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

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

On June 2, 2022, the US Commodity Futures Trading Commission (CFTC) launched an action against Gemini, the cryptocurrency exchange founded by billionaire twins Tyler and Cameron Winklevoss. The complaint alleges, among other things, that Gemini made various false and misleading statements to the CFTC in connection with a possible self-certification of a future Bitcoin contract, the price of which was to be settled daily by auction (“Gemini”). 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 was vulnerable to treatment.

Although the Winklevoss brothers were not mentioned in the lawsuit, the complaint states that “Twin officers, staff and agents […] knew or should have reasonably known that the statements and information sent or omitted […] were false or misleading. “These are serious allegations, given that the third and twelfth principles of the CFTC require that markets involved in derivatives trading, including those seeking to offer Bitcoin futures, have policies and practices that ensure that “agreements [are] not easily treated “and that they offer fair” market protection “.

Gemini made a formal statement in response to CFTC actions:

“We have an eight-year track record in asking for permission, not forgiveness, and always doing the right thing. We look forward to proving this once and for all in court. “

The response of the twins’ founders, however, was less professional. Cameron Winklevoss tísti:

It is unfortunate that the founders of Gemini do not take the matter seriously. The consequences of this possible true fraud must not be limited to any sanctions imposed by the courts against Gemini, but must also have a significant impact on the entire industry.

Connected: What has stood 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 a mutual fund (ETF), but about statements related to a specific Bitcoin futures contract. It also does not come with the US Securities and Exchange Commission, which has been in favor of approving a large and growing number of Bitcoin ETF proposals. However, it is about the possible treatment of cryptocurrencies.

The SEC’s record of refusing to approve any kind of Bitcoin ETF has been consistent across two fronts: To date, no local or physical Bitcoin ETFs (as opposed to Bitcoin Futures ETFs) have been approved, and have been consistently approved to date. The SEC’s concern is that Bitcoin pricing is too dependent on treatment to approve the Bitcoin ETF. Without SEC approval, securities exchanges will not be able to trade in proposed products that do not fit well with the traditional guidelines on what kind of interests can be sold in the securities market.

Admittedly, the SEC recently approved a limited number of Bitcoin Futures ETFs, including two under the same rule that those that offer Bitcoin ETFs in local markets are relying on. In part, the SEC relied on the CFTC’s decision that Bitcoin Futures ETFs could be listed on CFTC-regulated exchanges. As part of the CFTC process, that institution requires self-certification that the new product complies with CFTC regulations and is “not susceptible to treatment. In very general terms, the SEC has concluded that these Bitcoin Futures ETFs are sufficiently protected against abuse to justify allowing their trading in the securities market.

The current action against Gemini stems from behavior that allegedly took place in 2017 and 2018, when the CFTC was evaluating the Gemini Bitcoin auction (just after the SEC denied a request from the Winklevoss brothers seeking SEC approval for the Bitcoin ETF). The fact that a major US cryptocurrency that places itself with compliance records seems to have been lying in its dealings with regulators further reinforces the SEC’s view that cryptocurrencies are fraught with fraud and dependence, and therefore, we are not ready for Bitcoin. ETFs.

Connected: VanEck’s Bitcoin spot ETF shunt strengthens the SEC’s cryptocurrency prospects

Is cryptography really for criminals?

The reality, however, can be very different, as indicated both by the increased volume of enforcement actions in the cryptocurrency space (indicating that there is significant surveillance), as well as the technical analysis of crime in the space (carried out by independent companies and shows significant reduction in the frequency of crime). Take, for example, the 2022 Chainalysis report on cryptographic crimes. This report shows a clear reduction in fraud and abuse as a percentage of all cryptocurrency activity.

Nevertheless, headlines continue to report that the dollar value of cryptocurrencies has risen sharply. It is perhaps understandable that news sources would put stories into words that are likely to gather as many viewers as possible and it is clear that the $ 14 billion stolen by fraudsters is a brighter headline than noting that cryptocurrencies as a percentage of illegal transactions fell to an incredible low 0.15% in 2021.

What is somewhat surprising, however, is the extent to which the narrative of “cryptography is for criminals” continues to be emphasized by some regulators, especially in the SEC. SEC President Gary Gensler has compared the cryptocurrency ecosystem to the “Wild West” and complained that the cryptocurrency “is full of fraud, deception and abuse. In mid-May 2022, Gensler was still calling the warning, pointing out that “there is a need for greater investor protection in these cryptocurrencies. This was following the SEC’s decision to almost double the size of cryptocurrencies and network units within its law enforcement department.

Thus, when a sister organization such as the CFTC begins to take action against a large party in the cryptocurrency space with very detailed allegations of false and misleading statements that indicate that treatment has indeed taken place in the Bitcoin space, this adds fuel to the fire that the SEC is constantly focusing on. to. In addition, the SEC’s likely position that markets are not mature enough to accept the Bitcoin ETF emerging market is only strengthened when the founders of a cryptocurrency company facing that action post their contempt on social media.

Connected: In defense of cryptography: Why digital currencies deserve a better reputation

So, should there be a Bitcoin ETF?

In October 2021 and early 2022, the SEC approved many futures 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 cryptocurrency market was too sensitive to treatment to allow exchange-traded products. The significance of the change in position is that futures and cash markets are so closely linked now that there is no reasonable basis for concluding that only one of them is sufficiently free from the risk of fraud or vested interests to allow stock exchange products.

On April 6, 2022, the SEC approved a futures ETF that is governed by the same regulation that would oversee temporary ETFs. It approved another such product in May 2022. Although the agency explicitly refused to provide an “assessment of whether Bitcoin […] has utility or value as an innovation or investment, “she concluded that both of these ETFs were sufficiently protected against a change of interest to trade in stock exchanges.

Now that the SEC has decided that Bitcoin Futures ETFs can be traded on regulated exchanges, there seems to be no reason to conclude that US investors should be denied the opportunity to participate in Bitcoin ETFs as well. Such investment is widely allowed in other nations, including Canada and Australia. As for the CFTC’s enforcement action on Gemini, it would be unfortunate if the unfortunate response from the Winklevoss brothers – which has previously been rejected for permission to offer Bitcoin ETFs by the SEC – puts further progress in these areas.

The views expressed are those of the authors only and do not necessarily reflect the views of the University or its affiliates. This article is for informational purposes only and is not intended and should not be construed as legal advice.

The views, thoughts and opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect or represent the views and opinions of the Cointelegraph.

Carol Goforth is Clayton N. Little, Professor of Law at the University of Arkansas (Fayetteville).