CFTC action against Gemini is bad news for Bitcoin ETFs

On June 2, 2022, the US Commodity Futures Trading Commission (CFTC) took action against Gemini, the cryptocurrency exchange founded by billionaire twins Tyler and Cameron Winklevoss. Incidentally, the complaint alleges that Gemini made a number of false and misleading statements to the CFTC in relation to the potential self-certification of a Bitcoin futures contract, the prices of which had to be adjusted daily by an auction (the “Gemini Bitcoin Auction “). In the grievancethe CFTC specifically articulated the position that these claims were intended to mislead the commission as to whether the proposed Bitcoin futures contract would be susceptible to manipulation.

Although the Winklevoss brothers were not named in the lawsuit, the complaint alleges that “Gemini officers, employees and agents […] knew or should reasonably have known that the statements and information passed on or omitted […] were false or misleading “. These are serious allegations, considering the third and twelfth fundamental principles of the CFTC request markets involved in derivatives trading, including those seeking to offer Bitcoin futures contracts, to have policies and practices that ensure that “contracts [are] not easily subject to manipulation “and which offer reasonable” protection of market participants “.

Gemini offered a formal declaration in response to the action of the CFTC:

“We have an eight-year track record of asking for permission, not forgiveness and always doing the right thing. We can’t wait to prove it definitively in court. “

The founding twins’ response, however, was a little less professional. Cameron Winklevoss tweeted:

It’s a shame that the founders of Gemini don’t take the dress more seriously. The ramifications of this potentially true fraud may not be limited to any penalties assessed against Gemini by the courts, but also have a significant impact on the entire industry.

Related: What got in the way of a pure bitcoin ETF?

What is the relationship between this stock and Bitcoin ETFs?

The lawsuit against Gemini is not about an exchange-traded fund (ETF), but is about statements made in connection with a particular Bitcoin futures contract. It is also not proposed by the United States Securities and Exchange Commission, which has resisted approving a large and growing number of Bitcoin ETF proposals. It is, however, a potential manipulation in the cryptocurrency markets.

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The SEC’s record of refusing to approve any ETF on the spot Bitcoin market has been consistent on two fronts: To date, no Bitcoin ETFs on the spot or physical market (as opposed to Bitcoin Futures ETFs) have been approved and, so far, the concern expressed by the SEC is that Bitcoin prices are too subject handling to approve a Bitcoin ETF. Without SEC approval, stock exchanges cannot trade proposed products, which do not fit well with traditional guidelines on what types of interest can be sold on a stock exchange.

Sure, the SEC recently approved a limited number of Bitcoin Futures ETFs, including two with the same rule as those who offer Bitcoin ETFs in spot markets. In part, the SEC relied on the CFTC’s determination that Bitcoin Futures ETF I could be listed on CFTC regulated exchanges. As part of the CFTC process, that agency requires self-certification that the new product complies with CFTC regulations and “is not easily susceptible to manipulation”. In very broad terms, the SEC concluded that these Bitcoin Futures ETFs are sufficiently protected against manipulation to warrant trading them on stock exchanges.

The current action against Gemini stems from behaviors that would have occurred in 2017 and 2018, when the CFTC was evaluating the Gemini Bitcoin auction (shortly after the SEC denied a request from the Winklevoss brothers for SEC approval for a Bitcoin ETF). The very fact that a major U.S. cryptocurrency exchange positioning itself as having a record of regulatory compliance appears to have lied in its communication with regulators further strengthens the SEC’s view that cryptocurrency markets are rife with fraud. and subject to manipulation and, therefore, that we are not ready for Bitcoin ETFs.

Related: VanEck’s Bitcoin Spot ETF shunt solidifies SEC’s outlook on cryptocurrencies

Are cryptocurrencies really for criminals?

The reality, however, could be quite different, as suggested by both increasing volume of law enforcement activity in the crypto space (indicating the existence of substantial oversight) and also technical analysis of criminal activity in the space (conducted by independent companies and showing a marked decline in the rate of criminal activity). Consider, for example, the Chainalysis of 2022 report on cryptographic crime. This report documents a clear decrease in fraud and abuse as a percentage of all crypto assets.

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Anyway, titles Keep on to signal that the dollar value of cryptographic fraud has increased significantly. It’s perhaps understandable that news sources frame the stories in terms that are likely to garner the widest audience, and it’s clear that $ 14 billion stolen by scammers is a more conspicuous headline than noting that crypto crime as a percentage of illicit transactions is dropped to a remarkable low of 0.15% in 2021.

What is somewhat surprising, however, is the extent to which the “crypto is for criminals” narrative continues to be emphasized by some regulators, most notably in the SEC. SEC President Gary Gensler compared the crypto ecosystem to the “Wild West”, complain that crypto “is full of fraud, scams and abuse”. In mid-May 2022 Gensler was still sounding the alarm, suggesting that there is “a need to bring greater investor protection to these cryptocurrency markets”. This was in the wake of an almost SEC decision Double the size of the Crypto Assets and Cyber ​​Unit within its Application Department.

Therefore, when a sister agency such as the CFTC initiates executive action against a major player in the crypto space with highly detailed allegations of misleading and false claims suggesting that the manipulation did indeed take place in the Bitcoin space, it adds fuel to the fire that the SEC continually focuses on. Additionally, the SEC’s likely stance that markets are not mature enough to approve an ETF on the Bitcoin spot market only strengthens when the founders of a cryptocurrency firm facing that action publicize their disdain on social media. .

Related: In defense of cryptocurrencies: why digital currencies deserve a better reputation

So, should there be an ETF on the Bitcoin spot market?

In October 2021 and early 2022, the SEC approved several futures-based Bitcoin ETFs. Although these products were already available on CFTC-regulated exchanges, this was still a change in the SEC’s position that the entire cryptocurrency market was too susceptible to manipulation to allow exchange-traded products. The significance of the change in position is that spot and futures markets are so closely linked now that there is no rationale for concluding that only one of them is sufficiently free from the risk of fraud or manipulation to allow exchange-traded products.

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On April 6, 2022, the SEC approved a futures-based ETF regulated under the same regulation under which spot-based ETFs would be regulated. It approved another similar product in May 2022. Although the agency explicitly refused to provide any “s and Bitcoin […] has utility or value as an innovation or an investment, “he concluded that both of these ETFs were sufficiently protected against manipulation to be traded on stock exchanges.

Now that the SEC has decided that Bitcoin Futures ETFs can be traded on regulated stock exchanges, there seems to be no reason to conclude that US investors should also be denied the opportunity to participate in Bitcoin ETFs. Such investment is widely permitted in other countries, including Canada and Australia. As for the CFTC executive action on Gemini, it would be a shame if a dismissive response from the Winklevoss brothers – who have been previously refused for permission to offer a Bitcoin ETF from the SEC – reverses progress on that front further.

The views expressed are those of the author only and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be considered legal advice.

The views, thoughts and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Carol Goforth is a Clayton N. Little Professor of Law at the University of Arkansas School of Law (Fayetteville).