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The narrative

In July 2013, Cameron and Tyler Winklevoss filed to launch the first bitcoin exchange-traded fund (ETF). Eleven years later, the industry is still waiting for a spot bitcoin product.

Why it matters

A bitcoin ETF would, if approved, allow a broad swath of retail investors in the U.S. gain exposure to bitcoin as an asset without having to go through the trouble of setting up a wallet or dealing with sometimes finicky crypto exchanges. Furthermore, sophisticated investors like multimillion-dollar family offices would be able to invest in a regulated (and therefore “safe”) bitcoin product. Those are some of the reasons advocates want to see an ETF okayed by the Securities and Exchange Commission.

Breaking it down

Well over two years ago, the Ontario Securities Commission approved the first North American bitcoin exchange-traded fund, sparking hope that an American product might soon be approved as well. Later in 2021, the U.S. Securities and Exchange Commission approved the first bitcoin futures ETF, opening the door to several other similar products.

As of right now, there's still no spot bitcoin ETF trading in the U.S., but BlackRock’s filing a few weeks ago signaled to the industry that the time may be coming when that changes. Over the past few weeks, we’ve seen half a dozen new applications for a spot bitcoin ETF in the U.S. Has the market evolved enough to support an ETF, and can companies provide the SEC with enough assurances that an ETF would be safe?

The major difference we’re seeing now is these applicants are spending more time talking about their surveillance-sharing agreements (with some prompting from the SEC). COINBASE will be the marketplace for all of the major would-be ETF issuers that have identified a partner so far – namely, Nasdaq and Cboe BZX, on behalf of BlackRock, Fidelity, VanEck and others.

The SEC has brought up surveillance-sharing agreements in the past. In 2019, the regulator published a 112-page order explaining its rejection of a bitcoin ETF application from Bitwise, saying the bitcoin market had too much potential for manipulation and there needed to be a “surveillance-sharing agreement with a regulated market of significant size relating to the underlying assets” to deter any potential manipulation.

One problem is there's no clear definition for a what a regulated market of significant size is, said James Seyffart, an analyst with Bloomberg Intelligence who’s followed bitcoin ETF applications for years.

“Usually, every time they delay all the way through and then they deny them. In that process, they sometimes give comments,” Seyffart said. “Some of it is going to be behind closed doors ... some of that is undoubtedly going to happen.”

Coinbase is undoubtedly the largest U.S. crypto exchange. According to CoinGecko, it has more than twice the 24-hour trading volume (when normalized) overall when compared to its closest competitor, Kraken. The bulk of that appears to come from its bitcoin market.

The SEC has even acknowledged Coinbase’s role in the U.S., saying it is “one of the largest crypto asset trading platforms in the world and the largest in the United States” in its lawsuit against the exchange.

The SEC’s lawsuit against Coinbase has nothing to do with its bitcoin market, which I’m guessing is also one of the reasons these companies are looking to the exchange as their surveillance-sharing agreement partner.

The open question is whether the SEC will agree that Coinbase operates a regulated bitcoin market of significant size – and whether that’s necessary for an approval.

Last year, the regulator didn’t seem to think that there was any regulated market for bitcoin. Specifically, when it approved Teucrium’s bitcoin futures ETF in April 2022, the SEC wrote that “spot bitcoin markets are not currently ‘regulated,’” in a footnote explaining why surveillance-sharing agreements for bitcoin futures market wouldn’t work for spot ETFs.

Meanwhile, the BlackRock/Nasdaq filing argues that there doesn’t need to be a significant, regulated market in the first place, pointing to past ETF rejections.

“The regulated market of significant size test does not require that the spot bitcoin market be regulated in order for the Commission to approve this proposal, and precedent makes clear that an underlying market for a spot commodity or currency being a regulated market would actually be an exception to the norm,” the filing said. “These largely unregulated currency and commodity markets do not provide the same protections as the markets that are subject to the Commission’s oversight, but the Commission has consistently looked to surveillance sharing agreements with the underlying futures market in order to determine whether such products were consistent with the Act.”

The bitcoin futures market should be enough for the SEC’s “significant size” test, the filing said.

• Denmark's Financial Watchdog Orders Saxo Bank to Shed Its Crypto Holdings: Saxo Bank will have to get rid of its crypto holdings after a new order from the Danish Financial Supervisory Authority. The bank said it had a limited amount of holdings, with the bulk of its crypto exposure coming through exchange-traded products.
• Belarus Looks to Ban Peer-to-Peer Crypto Transactions to Reduce Fraud: The Belarusian government said it intends to introduce legislation that would ban peer-to-peer crypto transactions.
• Singapore's MAS Orders Crypto Firms to Keep Customer Assets in a Trust by Year-End: The Monetary Authority of Singapore ordered crypto service providers to deposit assets in a regulated trust entity by the end of 2023.

This week

• 13:30 UTC (2:30 p.m. BST) The U.K. Parliament went through its third reading of a bill that would give law enforcement agencies greater crypto authorities.

Thursday

• 15:00 UTC (11:00 a.m. ET) The judge overseeing Genesis’s bankruptcy case will make a decision on FTX claims by today.

• The SEC will file a response to Coinbase’s letter in its ongoing lawsuit against the crypto company by today.

Elsewhere:

• (Bloomberg) Muyao Shen and Justina Lee at Bloomberg profiled Yi He, a co-founder of global crypto exchange Binance. It’s well worth a read.
• (The Wall Street Journal) Google is violating its own standards for placing advertisers’ videos on partner websites, the Journal reports, citing a company called Adalytics. Google said the report Adalytics shared has “many” inaccurate claims.
• (The Verge) The moderators of Reddit’s Ask Me Anything community will step back from the amount of volunteer work they put in, citing the company’s recent actions.
• (The Atlantic) Twitter has made a number of changes recently: blocking users who aren’t logged in from seeing tweets, and a limit on how many tweets people can see even when logged in.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Twitter .

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See ya’ll next week!