The biggest question over BlackRock’s spot BTC ETF was whether or not it had really managed to secure a surveillance sharing agreement between Nasdaq, the exchange which would list the ETF, and a sufficiently regulated BTC spot trading platform.
In the application to list the ETF (formally made by Nasdaq, which must petition the Securities and Exchange Commission (SEC) to approve a rule change allowing the listing), the parties assured the SEC that it would enter into such an agreement—except it conspicuously didn’t name the surveillance partner.
Last week, BlackRock and the Nasdaq were forced to refile their application after the SEC rejected it on the basis of containing inadequate information. The new application has now made it obvious why they were reluctant to share: the surveillance partner is none other than Coinbase (NASDAQ: COIN).
Coinbase, of course, is currently the target of an enormous SEC enforcement action over its illegal listing of digital asset securities, which the SEC alleges the digital asset exchange did despite being told by its internal risk assessment system that such assets were at ‘high risk’ of amounting to securities.
It appears BlackRock knew exactly how announcing Coinbase as a compliance partner would look to the SEC. In the initial application filed on June 15, Nasdaq said it “is expecting to enter into a surveillance-sharing agreement with an operator of a United States-based spot trading platform for Bitcoin.” The SEC predictably rejected this application because it was inadequate, causing the Nasdaq to hastily refile last week and unveiling Coinbase as the mystery surveillance partner.
Except the filings also reveal that BlackRock had, in fact, secured the agreement between Nasdaq and Coinbase on June 8—a full week before the Nasdaq made its formal application. The refiled application somewhat self-consciously justifies this by saying that the agreement was only to come into force on June 16, a convenient 24 hours after the SEC application was sealed and delivered. However, it’s tough to see the timing as anything but a cynical attempt to avoid the apparent compliance questions that bringing a company like Coinbase on board would invite.
Though some took the new filings as an encouraging sign that a spot BTC ETF might gain approval after all, a glance at what the SEC most recently had to say about Coinbase should give pause to these hopefuls:
“While Coinbase’s calculated decisions may have allowed it to earn billions,” said Gurbir S. Grewal, director of the SEC’s division of enforcement, “it’s done so at the expense of investors by depriving them of the protections to which they are entitled.”
These are harsh words aimed at the company BlackRock now wishes to convince the world is a suitable surveillance partner that can be trusted to protect investors, coming from the very agency in charge of approving the ETF application.
Why do surveillance-sharing agreements matter?
The SEC has clarified that it considers surveillance-sharing agreements with regulated spot markets an essential component of any proposed BTC ETF. Under the Exchange Act, an exchange proposing to list an ETF must satisfy the SEC that it is sufficiently designed to “prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” Given that the SEC recognizes that the spot market for BTC is not inherently resistant to fraud and manipulation, it insists on a surveillance-sharing agreement with a sufficiently sized and regulated spot market.
Those proposing BTC ETFs in the past have pointed to the SEC’s acceptance of ETFs holding BTC futures as a reason that a spot ETF should be accepted. The SEC, however, has consistently said that the futures are traded on a highly regulated and surveilled market (the Chicago Mercantile Exchange); the same cannot be said for any spot BTC ETF.
Given the importance of investor protection under the Exchange Act, it’s tough to picture the SEC being satisfied that approving the Nasdaq’s proposal would be consistent with its regulatory mandate while it also pursues existentially-threatening litigation against Coinbase.
There’s also the question of whether Coinbase will exist in its current form by the time the ETF comes online. Analysts immediately estimated before the SEC’s case against Coinbase that an enforcement action aimed at the securities being illegally listed on the platform would jeopardize over 30% of its revenue.
That’s to say nothing of the other open litigation against Coinbase, including an immense passing-off claim that could lead the exchange having to delist BTC and hand over all the profits skimmed from its trading.
With plenty for the SEC to chew on as it considers if Coinbase is a good enough surveillance partner for it to break from years of spot ETF rejections, the market now awaits an answer. The SEC has up to 240 days to issue a decision on the application.
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