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Surveillance-Sharing Agreements Key to BTC ETF Approval

07/23 – 07/29

Surveillance-Sharing Agreements Key to BTC ETF Approval
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Investors have kept a close eye on the heated controversy surrounding Bitcoin exchange-traded funds (BTC ETF) this week. The U.S. Securities and Exchange Commission (SEC) has for the second time rejected the application of launching Winklevoss Bitcoin Trust (a BTC ETF) on the BATS BZX Exchange (BZX). The price of BTC suffered a slight dip to $7839 following this news, as noted in our Chart of the Week.

We believe that price manipulation questions surrounding BTC is the primary concern holding the U.S. SEC back from approving BTC ETF applications. The application submitted by BZX claims that price manipulation of BTC is prohibitively costly and difficult given that arbitrage leads to the convergence of BTC prices on global exchanges. However, BZX are unable to provide data or analysis in support of their statements regarding the effectiveness of arbitrage in the bitcoin spot market. The U.S. SEC thus rejected the application of BZX, citing its failure to comply with Section 6(b)(5) of the Exchange Act in preventing fraudulent and manipulative acts of BTC.

We believe that BTC ETF applications are more likely to get approved by the U.S. SEC if the applicant has entered into a surveillance-sharing agreement with a regulated market of significant size related to BTC. Such an agreement provides the information on market trading activity, clearing activity and customer identity, which enables the exchange to conduct prompt investigations into possible price manipulation of BTC. The U.S. SEC relies on surveillance-sharing agreements as a crucial indicator in approving commodity trust exchange-traded products (ETP) such as the iShares Copper Trust of BlackRock, which serves as a precedent for evaluating BTC ETF applications.

Despite the rejected BZX application, the U.S. SEC acknowledged the early stage of development of BTC markets, and did not restrict the application of future BTC ETFs. Investment firms such as VanEck and Direxion are striving to launch the first approved BTC ETFs, with Direxion’s decision to be postponed until 21 September by the U.S. SEC.  With the traditional ETF giants like BlackRock considering entering crypto markets, we expect that the competition in launching BTC ETFs will intensify in the future.


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