CFTC's action against Gemini is bad news for Bitcoin ETFs

CFTC’s action against Gemini is bad news for Bitcoin ETFs

On June 2, 2022, the United States Commodity Futures Trading Commission (CFTC) filed a lawsuit against Gemini, the crypto exchange founded by billionaire twins Tyler and Cameron Winklevoss. Among other things, the complaint alleges that Gemini made a series of false and misleading statements to the CFTC in connection with the potential self-certification of a Bitcoin futures contract, whose prices would be determined daily by an auction. Bitcoin Auction”). In the complaint, the CFTC specifically stated that these statements were designed to mislead the commission as to whether the proposed Bitcoin futures contract would be open to manipulation.

While the Winklevoss brothers are not named in the lawsuit, the complaint alleges “Gemini officers, staff and agents”. […] knew or reasonably should have known that statements and information were transmitted or omitted […] was wrong or misleading.” These are serious accusations, given that the third and twelfth core principles of the CFTC require derivatives trading-related markets, including those seeking to offer Bitcoin futures contracts, to have policies and practices that guarantee “contracts.” [are] are not easily manipulated” and offer reasonable “market participant protection”.

Gemini issued an official statement in response to the CFTC’s action:

“We have an eight-year history of asking permission, not forgiveness, and always doing the right thing. We look forward to definitively proving that in court.”

But the founding twins’ response was a little less professional. Cameron Winklevoss tweeted out:

Too bad Gemini’s founders didn’t take the case more seriously. The consequences of this potentially genuine fraud may not be limited to any penalties assessed against Gemini by the courts, but have a significant impact on the entire industry.

Related: What stands in the way of a pure Bitcoin ETF?

What is the relationship between this action and Bitcoin ETFs?

The lawsuit against Gemini is not about an exchange-traded fund (ETF), but rather about statements made in connection with a specific Bitcoin futures contract. Also, a large and growing number of Bitcoin ETF proposals are not being brought by the U.S. Securities and Exchange Commission, which is pending approval. However, it is about potential manipulation in crypto markets.

The SEC’s record of refusing to approve any spot market Bitcoin ETF has been consistent on two fronts: To date, no Bitcoin ETFs have been approved in the spot or physical markets (as opposed to Bitcoin Futures ETFs), and so far, the SEC has consistently stated that His concern is that Bitcoin pricing is subject to too much manipulation to approve a Bitcoin ETF. Without the approval of the SEC, stock exchanges may not trade proposed products that do not follow traditional guidelines on what types of interests can be sold on a stock exchange.

Admittedly, the SEC has recently approved a limited number of Bitcoin Futures ETFs, two of which are under the same rule that those who recommend Bitcoin ETFs in the spot markets trust. In part, the SEC relied on the CFTC’s determination that Bitcoin Futures ETFs could be listed on CFTC-regulated exchanges. As part of the CFTC process, the agency requires self-certification that the new product complies with CFTC regulations and is “not easily susceptible to manipulation.” Very generally speaking, the SEC has concluded that these Bitcoin Futures ETFs are sufficiently protected against manipulation to justify them being allowed to trade on securities exchanges.

The current lawsuit against Gemini stems from conduct that allegedly occurred in 2017 and 2018 when the CFTC considered the Gemini Bitcoin Auction (just after the SEC rejected the Winklevoss brothers’ request seeking SEC approval for a Bitcoin ETF). The fact that a major U.S. crypto exchange that positions itself as having a regulatory compliance record lies in its communications with regulators is that the SEC’s crypto markets are fraught with fraud and manipulation, and as such, we are not ready for Bitcoin ETFs.

Related: VanEck’s Bitcoin spot ETF shunt solidifies SEC’s view of crypto

Is crypto really for criminals?

However, both the increasing volume of application activity in the crypto space (indicating the presence of significant surveillance) and the technical analysis of criminal activity in the space (significant decreases in the rate of criminal activity conducted by independent firms). Take, for example, the 2022 Chainalysis report on crypto crimes. This report documents a clear drop in fraud and abuse as a percentage of all crypto activity.

However, headlines continue to report that the dollar value of crypto scams has increased significantly. It is perhaps understandable that news outlets frame stories in terms that are likely to garner the widest audience, and it is clear that $14 billion stolen by scammers is a more striking headline than stating that crypto crime as a percentage of illegal transactions has dropped by a percentage. A notable 0.15% drop in 2021.

What is somewhat surprising, however, is that the “crypto is for criminals” narrative continues to be highlighted by some regulators, particularly within the SEC. SEC chairman Gary Gensler compared the crypto ecosystem to the “Wild West” and complained that crypto is “fraught with scams, fraud and abuse.” In mid-May 2022, Gensler continued to sound the alarm, citing “the need to bring more investor protection to these crypto markets.” This came right after the SEC’s decision to nearly double the size of the Crypto Assets and Cyber ​​Unit within the Enforcement Department.

Therefore, when a sister organization like the CFTC initiates an enforcement action against a major player in the crypto space with very detailed false and misleading statements that indicate that manipulation is indeed taking place in the Bitcoin space, this is the SEC’s constant focus. Also, the SEC’s probable position that the markets are not mature enough for a spot market Bitcoin ETF to be approved is only strengthened when the founders of a crypto company confronted by this action declare their disdain on social media.

Related: In crypto defense: why digital currencies deserve a better reputation

So, should a spot market Bitcoin ETF be?

In October 2021 and early 2022, the SEC approved multiple 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 crypto market was too open to manipulation to allow exchange-traded products. The significance of the change in position is that futures and spot markets are now so closely linked that there is no rational basis to conclude that only one of them is sufficiently free to allow exchange-traded products from the risk of fraud or manipulation.

On April 6, 2022, the SEC approved a futures-based ETF regulated under the same regulation that spot-based ETFs would be issued. It approved another such product in May 2022. The agency has explicitly refused to provide any “assessment of whether it is Bitcoin.” […] has utility or value as an innovation or investment”, concluding that both of these ETFs are adequately protected against manipulation to be traded on stock exchanges.

Now that the SEC has decided that Bitcoin Futures ETFs can be traded on regulated securities exchanges, there seems to be no reason to conclude that American investors should be denied the opportunity to participate in Bitcoin ETFs. Such investments are widely permitted in other countries, including Canada and Australia. As for the CFTC’s enforcement action on Gemini, it would be unfortunate if a knightly response from the Winklevoss brothers, who were previously turned down by the SEC for permission to propose a Bitcoin ETF, further delay progress on that front.

The views expressed are solely those of the author and may not necessarily reflect the views of the University or its affiliates. This article is for general information purposes only and does not constitute legal advice and should not be taken.

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

Carol Goforth Clayton N. is a junior law professor at the University of Arkansas (Fayetteville) School of Law.

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