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

The United States Commodity Futures Trading Commission initiated an investigation against Gemini, a crypto exchange that was founded by twin billionaires Tyler Winklevoss and Cameron Winklevoss. The complaint claims that Gemini made a series of misleading statements to CFTC regarding the possibility of self-certification for a Bitcoin futures contract. Prices were to be settled by auction (“Gemini Bitcoin Auction”) each day. The CFTC stated in the complaint that the statements were made to mislead it about whether the Bitcoin futures contract was susceptible to manipulation.

Although the Winklevoss brothers are not named in the suit the complaint alleges that Gemini officers, employees, and agents knew, or reasonably should know, that statements and information conveyed […] were misleading or false. These accusations are concerning the third and twelfth core principles of CFTC that require markets that engage in derivative trading, such as those offering Bitcoin futures contracts to have policies and practices to ensure that “contracts [are]never readily subject to manipulation” that offer reasonable “protection for market participants.”

Gemini issued a formal response to the CFTC action.

“We have a proven track record of eight years of asking permission and not forgiving, and doing the right thing every time. This will be proven in court.

However, the response from the founding twins was a bit less professional. Cameron Winklevoss tweeted:

When I have the time, I might reply to this nonsense. We’ll see. Right now, I am very busy. I’m currently very busy so I’ll use any spare time to go see Top Gun Maverick. I heard it’s awesome!https://t.co/DJwZXQT3EB
— Cameron Winklevoss (@cameron) June 2, 2022

Gemini’s founders should be taking this suit seriously. This potentially fraudulent act could have significant ramifications for the industry.

Related: What is standing in the path of an ETF that is pure-Bitcoin?

What’s the connection between this action, and Bitcoin ETFs

Gemini’s lawsuit is not about an ETF, but rather about representations regarding a specific Bitcoin futures contract. The U.S. Securities and Exchange Commission is not bringing the suit, as it has been refusing to approve a growing number of Bitcoin ETF proposal. However, it is about manipulation in crypto markets.

Two aspects of the SEC’s track record of refusing to approve any spot market Bitcoin ETF have been consistent. To date, there have been no Bitcoin Futures ETFs approved. The SEC has expressed concerns that Bitcoin pricing is too susceptible to manipulation in order to approve a Bitcoin exchange-traded fund. Securities exchanges can’t trade the products without approval from the SEC. They are not allowed to sell the products if they don’t fit the traditional guidelines for what types of interest can be sold on securities exchanges.

The SEC approved two Bitcoin Futures ETFs recently, one under the same rule as those proposing Bitcoin ETFs on the spot markets. The SEC relied partly on the CFTC’s determination of Bitcoin Futures ETFs being able to be listed on CFTC regulated exchanges. The CFTC requires that an agency self-certify that the product is compliant with CFTC regulations. This process allows the agency to determine whether the product can be traded on securities exchanges.

Gemini is currently under investigation for conduct in 2017 and 2018. This was just after the SEC refused to approve a request by the Winklevoss Brothers seeking approval from the SEC for a Bitcoin ETF. Even though a major U.S. cryptocurrency exchange claims to have a track record of regulatory compliance, it appears that it was lying to regulators. This further supports the SEC’s view that crypto markets can be manipulated and are vulnerable to fraud.

Related: VanEck’s Bitcoin spot ETF Shunt strengthens SEC’s outlook regarding crypto

Crypto is it really for criminals?

However, the reality may be very different. This is evident by the increasing volume of enforcement activity within the crypto space (indicating substantial oversight) and also the technical analysis of criminal activities in the space (conducted independently and showing marked decreases in the rate criminal activity). Take, for instance, the 2022 Chainalysis report about crypto crime. This report shows a decrease in fraud and abuse, as a percentage all crypto activity.

However, headlines continue reporting that crypto fraud’s dollar value has increased significantly. It’s understandable that news outlets will present stories in ways that are most likely to attract the largest audience. For example, $14 billion stolen by scammers is a headline that is more dramatic than noting that crypto crimes as a percentage of illicit transaction fell to a remarkable 0.15% in 2021.

It is surprising to see how much regulators continue to emphasize the “crypto is for criminals” narrative, especially in the SEC. The SEC chair Gary Gensler compared crypto to the Wild West, claiming that it is “rife” with fraud, scams, and abuse. This came on the heels of a decision made by the SEC about nearly doubling the size of its Crypto Assets and Cyber Unit within the Department of Enforcement.

The SEC is always focused on the fact that a sister agency, like the CFTC, initiates enforcement actions against a major player within the crypto space. This includes detailed allegations of misleading statements and false statements that suggest that manipulation in the Bitcoin space has been taking place. The SEC’s likely view that the market is not mature enough to approve a spot-market Bitcoin ETF will be strengthened if founders of crypto companies facing such action make their disapproval on social media.

Related: Why digital currencies merit a better reputation

Should there be a spot market Bitcoin ETF?

Multiple futures-based Bitcoin ETFs were approved by the SEC in October 2021 and January 2022. These products were already available on CFTC regulated exchanges. However, the SEC approved multiple futures-based Bitcoin ETFs. This is because the spot and future markets are so closely connected that it is difficult to conclude that one is sufficiently safe from fraud or manipulation to allow for exchange-traded products.

The SEC approved a futures based ETF on April 6, 2022. It was regulated under the same regulation as spot-based ETFs. In May 2022, it approved another similar product. Although the agency declined to evaluate whether Bitcoin […] is an investment or innovation, it concluded that both ETFs are sufficiently protected from manipulation to allow trading on securities exchanges.

The SEC has ruled that Bitcoin Futures ETFs can be traded on regulated securities markets. There is no reason for American investors to be denied access to Bitcoin ETFs. This type of investment is also permitted in Australia and Canada. Concerning the CFTC’s enforcement actions on Gemini, it would not be a good thing if a cavalier reply from the Winklevoss brother — who were previously turned down by the SEC for permission to offer a Bitcoin ETF — impedes progress on this front.

These opinions are solely the author’s and do not necessarily reflect those of the University or any affiliates. This article is intended for informational purposes only and should not be interpreted as legal advice.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Carol Goforth, a Clayton N. Little professor of Law at the University of Arkansas in Fayetteville School of Law is.

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