Gemini will use Nasdaq surveillance software to monitor for potentially abusive trading practices
Gemini, the bitcoin exchange founded by Cameron and Tyler Winklevoss, has teamed up with Nasdaq Inc. to beef up its defenses against market manipulation—the latest sign that the cryptocurrency industry is trying to get past its Wild West days.
The deal comes as regulators have stepped up scrutiny of digital-currency exchanges in recent months. Securities and Exchange Commission officials have warned of potential fraud and manipulation on the largely unregulated trading venues.
Under the agreement, Gemini will use Nasdaq’s surveillance software, called SMARTS, to monitor its markets for potentially abusive trading practices. The two companies announced the agreement on Wednesday. Financial terms weren’t disclosed.
“We’re doing this because we believe in the importance of creating a rules-based marketplace,” Cameron Winklevoss, president and co-founder of Gemini, said in an interview. “We believe this is where things are headed.”
Suspicions of manipulation are a recurring theme in cryptocurrency markets. In January, U.S. and Israeli researchers published an article in the Journal of Monetary Economics arguing that suspicious trading activity on Mt. Gox—once the world’s largest bitcoin exchange—caused the price of bitcoin to surge to more than $1,000 from around $150 in two months in late 2013. Mt. Gox collapsed in 2014 after hackers robbed it of more than $470 million worth of bitcoin.
SMARTS is part of Nasdaq’s market-technology business, in which the New York-based exchange group sells software to other market operators. The surveillance technology is used by equities and derivatives exchanges around the world, including Intercontinental Exchange Inc., Hong Kong Exchanges and Clearing Ltd. and the Nigerian Stock Exchange.
Nasdaq’s technology monitors real-time market activity and raises alerts if it detects unusual trading patterns. It’s then up to humans to investigate the event and determine whether the traders behind it broke any rules.
Nasdaq is in “active discussions” with a number of other cryptocurrency firms about SMARTS, according to Chief Executive Adena Friedman. “The crypto space is a nice growth area,” she said in an interview Wednesday.
At Gemini, SMARTS will help monitor trading of bitcoin and ethereum, the second-largest cryptocurrency, and it will also surveil the auctions that Gemini holds at 4:00 p.m. ET to determine a daily benchmark price for bitcoin, the companies said.
Gemini’s auction price is used to underpin bitcoin futures offered by Cboe Global Markets Inc., which started trading in December. Some traders have voiced concerns that bitcoin futures could be manipulated through heavy buying or selling in the Gemini auctions. Cboe and Gemini say they have a variety of measures in place to combat any attempts at manipulation.
Last week, Gemini was among 13 crypto exchanges to receive a letter from New York Attorney General Eric Schneiderman demanding that they answer a list of questions about their practices, including what safeguards they had in place against manipulation.
Gemini pledged to cooperate with Mr. Schneiderman’s inquiry. Others were more defiant: San Francisco-based Kraken refused to fill out the questionnaire, with co-founder and Chief Executive Jesse Powell blasting it as “unreasonable” and “an overly broad fishing expedition” in a blog post on Sunday.
Mr. Powell also dismissed regulators’ worries about crypto-market manipulation as an “obsession,” blaming it on a “lack of education.”
The Winklevosses are among the earliest and best-known cryptocurrency entrepreneurs. They first drew attention for their legal feud with Facebook Inc. co-founder Mark Zuckerberg over who came up with the idea for the social network. Facebook settled the dispute in 2008 by agreeing to pay them $20 million in cash and what was then $45 million worth of Facebook private shares. The identical-twin brothers later invested much of that settlement in bitcoin and bitcoin-related projects.
For Nasdaq, the Gemini deal isn’t the first foray into the cryptocurrency space. The exchange group has said it is exploring the launch of its own bitcoin futures. It’s also involved in several projects that use blockchain, the technology that underpins bitcoin, for purposes including the trading of private shares and shareholder voting.
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