What Will It Take to Approve Spot Bitcoin ETFs?

[This article is part of a new series from etf.com highlighting innovation in ETFs.] 

In a race to be the first issuer to offer a spot bitcoin exchange-traded fund, financial services heavyweights and fund companies such as Fidelity Investments, BlackRock Inc., ARK Investment Management, WisdomTree and Valkyrie have recently submitted filings to the Securities and Exchange Commission. For many, a provision called surveillance-sharing agreement (SSA) is seen as an integral step to their application process. 

What Are Surveillance-Sharing Agreements? 

Surveillance-sharing agreements, in the context of spot bitcoin trading, refer to agreements between cryptocurrency exchanges and market surveillance providers or regulators. These agreements are aimed at enhancing the integrity and transparency of the cryptocurrency market by sharing trading data and information. 

Spot bitcoin trading refers to the buying and selling of actual bitcoin for immediate delivery, as opposed to trading bitcoin derivatives or futures contracts. Since the cryptocurrency market operates outside traditional regulatory frameworks, surveillance-sharing agreements can help address concerns related to market manipulation, insider trading and other illicit activities. 

Under these agreements, cryptocurrency exchanges may share trade data, order book information, and other relevant market data with surveillance providers or regulatory bodies. This allows the surveillance providers or regulators to monitor trading activities, identify irregularities, and ensure compliance with applicable laws and regulations. 

Short History of the SEC and the SSA 

U.S. investors currently have access to cryptocurrency ETFs that invest in bitcoin futures contracts, or agreements to buy or sell the asset later for an agreed-upon price. These ETFs offer indirect exposure to the price of bitcoin; however, bitcoin spot ETF would invest in the digital currency directly, potentially a game-changing security in the world of crypto.  

The recent batch of spot bitcoin ETF filings isn’t satisfactory to regulators, appearing to dash hopes for quick approval of a landmark spot bitcoin ETF. The key to approval appears to be an approved surveillance-sharing agreement. 

“The SEC was always going to need more info and likely will want to see the exact details of said SSA before remotely considering approving on this basis,” Bloomberg Intelligence’s ETF analyst James Seyffart tweeted on June 30, referring to surveillance-sharing agreements. 

Firms are permitted to amend and resubmit their filings. Cboe, which refiled Fidelity’s Wise Origin Bitcoin Trust, said it plans to update and resubmit its paperwork. A spokesperson declined to provide details. BlackRock’s iShares unit declined to comment and does not appear to have amended its application as of July 3. 

More Transparency 

These agreements aim to foster a fair, transparent, and secure trading environment for participants in the spot bitcoin market. The idea is that by sharing information, market participants and regulators can gain a better understanding of the overall market dynamics, detect potential market abuses and take appropriate actions to maintain market integrity. 

It's worth noting that the specific terms and conditions of surveillance-sharing agreements may vary between exchanges and regulatory jurisdictions. The extent of data shared, the frequency of reporting, and the entities involved can differ depending on the specific agreement and the regulatory landscape in which the exchange operates. 

As the cryptocurrency market evolves and regulatory frameworks continue to develop, surveillance-sharing agreements are becoming more prevalent and standardized to ensure the integrity of spot bitcoin trading. 

While a spot bitcoin ETF would provide investors direct exposure to the digital asset, easier access doesn’t mean investors should jump into them if and when they are approved. Like any other asset, investors should do their own research and due diligence before investing. 

With some of the biggest players in the ETF industry like BlackRock and Fidelity in the race to offer the first spot bitcoin ETF, there’s little doubt that these unique funds will be a major force in the ETF industry. 

The question is, will a more detailed surveillance-sharing agreement do the trick and instill confidence in the SEC?  

Contact Kent Thune at [email protected]