BlackRock’s Bitcoin ETF Application Enhances Surveillance Measures

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• BlackRock’s application for a spot Bitcoin ETF includes an information-sharing agreement that enables the sharing of trading data and personal information with regulators.
• The inclusion of this agreement gives regulators the power to request additional background information and strengthens the chances of ETF approval.

Amid speculation about the approval likelihood of BlackRock‘s spot Bitcoin ETF application, attention has turned to a significant mechanism within the proposal that allows suspicious trades to be flagged and reported to authorities. This development has prompted other ETF filings to incorporate a Surveillance-Sharing Agreement (SSA), but it is the information-sharing deal that could have a greater impact on the U.S. Securities and Exchange Commission’s (SEC) decision.

The SSA primarily focuses on data surveillance conducted by the spot exchange, Coinbase, allowing the exchange to push suspicious information to regulators, ETF providers, and listing exchanges. In contrast, information-sharing agreements give regulators and ETF providers the authority to pull data from the exchange. Under this arrangement, specific trade-related details, as well as personally identifiable information (PII) such as names and addresses, can be shared. While this structure is absent from spot Bitcoin ETF filings, it is prevalent in other markets.

It is essential to note that any information-sharing request must be highly specific, similar to a subpoena, as highlighted by an anonymous source familiar with the matter. The concern arises from the fact that cryptocurrency traders, by nature, prefer to keep their information private. However, for the success of the ETF, such sharing becomes necessary.

The SEC has consistently emphasized the need for surveillance-sharing agreements in Bitcoin ETF applications since 2017. The addition of an information-sharing agreement, rather than solely relying on surveillance sharing, is logical as it reduces reliance on unregulated markets. Matt Hougan, Chief Investment Officer at Bitwise Asset Management, explained that the SEC would prefer the ability to pull data from regulated markets to oversee surveillance effectively. Furthermore, identifying the parties involved in trades is an integral part of these agreements.

This structure of combining surveillance sharing and information sharing is familiar to brokers and exchanges in equity markets, where regulators can request additional information regarding a client’s trading history. When a broker submits an order to Nasdaq and it triggers suspicion in the exchange’s SMARTS surveillance system, both the broker and the exchange must file a suspicious activity report (SAR). Regulators can then investigate further by using PII to identify the beneficial owners behind a set of trades, facilitating a consolidated audit trail.

Coinbase, Nasdaq, and BlackRock assert that PII will only be shared upon suspicion of fraudulent activity, demonstrating the equivalence to traditional systems. Dave Weisberger, CEO of CoinRoutes, believes that if this claim holds true, the SEC will likely approve the ETF and potentially use it as an opportunity to gain public approval. Given the SEC’s current reputation, such a move may be necessary.