Well over two years ago, the Ontario Securities Commission approved the first North American bitcoin exchange-traded fund, sparking hope that an American product might soon be approved as well. Later in 2021, the U.S. Securities and Exchange Commission approved the first bitcoin futures ETF, opening the door to several other similar products.
As of right now, there's still no spot bitcoin ETF trading in the U.S., but BlackRock’s filing a few weeks ago signaled to the industry that the time may be coming when that changes. Over the past few weeks, we’ve seen half a dozen new applications for a spot bitcoin ETF in the U.S. Has the market evolved enough to support an ETF, and can companies provide the SEC with enough assurances that an ETF would be safe?
The major difference we’re seeing now is these applicants are spending more time talking about their surveillance-sharing agreements (with some prompting from the SEC). Coinbase will be the marketplace for all of the major would-be ETF issuers that have identified a partner so far – namely, Nasdaq and Cboe BZX, on behalf of BlackRock, Fidelity, VanEck and others.
The SEC has brought up surveillance-sharing agreements in the past. In 2019, the regulator published a 112-page order explaining its rejection of a bitcoin ETF application from Bitwise, saying the bitcoin market had too much potential for manipulation and there needed to be a “surveillance-sharing agreement with a regulated market of significant size relating to the underlying assets” to deter any potential manipulation.
One problem is there's no clear definition for a what a regulated market of significant size is, said James Seyffart, an analyst with Bloomberg Intelligence who’s followed bitcoin ETF applications for years.
“Usually, every time they delay all the way through and then they deny them. In that process, they sometimes give comments,” Seyffart said. “Some of it is going to be behind closed doors ... some of that is undoubtedly going to happen.”
Coinbase is undoubtedly the largest U.S. crypto exchange. According to CoinGecko, it has more than twice the 24-hour trading volume (when normalized) overall when compared to its closest competitor, Kraken. The bulk of that appears to come from its bitcoin market.
The SEC has even acknowledged Coinbase’s role in the U.S., saying it is “one of the largest crypto asset trading platforms in the world and the largest in the United States” in its lawsuit against the exchange.
The SEC’s lawsuit against Coinbase has nothing to do with its bitcoin market, which I’m guessing is also one of the reasons these companies are looking to the exchange as their surveillance-sharing agreement partner.
The open question is whether the SEC will agree that Coinbase operates a regulated bitcoin market of significant size – and whether that’s necessary for an approval.
Last year, the regulator didn’t seem to think that there was any regulated market for bitcoin. Specifically, when it approved Teucrium’s bitcoin futures ETF in April 2022, the SEC wrote that “spot bitcoin markets are not currently ‘regulated,’” in a footnote explaining why surveillance-sharing agreements for bitcoin futures market wouldn’t work for spot ETFs.
Meanwhile, the BlackRock/Nasdaq filing argues that there doesn’t need to be a significant, regulated market in the first place, pointing to past ETF rejections.
“The regulated market of significant size test does not require that the spot bitcoin market be regulated in order for the Commission to approve this proposal, and precedent makes clear that an underlying market for a spot commodity or currency being a regulated market would actually be an exception to the norm,” the filing said. “These largely unregulated currency and commodity markets do not provide the same protections as the markets that are subject to the Commission’s oversight, but the Commission has consistently looked to surveillance sharing agreements with the underlying futures market in order to determine whether such products were consistent with the Act.”
The bitcoin futures market should be enough for the SEC’s “significant size” test, the filing said.
