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Unveiling the New Era of Bitcoin ETFs: Cboe’s Strategic Alliance with Coinbase

In an unexpected turn of events, Cboe’s BZX Exchange singled out Coinbase, the renowned cryptocurrency exchange, as the market it will work with under its surveillance-sharing agreement. The news comes as Cboe submitted new applications for a spot Bitcoin exchange-traded fund (ETF) on behalf of several prospective Bitcoin ETF issuers on Friday.

A Collective Bid for Spot Bitcoin ETFs

Over the past few weeks, financial giants like Fidelity, WisdomTree, VanEck, ARK Invest, Galaxy/Invesco, and BlackRock have taken the plunge, filing applications for spot Bitcoin ETFs. Their ambition? To finally break ground on a product the U.S. Securities and Exchange Commission (SEC) has resisted for years.

While BlackRock’s proposal goes through Nasdaq, the other firms have allied with Cboe. However, according to the Wall Street Journal, the SEC countered Nasdaq and Cboe on Friday, citing their applications as “inadequate” due to the absence of a specified market partner for their surveillance-sharing agreements.

Cboe Strikes Back: Coinbase Named as Partner

Cboe’s updated filings underscored Coinbase’s vital role in Bitcoin trading, highlighting that its platform “accounts for a significant part of U.S.-based and USD-denominated Bitcoin trading.” With this move, Cboe officially declared the U.S. crypto exchange as its partner for these surveillance-sharing agreements.

The revised filings detailed that the Spot BTC SSA (surveillance-sharing agreement) would likely resemble a surveillance-sharing agreement between two Intermarket Surveillance Group members. This partnership would furnish the Exchange with auxiliary access to information concerning spot Bitcoin trades on Coinbase, should the Exchange deem it essential for its surveillance program for the Commodity-Based Trust Shares, akin to how exchanges share data as part of the ISG.

The SEC’s Stance on Surveillance-Sharing Agreements

Historically, the SEC has endorsed surveillance-sharing agreements with markets of “significant size.” The regulator maintains that such arrangements are critical to stave off market manipulation, curb undesired activities, and shield consumers. Indeed, the absence of these pacts played a pivotal role in the SEC’s previous dismissals of Bitcoin ETF applications.

However, the SEC has yet to acknowledge that it is formally scrutinizing these applications. Once the filings are documented in the Federal Register – the national logbook – the SEC will commence an initial 45-day review period, which can extend up to 240 days.

A Wrinkle in the Process for Bitcoin ETFs

What could potentially complicate the SEC’s evaluation is its recent legal action against Coinbase, alleging the company of operating an unregistered securities exchange, broker, and clearinghouse. However, it should be noted that the SEC has not claimed that Bitcoin is a security. SEC Chair Gary Gensler has frequently used Bitcoin as an example of a digital asset that is not a security.

With the dust yet to settle, the million-dollar question is whether the SEC will concede that Coinbase holds a significant and regulated market for Bitcoin.