to feel for the CFTC team undertaking the investigation. Remember that part of the 2022 settlement was about misleading people around fees and rebates. At this point we know Gemini did that – but in an incredibly strange way. The COO was running unapproved fee and rebates schemes hidden from their own managers. Again, this is the COO not some random lower level employee. This is not a situation where nobody in senior management knew. The COO is senior management. When, finally, the people ultimately in charge found out they fired the COO but were otherwise not particularly forthcoming with the CFTC.
As an aside it is not entirely clear whether anyone ever investigated if the rest of senior management knew and was throwing this guy under the bus or if the COO was really a lone operator. We may never get a good answer on that. And this is supposed to be a non-cynical analysis focused on amusement.
So back to the main story. Gemini 100% absolutely did run undisclosed, misrepresented – and unapproved! – fee and rebate schemes. At least one member of senior management knew about this because they were the one doing it. But the people ultimately running the exchange did not know about any of that. At least not at the time. At least per their current claims.
From the latest filings we get further detail on this front too. The FBI interviewed customers A and B from the above quote and they admitted the whole thing some time before "late 2021." So before the 2022 settlement the government had proof – really an amazingly large, funny and steaming pile of proof – Gemini misrepresented their fee and rebate arrangements. They even had corroborating statements from external parties involved in the dodgy arrangements.
But none of this fraud was done at the direction of the people in charge of Gemini. It was, instead, directed by someone that was fired for offering those schemes behind the backs of the people in charge. And then Gemini did not tell the government that was the reason that person stopped representing them in meetings. At each turn Gemini had a chance to stop digging and it just consistently, over and over, refused to put down the shovel. The overall impression of Gemini management that emerges from this story is that they should not be allowed to run a Cinnabon in Omaha Nebraska.
What in the world was the CFTC supposed to do at this point? This is an insane mess. The COO was obviously a bad actor here. But Gemini was not candid with the CFTC and, formally speaking, Gemini did misrepresent their fees and rebates. Even if only the subsequently-fired COO offered the errant fee schemes the exchange still did it. Once again: the fee and rebate issues came from the COO not a random low level employee. Between the lack of distance and lack of candor there are real problems for sure.
This is all so stupid. But put a pin in that thought for now.
Dirty Material
The rest of the original 2022 settlement was about other misrepresentations. Gemini, the settlement stated, misrepresented that all trades on the exchange were pre-funded. And it also misrepresented that it had effective controls to stop people from trading with themselves and influencing an important auction pricing mechanism through meaningless self-trades.
Reading the latest filings there seems to be no dispute Gemini misrepresented these things. The 2026 request to dismiss the earlier settlement acknowledges misrepresentation in these areas. And it then goes on to argue the two additional issues – trading on credit and trading with yourself – were so rare they were not material.
Maybe that last bit is true. Certainly these look to have been infrequent occurrences. But it is also worth going back and looking at the details because they, too, are incredibly stupid. The trading on credit was done by firms that borrowed funds from one of the Winklevoss twins that run Gemini in that twin's personal capacity. You are looking at more than simply allowing some trading on credit when the person who runs the exchange is extending that credit personally.
And the self-trading was similarly absurd. As the sole pricing source for a meaningful futures fixing Gemini was required to have controls to prevent people from trading with themselves to influence that price. Except:
As Gemini Principal-1 then wrote in an internal message to several other Gemini personnel regarding self-crossing and the Gemini Bitcoin Auction: “it’s really up to the MMs . . . MM’s are grownups, they can figure it out.”
That is from the 2022 filing. The 2026 attempt to dismiss that tells us the self-crossing was rare. Again: maybe that is true but it is also not the issue. Management's cavalier attitude clearly did not match the requirements of a price feed for a futures fixing. This, too, is remarkably dumb and below what we would expect from the team running a fast food franchise. If people trading with themselves was supposed to be banned and it was also not very frequent, and management knew their systems were inadequate…why not just fix it? Actively deciding it was not worth doing anything about a clear rule violation and claiming the involved traders can figure it out themselves is ridiculous.
Sometimes you find a bad thing but it turns out that bad thing is critical to your company surviving. This is a genuinely difficult situation from many perspectives. But when you find something bad and fixing it does not harm your business? And that thing is not even difficult to fix? WTF are you not just fixing it?
Or, hey, try the corporate classic of putting it on a list of things to do and then never allocating any resources to getting it done. Or pass the task of developing a fix off to some consultants or change management team that would rather spend time on analysis than doing a fix. Or assign someone that absolutely does not have the authority or understanding of the problem the job of fixing it and let it die there. There are myriad ways to address this problem without fixing it which are themselves awful and ineffective and yet still better than declaring that your clients are adults and they can figure it out themselves! Why would you do that unless you really do not care about the rules at all and want to telegraph this attitude to the rest of the team? These people should not run a fast food establishment in part because they will telegraph their disdain for the hygiene rules by never washing their hands.
How Sausage Is Made
For now let us set aside any cynicism about the CFTC's request here and assume the latest filings are an honest and complete depiction of what happened. This means Gemini management did misrepresent the self-trading and pre-funding controls but not in a way that impacted a lot of business. And also that Gemini the company misrepresented fee and rebates arrangements but top management was not aware of the non-compliant arrangements that rendered their representations inaccurate until later. The onetime COO entered into rogue arrangements and was eventually fired for it. Gemini did not bring the connection between the COO's departure and these misrepresentations to the CFTC's attention until well after the CFTC already knew about it. But, eventually, they cleared up the confusion evident in the 2022 settlement.
What is the right outcome here? Dismissing the entire thing and waving it away feels wrong. This was clearly unacceptable behaviour whether or not exchange users were economically harmed. Attempted murder is still a crime even if the target is not harmed. Telegraphing indifference to the rules is bad.
Once you know what the CFTC knew in 2022 it feels like they should have done something. There were real problems. Maybe they were stupid or clownish or something like that. But false statements were made and Gemini knew the pricing information in question fed into something important. Gemini management's attitude was clearly not what the CFTC was looking for in an exchange operator. Something needed to be done.
At the same time this looks to be in the general vicinity of “no harm, no foul.” The futures that were fixed to this price were never large. And none of the dishonesty related to a large fraction of the covered activity. Severe action was never warranted. And, of course, nothing severe ever happened. A fine was paid and documents that made Gemini management look a bit clownish were published. That was probably about right for the conduct at issue.
Also note the government is not offering to return the money Gemini paid. This is not a total unwind of the regulatory action that was taken. And the latest filings absolutely do not claim Gemini did nothing wrong. Nothing in the more recent filings burnishes management's image. The government states only that, from a 2026 perspective, Gemini's conduct was not material such that regulatory action was warranted and that under current guidelines no action would be taken in these circumstances. Keeping the US$ 5 million is more than, supposedly, would be done today. Except keeping the money is exactly what the government is doing today.
Laws are like sausages. It is best not to see how they are made. -Otto von Bismark (apocryphal)
The CFTC is a political body. Yes, the commissioners are generally lawyers without backgrounds in elected office. And yes, historically the CFTC was not involved in a lot of political disputes. But for years now it has been at the center of clearly -political debates around the structure of web3 regulation and prediction markets and various other blockchain-induced upheavals in finance.
Political or otherwise, the CFTC is still some kind of rules enforcement operation. And those operations have 2 relevant tasks: deterrence and punishment. Did Gemini really hurt anyone here? Yes. It told the government and the public things that were false. But did anybody rely on those statements to do anything? Not really. And is any other company likely to be in a position where management is personally lending money to traders on the platform? Is another company going to try to hire a COO that makes unapproved side deals and gets fired for it and then not notify the regulator in a timely fashion?
There is not much deterrence available here because the dishonesty was so wonky nobody is going to be able to do this again anyway even if they wanted to. Punishment should be measured against how bad the acts were. That is not exactly zero as lying and terrible management are bad things to discourage...but it is not like the consequences were massive here either. This establishment run by clowns never had enough customers to do real damage.
If companies are going to act like clowns and they are going to be regulated by political bodies we should not be surprised when this sort of sausage comes out the other side. And one imagines the money the CFTC collected – and is not returning! – was more than sufficient to pay for the comedy writers lawyers who did all the good work here.
Blockhead
