When financial giant BlackRock applied to launch a spot bitcoin BTC -0.06% ETF in the U.S., the crypto community speculated whether the world’s largest asset manager was more likely to be approved than its failed predecessors.
BlackRock’s actions have spurred a string of followers, with financial firms such as ARK Investment, Valkyrie, and Fidelity filing their own bitcoin ETF applications, incorporating supervisory sharing agreements (SSAs) into nearly all filings.
The SEC’s requirement for shared oversight to prevent crypto market manipulation is not new, first appearing in the Winklevoss brothers’ bitcoin ETF filing back in 2017.
Industry insiders believe that in theory, an information sharing agreement is more likely to influence the decision of the U.S. Securities and Exchange Commission (SEC), which allows regulators to obtain additional background information on transactions, which undoubtedly gives the SEC more room for power.
The subtle differences between SSA and information sharing protocols can be described as the difference between “push” and “pull”.
The SSA is concerned with data monitoring by spot exchange Coinbase, and if deemed suspicious, can push it to regulators, ETF providers, and listing exchanges.
In contrast, information-sharing agreements allow regulators and ETF providers to request data from exchanges.
Relevant information may be related to a specific transaction or trader. The agreement also forces cryptocurrency exchanges to share data, including personally identifiable information (PII), such as the name and address of customers. The information sharing agreement does not appear in any spot bitcoin ETF documents , but this structure already exists in other markets.
An important caveat is that information-sharing requests must be very specific, no different than a subpoena, a person familiar with the matter told Coindesk.
“It’s not just a fishing expedition with all the information that comes with any transaction between two specific points in time,” said the person, who requested anonymity. “The obvious concern is that, almost by definition, cryptocurrencies Traders don’t like sharing information about them. It’s an aversion to the ethos of cryptocurrencies in general. But for ETFs to succeed, companies have to.”
As early as 2017, the SEC emphasized that Bitcoin ETF applications required a supervisory sharing agreement with a larger regulated market, but companies lacked clarity and objective standards when interpreting this.
Matt Hougan, chief investment officer at Bitwise Asset Management, said the inclusion of an information-sharing agreement makes sense compared to simple supervisory sharing because it means the ETF is not dependent on an unregulated market. Bitwise has applied for the ETF several times.
“Regulators have the power to extract information from the regulated market, and the reported information comes from the unregulated market,” Hougan said in an interview. “So the SEC wants the regulated market to oversee this monitoring and identify these transactions. The users behind it, I think that’s going to be a big part of these protocols.”
A combination of supervisory sharing and information sharing is a structure well known to stock market brokers and exchanges, with regulators empowered to demand additional information about end-client trading histories.
For example, both the broker and the exchange are required to file a Suspicious Activity Report (SAR) whenever a broker’s client sends an order to Nasdaq and that order is flagged as suspicious by the exchange’s SMARTS monitoring system.
Dave Weisberger, chief executive of cryptocurrency trading platform CoinRoutes, said regulators investigating SARs could go ahead with a “second step,” requiring the identification of personally identifiable information (PII) to find out whether the same beneficiary was behind a particular transaction, thereby creating Unified audit trail.
Coinbase, Nasdaq and BlackRock may say that if there is suspicious activity (and they are monitoring it), then regulators can ask who is doing it, but they will not give out personally identifiable information at will (PII).
