The takeaway: “Markets Daily” podcast host George Kaloudis writes that Coinbase accounts for a fraction of the total bitcoin spot market. So is it really the best choice as an information provider for proposed ETFs?
Deanonymized Destiny?
Two U.S. government-controlled crypto wallets linked to the Silk Road have moved over $300 million worth of bitcoin (BTC) in three Wednesday transactions. In March, the government auctioned 9,861 BTC for $216 million, after it seized 50,000 BTC linked to Silk Road in late 2022, which preceded a minor sell off across crypto markets. A new report from on-chain analytics firm Chainalysis claims criminals are stealing far less crypto than previous years. However, nearly $450 million already has been stolen via ransomware attacks, which are becoming more frequent and often involve crypto transactions. This comes as rival analytics firm Arkham is embroiled in a messy PR situation after unveiling a marketplace that incentives doxxing, and a company statement arguing “deanonymization is destiny” – an affront to crypto’s pro-financial-privacy views.
ETF Agreements
Shares of Coinbase jumped as much as 16% Tuesday after the crypto exchange reached an agreement with Cboe’s BZX Exchange to maintain a surveillance-sharing agreement for five of its spot bitcoin exchange-traded fund (ETF) applications. Amendments were filed for all five of Cboe’s ETF proposals, including Wise Origin, WisdomTree, VanEck, Invesco Galaxy and ARK 21Shares which would offer institutions exposure to bitcoin through a more-traditional financial vehicle. Cathie Wood’s ARK Invest, one of the largest holders of Coinbase stock, sold $12 million worth of shares during yesterday’s runup. Meanwhile, New details of the so-called Surveillance-Sharing Agreements (SSA) being added to recent spot market bitcoin exchange traded fund (ETF) applications have been revealed in a leaked document to CoinDesk.
Regulation Roster
A second draft of the bipartisan crypto bill introduced by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) has clarified the level of crypto industry oversight given to the Commodity Futures Trading Commission (CFTC), and takes a swing at defining decentralized finance (DeFi). Although an earlier version of the bill was stymied by the political process last year, many industry experts say this bipartisan attempt at legislating stands a better chance than other bills. Meanwhile, the U.S. Senate Committee on Finance is asking industry insiders for their input on the “intersection of digital assets and tax law.” Finally, South Korea will require companies to disclose their crypto holdings beginning in 2024, according to draft rules released by the country’s financial regulator on Tuesday.
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Two weeks ago, the Wall Street Journal reported that the U.S. Securities and Exchange Commission (SEC) thought the recent spate of applications for spot bitcoin exchange-traded funds (ETF) were inadequate because they weren’t clear and comprehensive.
The SEC wanted the filings to name the exchange that would carry out the surveillance-sharing agreements (SSA) mentioned in the original filings. These SSAs are supposed to show the SEC that these potential bitcoin ETF issuers would be able to detect fraud and manipulation in the bitcoin market.
The specific addition of an SSA to these applications is widely viewed as the key to finally getting the bitcoin ETF approved in the United States. Some analysts predict an ETF that tracks that spot market value of bitcoin (as opposed to existing futures-based ETFs) would lead to greater institutional adoption of the cryptocurrency.
Many of the applicants reacted quickly to the SEC and all named Coinbase (COIN) as the exchange that would oversee surveillance on the bitcoin market for them and refiled. On its face, a great choice. Coinbase is a publicly traded company and has a far less sketchy reputation than most other crypto exchanges.
The spot bitcoin ETF has been denied by the SEC multiple times from multiple potential issuers. Previously the SEC stated that those denials were in part due to a lack of something like an SSA. According to those denials, the SEC would want to see an information sharing agreement between the stock exchange the ETF is listed on and a spot bitcoin exchange that is both 1) of significant size and 2) regulated.
On the former point, Coinbase is not the largest spot bitcoin exchange. It currently sees somewhere around 2.5% of global daily trading volume, according to BTC/USD trading pair data from CoinGecko and CoinMarketCap. You can quibble about the details, bitcoin trading exchange volumes could also include trading pairs between many currencies, crypto or otherwise.
And so, the roughly $400 million that represents daily BTC/USD trading on Coinbase is probably adequate to “surveil” the market.
In honesty though, that’s probably not where the issue will lie. In honesty though, that’s probably not where the issue of the SEC’s approval will lie. Instead, the SEC will likely approve or deny the recent ETF applications based on its understanding of Coinbase being “regulated.” I’m sure the SEC will be over the moon to find that a firm it’s bickering with in court is the proposed market surveillance provider for the likes of Wall Street giants like BlackRock and Fidelity. The court squabble has nothing to do with the bitcoin market, but still, it’s a consideration.
The thing is: Coinbase’s fit for this role is all a bit unclear.
There is, unfortunately, no exact definition of a “regulated market” and “significant size.” So yes, it’s unclear.
The bigger point amid all this ETF talk is that Coinbase is not a shoo in as an adequate data provider partner.
The unfortunate truth is that the natural progression of this conversation is going to leak into taking surveillance to the next level via an information-sharing agreement. As CoinDesk’s Ian Allison puts it:
“… what’s more likely to influence the SEC’s decision is an information-sharing deal that flips the position of power in the arrangement and gives regulators the right to demand extra background.”
Now this is different.
An information-sharing deal would allow the SEC to request specific information about an end client’s trading history of the spot bitcoin ETF superseding the surveillance provider telling the regulator that “everything’s a-OK, Captain.”
Critically, an information-sharing agreement could also include personal information such as a customer’s name and address. This as an end state of the spot bitcoin ETF is, in all honesty, completely unsurprising.
You wanted a highly regulated bitcoin product? Well, here’s the regulation.
