On June 2, 2022, the US Commodity Futures Trading Commission (CFTC) initiated a lawsuit against Gemini, a cryptocurrency exchange founded by billionaire twins Tyler and Cameron Winklevoss. Among other things, the complaint alleges that Gemini made a number of false and misleading statements to the CFTC in connection with the potential self-certification of a bitcoin futures contract that was to be priced daily at an auction (“Gemini Bitcoin Auction”). in a complaintThe CFTC specifically articulated the position that these statements were designed to mislead the commission as to whether a proposed Bitcoin futures contract would be manipulated.

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

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The twins proposed a formal statement in response to the CFTC’s actions:

“We have eight years of experience asking for permission, not forgiveness, and always do the right thing. We look forward to definitive proof of this in court.”

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However, the founding twins’ response was somewhat less professional. Cameron Winklevoss tweeted:

Too bad the founders of Gemini don’t take this case more seriously. The repercussions of this potentially true scam may not be limited to any fines imposed by the courts on the Gemini, but also significantly affect the entire industry.

What stands in the way of a pure bitcoin ETF?

What is the connection between this action and Bitcoin ETF?

The lawsuit against Gemini is not about an exchange-traded fund (ETF), but about statements made in connection with a specific bitcoin futures contract. It is also not being submitted by the US Securities and Exchange Commission, which has refrained from approving a large and growing number of Bitcoin ETF offerings. However, we are talking about possible manipulations in the cryptocurrency markets.

The SEC’s history of refusing to approve a Bitcoin ETF in the spot market has been consistent on two fronts: to date, no Bitcoin ETF in the spot or physical market (unlike Bitcoin Futures ETFs) has been approved, and there is still ongoing concern from the SEC. is that bitcoin prices are too exposed manipulation approve bitcoin ETF. Without SEC approval, securities exchanges cannot trade offerings that do not meet traditional guidelines for what types of stocks can be traded on a securities exchange.

Admittedly, the SEC recently approved a limited number of bitcoin futures ETFs, including two under the same rule that those who offer bitcoin ETFs on the spot markets rely on. In part, the SEC relied on the CFTC’s determination that a Bitcoin futures ETF could be listed on exchanges regulated by the CFTC. As part of the CFTC process, this agency requires self-certification that the new product complies with CFTC rules and is “hard to manipulate”. In the most general terms, the SEC has concluded that these Bitcoin futures ETFs are sufficiently protected from manipulation to justify trading on securities exchanges.

The current lawsuit against Gemini arises from behavior that allegedly took place in 2017 and 2018 when the CFTC evaluated the Gemini bitcoin auction (immediately after the SEC rejected request from the Winklevoss brothers seeking SEC approval for Bitcoin ETF). The very fact that a major U.S. cryptocurrency exchange that positions itself as having a record of compliance appears to have lied in its communication with regulators further supports the SEC’s view that cryptocurrency markets are rife with fraud and manipulation. and therefore that we are not ready for a bitcoin ETF.

Bitcoin Spot ETF VanEck Strengthens SEC Views on Cryptocurrency

Is Cryptocurrency Really For Criminals?

The reality, however, may be quite different, as both suggest. growth the volume of law enforcement activity in the crypto space (indicating the presence of significant oversight), as well as the technical analysis of criminal activity in the space (conducted by independent firms and showing a marked decrease in the level of criminal activity). Consider, for example, Chainalysis 2022. report about cryptocrime. This report documents a clear reduction in fraud and abuse as a percentage of all crypto activity.

Still the headlines Continue to report that the dollar value of crypto fraud has risen significantly. It is perhaps understandable that news sources are presenting stories in terms capable of attracting the widest possible audience, and it is clear that $14 billion stolen by scammers is a louder headline than the notation that crypto crime as a percentage of illegal transactions has fallen. to a remarkable low of 0.15% in 2021.

What is somewhat surprising is the extent to which some regulators, especially in the SEC, continue to emphasize the “crypto for criminals” narrative. SEC Chairman Gary Gensler compared the crypto ecosystem to the “Wild West”. to complain this cryptocurrency is “rife with scams, scams and abuse.” In mid-May 2022, Gensler was still sounding the alarm, sentence that “investor protection needs to be strengthened in these crypto-currency markets.” This happened immediately after the decision of the Securities and Exchange Commission almost double the size of the Crypto Assets and Cyber ​​Division in its Enforcement Department.

Thus, when a sister agency such as the CFTC initiates enforcement action against a major player in the crypto space with very detailed allegations of false and misleading claims suggesting that manipulation actually took place in the bitcoin space, it adds fuel to the fire that The SEC is constantly focusing on. What’s more, the SEC’s likely stance that the markets are not mature enough to approve a Bitcoin ETF in the spot market is only strengthened when the founders of a cryptocurrency company faced with this action publicly express their disdain on social media.

In Defense of Crypto: Why Digital Currencies Deserve a Better Reputation

So, should there be a Bitcoin ETF in the spot market?

In October 2021 and early 2022, the SEC approved several futures-based bitcoin ETFs. While 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 manipulative to allow exchange-traded products. 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 for concluding that only one of them is free enough from the risk of fraud or manipulation to allow exchange-traded products.

April 6, 2022 SEC approved a futures ETF regulated under the same rules as spot ETFs. it approved another such product in May 2022. Although the agency expressly declined to provide any “assessment of whether Bitcoin is […] has utility or value as an innovation or investment,” he concluded that both of these ETFs were sufficiently tamper-proof to be traded on stock exchanges.

Now that the SEC has decided that Bitcoin futures ETFs can trade on regulated securities exchanges, there seems to be no reason to conclude that US investors should also 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 actions against the Twins, it would be unfortunate if the offhand response of the Winklevoss brothers, who was previously refused allowing the SEC to offer a bitcoin ETF would further stall progress on that front.

The opinions expressed are solely those of the author and do not necessarily reflect the views of the University or its affiliates. This article is for general informational purposes and is not intended and should not be taken as legal advice.

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

Carol Goforth Clayton N. Little, professor of law at the University of Arkansas School of Law (Fayetteville).