On June 2, 2022, the United States Commodity Futures Trading Commission (CFTC) launched an action against Gemini, the crypto exchange founded by billionaire twins Tyler and Cameron Winklevoss. Among other things, the complaint alleges that Gemini made several false and misleading statements to the CFTC regarding possible self-certification of bitcoin futures contracts whose prices were to be set daily by an auction (“Gemini” bitcoin auction). In the complaint, the CFTC specifically clarified the position that these statements were designed to mislead the Commission as to whether the proposed bitcoin futures contract would be susceptible to manipulation.
While the Winklevoss brothers were not named in the suit, the complaint alleges that “Gemini officers, employees and agents […] knew or reasonably should have known that the statement and information was disclosed or omitted […] were false or misleading.” These are serious allegations, given that the CFTC’s Third and Twelfth Fundamentals require markets involved in derivatives trading, including those offering bitcoin futures contracts, to comply with policies and regulations. practices to ensure that “contract [are] not easily subject to manipulation” and that they provide reasonable “protection of market participants”.
Gemini made a formal statement in response to the CFTC’s action:
“We have an eight-year track record of seeking permission, not pardon, and always doing the right thing. We look forward to conclusively proving this in court.”
However, the response from the founding twins was somewhat less professional. Cameron Winklevoss tweeted,
I can answer this nonsense when I have some free time. But I dunno, maybe not, we’ll see. I am very busy at the moment. For now, whatever spare time I have, I’ll use it to watch Top Gun Maverick. I hear it’s awesome! https://t.co/DJwZXQT3EB
— Cameron Winklevoss (@cameron) 2 June 2022
It’s too bad that the founders of Gemini aren’t taking suit more seriously. The effects of this potentially genuine fraud may not be limited to any penalties assessed by the courts against Gemini, but also significantly impacts the industry as a whole.
related: What Has Been in the Way of Pure-Bitcoin ETFs?
What is the connection between this action and the Bitcoin ETF?
The lawsuit against Gemini is not about exchange-traded funds (ETFs), it is about representations made in relation to a particular bitcoin futures contract. It is also not being brought in by the US Securities and Exchange Commission, which is approving a large number of bitcoin ETF proposals. However, it is about possible manipulation in the crypto markets.
The SEC’s record in approving any spot-market bitcoin ETF has been consistent on two fronts: to date, no bitcoin ETF (unlike bitcoin futures ETF) has been approved in the spot or physical markets, and so far, Concerns have been expressed by the SEC that the price of bitcoin is subject to too much manipulation for the bitcoin ETF to be approved. Without approval by the SEC, securities exchanges cannot trade offered products that do not fit well under traditional guidelines on what types of interests can be sold on the securities exchange.
Of course, the SEC recently approved a limited number of bitcoin futures ETFs, including two under the same rules, relying on those proposing bitcoin ETFs in the spot market. 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’s process, that agency is required to self-certify that the new product complies with CFTC regulations and is “not easily susceptible to manipulation.” In very general terms, the SEC has concluded that these bitcoin futures ETFs are protected against sufficient manipulation to justify allowing their trading on securities exchanges.
The current action against Gemini stems from alleged conduct in 2017 and 2018, when the CFTC was evaluating the Gemini bitcoin auction (in response to the SEC’s denial of the Winklevoss brothers’ request for SEC approval for a bitcoin ETF). Afterwards). The fact that a major US crypto exchange that holds itself as a regulatory compliance record is lying in its communications with regulators, furthering the SEC’s view that the crypto market is full of fraud and prone to manipulation. Subject to, and therefore, that we are not ready for Bitcoin ETFs.
related: VanEck’s Bitcoin Spot ETF Shunt Strengthens SEC’s View on Crypto
Is crypto really for criminals?
The reality, however, may be quite different, as evidenced by both the increasing amount of enforcement activity in the crypto space (indicating the existence of substantial oversight), and technical analysis of criminal activity in the space (conducted and showing by independent firms). Suggested by. a significant drop in the rate of criminal activity). For example, consider the 2022 Chainalysis report on crypto crime. This report documents a clear reduction in fraud and abuse as a percentage of all crypto activity.
Nonetheless, headlines continue to report that the dollar value of crypto fraud has increased significantly. It’s probably understandable that news sources would frame stories that are most likely to garner a wide audience, and it’s clear that $14 billion is being stolen by scammers, a grander than notation. The headline that crypto crime fell as a percentage of illegal transactions. A notable low of 0.15% in 2021.
What is somewhat surprising, however, is that the “cryptocurrency is for criminals” narrative is being asserted by some regulators, notably the SEC. SEC Chairman Gary Gensler has compared the crypto ecosystem to the “Wild West”, complaining 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 more investor protection to these crypto markets.” This was on the heels of a decision by the SEC to nearly double the size of the Crypto Assets and Cyber Unit within its enforcement department.
Thus, when a partner agency such as the CFTC initiates an enforcement action against a major player in the crypto space, there are very detailed allegations of false and misleading statements that suggest that manipulation in the bitcoin space is indeed taking place. Yes, it adds fuel to the fire that the SEC continues to focus on. Furthermore, the SEC’s potential position that markets are not mature enough to approve spot-market bitcoin ETFs only strengthens when the founders of the crypto company facing that action publicize their disdain on social media. .
related: In Defense of Crypto: Why Digital Currencies Deserve a Better Reputation
So, should there be a spot-market bitcoin ETF?
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 a change in the position of the SEC to allow exchange-traded products as the entire crypto market was susceptible to manipulation. The significance of the change in position is that the futures and spot markets are now so closely linked that there is no rational basis to conclude that only one of them is subject to the risk of fraud or manipulation to allow exchange-traded products. sufficiently free.
On April 6, 2022, the SEC approved regulated futures-based ETFs under the same regulation that spot-based ETFs would be regulated. It approved another such product in May 2022. Although the agency declined to explicitly provide a “valuation of bitcoin”. […] have utility or value as an innovation or investment,” it concluded that both of these ETFs were sufficiently protected against manipulation to be traded on securities exchanges.
Now that the SEC has ruled that bitcoin futures ETFs can be traded on regulated securities exchanges, there would be no reason to conclude that US investors should be denied the opportunity to participate in bitcoin ETFs as well. 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 an aggressive response from the Winklevoss brothers — who were previously turned down by the SEC for being allowed to offer bitcoin ETFs — stifled progress on this front even further.
The views expressed are those of the author alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and should not be construed as legal advice.
The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
carol goforth of Law at the University of Arkansas (Fayetteville) School of Law, Clayton N. Little Professor.
