How ‘surveillance-sharing’ is designed to deter bitcoin ETF manipulation

The listing exchanges of proposed ETFs must show the SEC it is able to detect fraud and manipulation via these agreements, which has proven difficult

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CHALERMPHON SRISANG/Shutterstock modified by Blockworks

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Those scanning through the latest pile of proposed spot bitcoin ETF filings have likely seen a term come up again and again: surveillance-sharing agreement.

Mentions are plastered all over the proposal by asset management giant BlackRock, as well more recent filers, such as Valkyrie, Bitwise, WisdomTree and Invesco.

When considering proposed bitcoin ETFs, the SEC weighs whether the intended listing exchange — Nasdaq, NYSE or another entity — can meet certain obligations under the Exchange Act to prevent fraud and manipulation.

The exchange can do this by demonstrating it has “a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets,” according to a June 2022 SEC order rejecting Bitwise’s bid for a spot bitcoin ETF.  

The size of such a market is not quantified numerically. 

The metric rather refers to a market in which there is “a reasonable likelihood” a would-be manipulator would have to trade on that market to do so — “so that a surveillance-sharing agreement would assist in detecting and deterring misconduct,” the document states.

A market of significant size would also be one in which trading in the ETP would not be the predominant influence on pricing.  

Surveillance-sharing agreements are not the only way exchanges seeking to list a bitcoin ETF can meet Section 6(b)(5) of the Exchange Act, the SEC notes in the Bitwise order

But, the securities regulator says, “such agreements have previously provided the basis for the exchanges that list commodity-trust ETPs to meet those obligations, and the commission has historically recognized their importance.”

They allow for information sharing about market trading activity, clearing activity and customer identity, the SEC has said.

David Hirsch, chief of the crypto asset and cyber unit within the SEC’s division of enforcement, said last week prospective spot bitcoin ETF issuers have not established there is “an adequate system of surveillance” comparable to trading on a registered exchange.   

Enter BlackRock, a fund giant with roughly $9 trillion assets under management — which last week, for the first time, filed for a spot bitcoin ETF.

Read more: Is BlackRock’s clout enough to get its spot bitcoin ETF past the SEC?

The June 15 filing by Nasdaq, the exchange on which its ETF would be listed, points out the SEC’s approval of ETFs that hold bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME).

“If CME’s surveillance is sufficient to mitigate concerns related to trading in bitcoin futures for which the pricing is based directly on pricing from spot bitcoin markets, it’s not clear how such a conclusion could apply only to ETPs based on bitcoin futures and not extend to spot bitcoin ETPs,” it states.

Nasdaq expects to enter into a surveillance-sharing agreement with “an operator of a US-based spot trading platform for bitcoin,” which is not named in the filing.

Sumit Roy, a senior analyst at ETF.com, told Blockworks earlier this week that the additional agreement might not be enough for approval, particularly if the platform operator is Coinbase — a company the SEC sued earlier this month. 

“But because BlackRock is involved, there is hope that they have the inside scoop and will get this done,” Roy said. 

Proposals feature different exchanges

Investment firm Valkyrie on Wednesday became the latest to re-join the spot bitcoin ETF race.

The company’s last attempt to launch a spot bitcoin ETF ended in December 2021 when the SEC failed to give it the go-ahead. 

The Valkyrie Bitcoin Fund, according to the new filing, would trade under the ticker BRRR — seemingly a reference to the sound of a money printer.

The firm, like BlackRock, named Nasdaq as its listing exchange, which Bloomberg Intelligence analyst James Seyffart said in a tweet could give it an edge over others.  

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Valkyrie’s new bid followed a filing by Bitwise, as well as those by more traditional finance players WisdomTree and Invesco. It was not their first attempt. 

Bitwise’s proposed spot bitcoin ETF would be listed on NYSE Arca, while the planned products by WisdomTree and Invesco would trade on the Cboe BZX Exchange.

A prospective spot bitcoin ETF by Ark Invest and 21Shares, re-filed for in April, would also trade on Cboe.

“It depends on when [and] if the SEC approves the 19b-4 applications for the other exchanges,” Seyffart told Blockworks in an email. “If there are multiple days between approval of Nasdaq’s application and NYSE/Cboe, then that would be a theoretical window for Valkyrie to slip their fund in before the [others].”


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