How does BlackRock’s “supervisory sharing agreement” prevent manipulation of Bitcoin ETF?

Source: BlockWorks

Compiled by: BlockingBitpushNews Mary Liu

In the latest batch of Bitcoin ETF applications for spot trading, one term appears frequently: surveillance-sharing agreement.

Following asset management giant BlackRock, companies such as ARK Invest, Valkyrie, Bitwise, WisdomTree, and Invesco have all added this to their proposals.

Ophelia Snyder, co-founder and president of 21Shares, said, “These agreements will provide greater transparency to the market and make the regulation of the cryptocurrency market more consistent with the US market.”

When considering the proposed Bitcoin ETF, the US Securities and Exchange Commission (SEC) weighs whether the exchange to be listed (Nasdaq, NYSE, or other entity) can fulfill certain obligations under the Trading Act to prevent fraud and manipulation.

According to the SEC’s rejection of Bitwise’s spot Bitcoin ETF in June 2022, the exchange can do this by proving that it has signed comprehensive surveillance-sharing agreements with a market that is “substantially regulated and related to the underlying or referenced Bitcoin assets.”

The SEC defines “surveillance-sharing agreement” very clearly in its rejection order:

The characteristic of the sharing agreement is that it stipulates the sharing of information on market trading activities, clearing activities, and customer identities; the parties to the agreement have a reasonable ability to obtain and provide the requested information; and no existing rules, laws, or conventions will prevent one party from obtaining or providing this information to the other.

The size of this market cannot be quantified in numbers. The document states that this indicator refers to a market where potential manipulators “have a reasonable possibility” of trading on the market in order to monitor and share agreements that will help detect and prevent improper behavior.

The US Securities and Exchange Commission pointed out in the Bitwise order that surveillance-sharing agreements are not the only way for exchanges seeking to list Bitcoin ETFs to satisfy the requirements of Section 6(b)(5) of the Trading Act.

However, the securities regulator said, “Such agreements have provided a basis for trading venues of listed commodity trust ETPs to fulfill these obligations, and the Commission has long recognized their importance as they allow for the sharing of information on market trading activities, clearing activities, and customer identities.”

Last week, David Hirsch, head of the Cryptocurrency and Cyber unit at the U.S. Securities and Exchange Commission’s enforcement division, said that potential bitcoin ETF sponsors have not yet established “appropriate surveillance-sharing agreements with exchanges of significant size.”

BlackRock, a fund giant that manages around $9 trillion in assets, last week filed for its first physically backed bitcoin ETF. Its filing stated that the SEC should approve an ETF holding bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME): “If CME’s regulatory oversight is sufficient to alleviate concerns related to bitcoin futures trading, because the price of bitcoin futures is directly based on the price of the bitcoin spot market, it is unclear how such a finding would not be applicable solely to an ETP based on bitcoin futures and not to a bitcoin spot ETP.”

Nasdaq expects to sign a supervisory sharing agreement with “an operator of a U.S. bitcoin spot trading platform,” whose specific name was not mentioned in the filing.

“Additional agreements may not be enough to get approval, especially if the platform operator is Coinbase (which the SEC sued earlier this month),” senior analyst Sumit Roy told Blockworks earlier this week. “But because BlackRock is involved, they might have inside information and help move this along.”

Different proposals correspond to different exchanges

Investment company Valkyrie is the latest firm to rejoin the race for a physically backed bitcoin ETF. Its last attempt at a physically backed bitcoin ETF ended in December 2021 when the SEC declined to approve.

According to its newly submitted filing, the Valkyrie Bitcoin Fund will trade under the ticker symbol BRRR (also used to describe the sound of a printing press).

The company, like BlackRock, will designate Nasdaq as its listing exchange, a move that may give it an edge over other firms, said Bloomberg analyst James Seyffart in a tweet.

Valkyrie filed after Bitwise and more traditional financial firms WisdomTree and Invesco submitted their applications, with Bitwise’s physically backed bitcoin ETF set to trade on NYSE Arca while WisdomTree and Invesco’s products are planned to trade on the Cboe BZX exchange.

Ark Invest and 21Shares’ spot Bitcoin ETF, filed in April, is also scheduled to trade on Cboe.

Seyffart told Blockworks in an email, “21Shares, ARK, and Cboe are at the top of the list because the SEC’s next decision date is August 13, 2023, and we have not yet determined the dates for the other 19b-4 applications, such as BlackRock’s application.”

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