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.

What is the relationship between this action and Bitcoin ETFs?

The lawsuit against Gemini is not about an exchange-traded fund (ETF), it is about representations made in connection with a particular Bitcoin futures contract. It is also not being brought by the U.S. Securities and Exchange Commission, which has been holding out on approving a large and growing number of Bitcoin ETF proposals. It is, however, about potential manipulation in the crypto markets.

The SEC’s record of declining to approve any spot-market Bitcoin ETF has been consistent on two fronts: To date, no Bitcoin ETFs in the spot or physical markets (as opposed to Bitcoin Futures ETFs) have been approved, and so far, the consistently expressed concern of the SEC is that Bitcoin pricing is too subject to manipulation to approve a Bitcoin ETF. Without approval by the SEC, securities exchanges cannot trade the proposed products, which do not fit well under traditional guidelines on what kinds of interests can be sold on a securities exchange.

Admittedly, the SEC recently approved a limited number of Bitcoin Futures ETFs, including two under the same rule that those proposing Bitcoin ETFs in the spot markets are relying on. 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 requires self-certification that the new product complies with CFTC regulations and is “not readily susceptible to manipulation.” In very general terms, the SEC has concluded that these Bitcoin Futures ETFs are protected against manipulation enough to justify allowing their trade on securities exchanges.

The current action…