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

On June 2, 2022, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against Gemini, the cryptocurrency currency exchange founded by the billionaires Tyler and Cameron Winklevoss. The Complaint alleges, among other things, that Gemini made a number of false and misleading statements to the CFTC regarding the self-certification of Bitcoin futures contracts, the prices of which were to be set daily at auction (the “Gemini Bitcoin Auction).”). complaint, the CFTC specifically stated the position that these statements were intended to mislead the Commission as to whether the proposed Bitcoin futures contract would be at risk of manipulation.

Although the Winklevoss brothers were not named in the law, the complaint alleges that “Gemini officials, employees and agents” […] knew or ought reasonably to have known that the statements and information were transmitted or omitted […] which was false or misleading. These are serious accusations, given that the CFTC’s Third and Twelfth requires that markets involved in derivatives trading, including those seeking to offer Bitcoin futures, have policies and practices in place. which ensures “contracts”. [ne sont] they are not easily manipulated ”and provide reasonable protection for market participants. »

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

“For the past eight years, we have always been in the habit of asking permission, not forgiveness, and always doing the right thing. We look forward to proving it decisively in court. ”

The response from the established twins, however, was a little less professional. Cameron Winklevoss has tweeted :

I may respond to this nonsense when I have some free time. But I do not know, maybe not, we will see. I am pretty busy at the moment. For now, any extra time I have I will use to see Top Gun Maverick. I heard it’s great! https://t.co/DJwZXQT3EB

—Cameron Winklevoss (@cameron) June 2, 2022

Maybe I will answer this nonsense when I have some free time. But I do not know, maybe not, we will see. I am pretty busy at the moment. Right now, all my free time, I’m going to use it to see Top Gun Maverick. Heard it was great! https://t.co/DJwZXQT3EB – Cameron Winklevoss (@cameron) June 2, 2022

It is unfortunate that the founders of Gemini will not take the pursuit more seriously. The consequences of this real fraud may not be limited to the penalties imposed by the courts on Gemini, but may have a significant impact on the industry as a whole.

Read also: What prevented the creation of a pure Bitcoin ETF?

What is the relationship between this stock and Bitcoin ETFs?

The lawsuit against Gemini does not concern an exchange traded fund (ETF), but statements made about a specific Bitcoin futures contract. Nor has the U.S. Securities and Exchange Commission, which has failed to approve a large and growing number of Bitcoin ETF proposals, given it. However, this is a case in which the cryptocurrency markets could be manipulated.

The SEC’s refusal to approve any Bitcoin ETFs in the money market was consistent on two sides: To date, no Bitcoin ETFs have been approved in the money or physical markets (other than Bitcoin Futures ETFs), and to date the ongoing concern has been expressed. at SEC that Bitcoin pricing is too prone to manipulation to allow Bitcoin ETF. Without SEC approval, stock exchanges cannot trade the products offered, which do not fit well with traditional guidelines on the types of interests that can be sold on a stock exchange.

Admittedly, the SEC recently approved a limited number of Bitcoin Futures ETFs, including two under the same rule that those offering Bitcoin ETFs in the spot markets rely on. The SEC relied in part on the CFTC’s ruling that Bitcoin Futures ETFs could be listed on exchanges controlled by the CFTC. As part of the CFTC process, this agency requires self-certification that the new product complies with CFTC regulations and is not “easily manipulable.” In very general terms, the SEC has concluded that these Bitcoin Futures ETFs are sufficiently protected against manipulation to allow warrants to be traded on securities exchanges.

The current action against Gemini stems from alleged behavior that took place in 2017 and 2018, when the CFTC was evaluating the Gemini bitcoin auction (right after the SEC rejected a request from the Winklevoss brothers for SEC approval for Bitcoin ETF). Given that major US currency exchanges that have a regulatory compliance record appear to be lying in their communications with regulators, it reinforces the SEC’s view that cryptocurrency markets are vulnerable to fraud and are therefore prone to manipulation, and therefore we are not ready for Bitcoin ETFs.

Read also: VanEck’s decision on bitcoin ETF spot strengthens SEC position on cryptocurrencies

Is Cryptocurrency Really for Criminals?

The reality, however, could be very different, as suggested by both the increase in the number of law enforcement activity in the cryptocurrency space (indicating substantial supervision), and also the technical analysis of criminal activity in space. (conducted by independent companies and showing significant reductions in the rate of criminal activity). Take, for example, Chainalysis Cryptocurrency Crime Report 2022. This report documents a significant reduction in fraud and abuse as a percentage of all cryptocurrency activity.

However, headlines continue to report a significant increase in the monetary value of cryptocurrency fraud. It is understandable, perhaps, that news sources present their stories in terms that are likely to attract the most readers, and crooks who stole $ 14 billion are clearly a more enticing headline than noticing that cryptocurrency crime has fallen as a percentage of illicit transactions to 0.15% extremely low i. 2021.

However, it is surprising that some regulators continue to emphasize the use of “crypto currency for criminals”, especially by the SEC. SEC Chairman Gary Gensler compared the cryptocurrency ecosystem to the “Wild West,” complaining that cryptocurrency is “a hymn to fraud, scams and abuses.” In mid-May 2022, Gensler sounded the alarm again, suggesting that “there is a need for greater investor protection in these cryptocurrency markets. This followed the SEC’s decision to almost double the size of Crypto Assets and the Cyber ​​Unit within its enforcement department.

So when a sister agency like the CFTC launches enforcement action against a major player in the cryptocurrency space with highly detailed allegations of false and misleading statements suggesting that the manipulation actually took place in the Bitcoin space, it adds oil on this fire on which the SEC. focuses continuously. Furthermore, the SEC’s likely position that markets are not mature enough to allow Bitcoin ETFs on the spot market is only strengthened when the founders of a cryptocurrency company facing this activity publish their depreciation of the social media.

Read also: In Cryptocurrency Defense: Why Digital Currencies Earn a Better Reputation

So, should you create a Bitcoin ETF in the spot market?

In October 2021 and early 2022, the SEC approved multiple ETFs based on Bitcoin futures. While 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 overly biased towards manipulation to allow the exchange of traded products. The significance of the change in location is that the futures and spot markets are now so close that there is no reasonable basis for concluding that only one of them is sufficiently free from the risk of fraud or manipulation to allow products traded on the exchange.

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

On April 6, 2022, the SEC approved an ETF based on futures contracts and governed by the same regulations that would apply to on-the-spot ETFs. It approved another such product in May 2022. Although the agency explicitly refused to “assess the usefulness or value of bitcoin […] as innovation or investment, ”she concluded that both Institutions were sufficiently protected from manipulation to be traded on the stock exchanges.

Now that the SEC has ruled that Bitcoin Futures ETFs can be traded on regulated exchanges, there does not appear to be any reason to conclude that US investors should not be able to participate in Bitcoin ETFs. This type of investment is widely approved in other countries, including Canada and Australia. As for CFTC’s enforcement action against Gemini, it would be unfortunate if a cavalier response from the Winklevoss brothers – which the SEC has already refused permission to offer Bitcoin ETFs – still reverses progress on this front.

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 intended for general information purposes only and is not intended to be legal advice and should not be construed as such.

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