What Is The Relationship Between This Action And Bitcoin ETFs?

Ronald Ray · June 13, 2022

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 sport 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 against Gemini arises out of conduct that allegedly occurred 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 a Bitcoin ETF).

The very fact that a major U.S. crypto exchange that positions itself as having a record of regulatory compliance appears to have been lying in its communication with regulators further bolsters the SEC view that crypto markets are rife with fraud and subject to manipulation, and therefore, that we are not ready for Bitcoin ETFs.

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