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

On June 2, 2022, the United States Commodity Futures Trading Commission (CFTC) initiated an action against Gemini, the crypto 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, the prices for which were to be settled daily by an auction (the “Gemini Bitcoin Auction”). In the complaint, the CFTC specifically articulated 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 statements and information conveyed or omitted […] were false or misleading.” These are serious accusations, considering that CFTC’s third and twelfth core principles require markets involved in derivative trading, including those seeking to offer Bitcoin futures contracts, to have policies and practices ensuring that “contracts [are] not readily subject to manipulation” and that they offer reasonable “protection of market participants.”

Gemini offered a formal statement in response to the CFTC’s action:

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

The response from the founding twins, however, was somewhat less professional. Cameron Winklevoss tweeted:

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

— Cameron Winklevoss (@cameron) June 2, 2022

It’s too bad that Gemini’s founders are not taking the suit more seriously. The ramifications of this potentially true fraud may not be limited to any penalties assessed against Gemini by the courts, but also significantly impact the entire industry.

So, should there be a spot-market Bitcoin ETF?

In October of 2021 and early in 2022, the SEC approved multiple futures-based 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 crypto market was too susceptible to manipulation to allow exchange-traded products. The significance of the change in position is that the futures and spot markets are so closely linked now that there is no rational basis for concluding that only one of them is sufficiently free from the risk of fraud or manipulation to allow exchange-traded products.

On April 6, 2022, the SEC approved a futures-based ETF regulated under the same regulation under which spot-based ETFs would be regulated. It approved another such product in May 2022. While the agency explicitly declined to provide any “evaluation of whether Bitcoin […] has utility or value as an innovation or an investment,” it did conclude that both of these ETFs were sufficiently protected against manipulation to be traded on securities exchanges.

Now that the SEC has decided Bitcoin Futures ETFs may be traded on regulated securities exchanges, there would seem to be no reason to conclude that American investors should be denied the opportunity to participate in Bitcoin ETFs as well. Such investment is widely permitted in other nations, including Canada and Australia. As for the CFTC’s enforcement action on Gemini, it would be unfortunate if a cavalier response from the Winklevoss brothers — who have previously been turned down for permission to offer a Bitcoin ETF by the SEC — sets back the progress on this front any further.

The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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