The moment finance giant BlackRock filed to create a spot bitcoin ETF in the U.S., market watchers wondered whether the world’s biggest asset manager had a better chance of approval than the many rejected predecessors. They quickly fixated on a mechanism within the application that allows suspicious trades to be flagged to the authorities.
BlackRock’s application sparked a flurry of follow-on filings with the now-ubiquitous Surveillance-Sharing Agreement (SSA) added. But what’s more likely to influence the U.S. Securities and Exchange Commission (SEC)’s decision is an information-sharing deal that flips the position of power in the arrangement and gives regulators the right to demand extra background.
While the SEC’s requirement for surveillance sharing to prevent market manipulation of crypto is not new – it first appeared in the Winklevoss Bitcoin ETF application in 2017 – details of a “Coinbase and NASDAQ Information Sharing Term Sheet” shared with CoinDesk point to something more.
The nuance here can be characterized as the difference between push and pull. The SSA concerns data surveillance carried out by the spot exchange, Coinbase (COIN) in this case, which can be pushed to regulators, ETF providers and listing exchanges if deemed suspicious. Information-sharing agreements, in contrast, allow regulators and ETF providers to pull data from the exchange.
The information in question could be about specific trades or traders, and the agreement also compels a crypto exchange to share data up to and including personally identifiable information (PII), such as the customer’s name and address. Information-sharing agreements do not appear in any of the spot bitcoin ETF filings, but the structure is found in other markets.
An important caveat is that an information-sharing request has to be very specific, not dissimilar to a subpoena, according to a person familiar with the matter.
“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 declined to comment. BlackRock did not respond to requests for comment.
Bitcoin ETF application history
Going back to 2017, the SEC has highlighted the need for bitcoin ETF applications to have a surveillance-sharing agreement with a regulated market of significant size, but firms have lacked clarity and an objective standard when it comes to interpreting this.
The inclusion of an information-sharing agreement, as opposed to simply surveillance sharing, makes sense, because it means an ETF is not reliant on an unregulated market, said Matt Hougan, chief investment officer at Bitwise Asset Management. Bitwise has applied for an ETF numerous times.
“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.”
The combination of surveillance sharing and information sharing is a structure known to brokers and exchanges in equities markets, where the regulator has the authority to request more information about the end client’s trading history.
Whenever a broker has a client that sends an order to Nasdaq, for example, and that order is flagged as suspicious by the exchange’s SMARTS surveillance system, then the broker and the exchange are required to file a suspicious activity report (SAR).
Regulators investigating a SAR can go on to this “second step,” said Dave Weisberger, CEO of crypto trading platform CoinRoutes, which is requesting PII to identify whether the same beneficial owners are behind a given set of trades, creating 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.”
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