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When finance giant BlackRock submitted its proposal for a Bitcoin exchange-traded fund (ETF) in the United States, experts in the market speculated about the likelihood of approval, comparing it to previous unsuccessful attempts. Their attention was swiftly drawn to a specific feature in the application that enables the identification and reporting of potentially illicit transactions to regulatory authorities.
BlackRock's application prompted a series of subsequent filings, each including the widely adopted Surveillance-Sharing Agreement (SSA). However, what is expected to have a greater impact on the decision of the U.S. Securities and Exchange Commission (SEC) is an information-sharing agreement that alters the dynamics of the arrangement and grants regulators the authority to request additional background information.
Although the SEC's demand for surveillance sharing to counteract crypto market manipulation is not a recent development – as it initially surfaced in the Winklevoss Bitcoin ETF application back in 2017 – the disclosure of a "Coinbase and NASDAQ Information Sharing Term Sheet" to CoinDesk suggests a deeper level of significance.
The distinction can be described as the contrast between "push" and "pull" approaches. The concern lies with the data monitoring conducted by Coinbase (COIN), the spot exchange, known as the SSA. If any suspicious activities are identified, Coinbase has the ability to push this data to regulators, ETF providers, and listing exchanges. On the other hand, information-sharing agreements enable regulators and ETF providers to pull data from the exchange when necessary.
The information in question may pertain to particular trades or traders, and the agreement also requires a cryptocurrency exchange to disclose data, including personally identifiable information (PII) such as the customer's name and address. While information-sharing agreements are not evident in any of the spot bitcoin ETF filings, a similar framework can be found in other markets.
A crucial point to note is that an information-sharing request must be highly specific, similar to a subpoena, as per an individual knowledgeable about the situation.
“It can’t just be a fishing expedition, where it’s all of the information attached to any trade that was made between two given points in time,” said the person, who asked to remain unidentified. “The obvious concern is that crypto traders, almost by definition, don’t like having information shared about them. It’s sort of anathema to the ethos of crypto in general. But for the ETF to be successful, [firms] have to do it.”
Nasdaq and Coinbase opted not to provide any comments, while BlackRock failed to respond to comment requests.
Bitcoin ETF application history
Since 2017, the SEC has emphasized the requirement for bitcoin exchange-traded fund (ETF) applications to establish a surveillance-sharing agreement with a regulated market of considerable magnitude. However, firms have faced challenges in deciphering this requirement due to the absence of clear guidelines and an objective criterion.
Matt Hougan, the chief investment officer at Bitwise Asset Management, emphasized the importance of including an information-sharing agreement rather than solely relying on surveillance sharing. This approach ensures that an ETF is not dependent on an unregulated market. Bitwise Asset Management, which has made multiple applications for an ETF, recognizes the significance of this enhanced framework.
“If there’s an ability to pull, then that’s coming from the regulated market; an ability to push is coming from the unregulated market,” Hougan said in an interview. “So, the SEC will want the ability for the regulated market to oversee this surveillance, and in terms of identifying the people at the bottom of these trades, I think that’s just going to be part and parcel of these agreements.”
Approval ratings
Brokers and exchanges in equities markets are familiar with the framework of surveillance sharing and information sharing. In this structure, the regulator possesses the power to demand additional details regarding the trading history of the end client.
If a broker's client submits an order to Nasdaq, for instance, and that order is identified as suspicious by the exchange's SMARTS surveillance system, both the broker and the exchange must file a suspicious activity report (SAR).
Regulators conducting a SAR investigation can proceed to the "second step," as explained by Dave Weisberger, the CEO of CoinRoutes, a cryptocurrency trading platform. CoinRoutes is currently seeking personally identifiable information (PII) to determine if the same beneficial owners are involved in a particular series of trades. This process aims to establish a consolidated audit trail.
“Coinbase, Nasdaq and BlackRock are likely saying that if there is suspicious activity – and they are surveilling for it – then the regulator can request who’s doing it, but they’re not just going to give out PII willy-nilly. There is going to have to be suspicious activity. That is the equivalency here,” Weisberger said in an interview, adding:
“If that is true, I believe the SEC will not only approve this ETF, but will approve it and take a victory lap. And considering how unpopular this SEC is, I suspect they need to do that now.”
Source Coindesk
