How does BlackRock’s “Oversight Sharing Agreement” prevent Bitcoin ETF manipulation?

In the latest wave of spot Bitcoin ETF application documents, a term appears frequently: surveillance-sharing agreement.

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

“These agreements will provide greater transparency to the market and bring the cryptocurrency market more in line with how it is regulated in the U.S.,” said Ophelia Snyder , co-founder and president of 21Shares .

When considering a proposed Bitcoin ETF, the U.S. Securities and Exchange Commission ( SEC ) weighs whether the proposed listing exchange (Nasdaq, NYSE, or another entity) can meet certain obligations under the Exchange Act to prevent fraud and manipulation.

According to the SEC’s June 2022 filing rejecting the Bitwise Spot Bitcoin ETF, the SEC believed the exchange could do this by demonstrating “a comprehensive supervisory sharing agreement with respect to a regulated market of significant size related to the underlying or reference Bitcoin asset.”

The SEC defines a “supervision sharing agreement” very clearly in its denial order:

The characteristics of a sharing agreement are that the agreement provides for the sharing of information about market trading activities, clearing activities and customer identities; the parties to the agreement have reasonable ability to obtain and provide the requested information; and no existing rules, laws or practices prevent one party from obtaining this information from or providing this information to the other party.

The size of such a market cannot be quantified with a number. The document states that the metric refers to a market where there is a “reasonable probability” that a potential manipulator would have to trade in that market to do so — “so that monitoring the sharing agreement would help detect and deter misconduct.”

The SEC noted in the Bitwise Order that supervisory sharing agreements are not the only way for exchanges seeking to list a bitcoin ETF to satisfy Section 6(b)(5) of the Exchange Act.

But the securities regulator said that “such agreements have previously provided the basis for exchanges that list commodity trust ETPs to implement these obligations, and the Commission has historically recognized their importance in allowing for the sharing of information about market trading activity, clearing activities, and customer identities”.

David Hirsch , chief of the SEC’s enforcement division’s crypto assets and cyber unit, said last week that potential bitcoin ETF spot issuers have not yet established “adequate monitoring systems” comparable to those trading on registered exchanges.

BlackRock, a fund giant with about $9 trillion in assets under management, filed for its first spot Bitcoin ETF last week. Its filing states that the SEC approved an ETF that holds Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME): "If CME's regulation is sufficient to mitigate concerns related to trading in Bitcoin futures, where the pricing of Bitcoin futures is directly based on pricing in the spot Bitcoin market, it is unclear how such a conclusion would apply only to ETPs based on Bitcoin futures and not to spot Bitcoin ETPs."

Nasdaq is expected to enter into a shared oversight agreement with “the operator of a U.S.-based bitcoin spot trading platform,” which was not named in the filing.

Sumit Roy, senior analyst at ETF.com, told Blockworks earlier this week that the additional agreements may not be enough to gain approval, especially if the platform operator is Coinbase , which the SEC sued earlier this month.

But he said: "Because BlackRock is involved, they will hopefully have inside information and facilitate this."

Different proposals correspond to different exchanges

Investment firm Valkyrie is the latest to rejoin the spot Bitcoin ETF race. The firm’s last attempt at a spot Bitcoin ETF ended in December 2021 when the SEC failed to approve it.

According to the new filing, the Valkyrie Bitcoin Fund will trade under the ticker BRRR (BRRR is also used to describe the sound of a money printing machine).

The company, like BlackRock, has designated Nasdaq as its listing exchange, which Bloomberg Intelligence analyst James Seyffart said in a tweet could give it an advantage over other companies.

Valkyrie’s filing follows applications from Bitwise, whose proposed spot bitcoin ETF would be listed on NYSE Arca, and more traditional financial firms WisdomTree and Invesco, whose planned products would trade on the Cboe BZX exchange.

Ark Invest and 21Shares' spot bitcoin ETF filed in April is also planned to trade on Cboe.

“21Shares, ARK, and Cboe [Chicago Board Options Exchange] are first in line because the next SEC decision date is August 13, 2023, and we do not yet have dates for other 19b-4 filings, such as BlackRock’s,” Seyffart told Blockworks in an email.