On June 15th, BlackRock registered for a Bitcoin ETF, which led to a flood of related (re)filings. Ever since the Winklevoss brothers of Gemini Exchange submitted the initial application in 2013, the SEC has rejected every one. BlackRock, the largest asset manager in the world with $9 trillion in assets, has an unsurpassed SEC approval record of 575 to 1.
After the monitoring organization contacted BlackRock for further information regarding market surveillance two weeks later, the chances for another SEC clearance grew extremely strong. The optimistic interpretation is that the SEC had to make sure everything was in order before committing to an approval.
On June 29, Nasdaq updated the exchange-traded fund registered by BlackRock, naming Coinbase Global Inc (COIN) as its partner in surveillance. All six Bitcoin ETF applicants, including BlackRock, Ark Invest, Fidelity, WisdomTree, Invesco, and VanEck, did the same.
Explaining the SEC’s Stance on Coinbase
Heavyweight investors choosing Coinbase as their co-signatory for a shared surveillance agreement is quite uncommon. This requirement is made by the SEC to guarantee the existence of a system for identifying and mitigating fraud, conflicts of interest, and market manipulation. It would be Coinbase in this instance keeping an eye on the underlying asset, Bitcoin, for potential future spot-traded ETFs.
Investor protection is the SEC’s primary objective. This covers the avoidance of spoofing, wash trading, and pump-and-dump tactics.
Coinbase was accused by the same agency of being an unlicensed broker and earning “billions of dollars unlawfully facilitating the buying and selling of crypto asset securities”, according to the government’s allegations.
The SEC also claimed that Coinbase denied “investors of critical protections, including rulebooks that prevent fraud and manipulation.”
This appears quite incongruous at first. The conflict, however, disappears when Operation Chokepoint 2.0, which opens the way for TradFi, is seen in the context of the SEC action against Coinbase. In particular, as it looks into the legislative gap around crypto assets, the SEC is engaged in regulatory overreach.
Paul Grewal, the chief legal officer of Coinbase, made this suggestion after filing a motion to dismiss the SEC’s action, to which the SEC allegedly replied by disregarding accepted legal procedure:
“They ignore the clear and unmistakable warnings of the Supreme Court just last week against regulatory overreach in major questions reserved to Congress.”
In particular, the SEC goes beyond the parameters of « regulation by enforcement. » By the same token, the TradiFi investing businesses are secure in designating Coinbase as the Bitcoin ETF monitoring custodian.
That’s because their underlying presumption is that this is the SEC’s genuine intention, rather than that the agency considers Coinbase to be fraudulent to the point where it endangers investors who the agency is tasked with protecting.
Coinbase has already established its regulatory compliance procedures
Prior to coming public in April 2021 under the COIN ticker, Coinbase CEO Brian Armstrong forged close relationships with the USG. The exchange and the Department of Homeland Security (DHS) agreed to a $1.8 million contract in September 2021 to provide DHS with blockchain analytics software.
The Immigrations and Customs Enforcement (ICE) was also included in this agreement. In August 2022, Coinbase was projected to benefit from the milestone agreement with BlackRock as a result of their proactive measures to monitor bitcoin activities.
By choosing Coinbase, BlackRock, dubbed « the fourth branch of government » by Bloomberg, allowed institutional investors to utilize its sophisticated Aladdin end-to-end portfolio management system and get access to its crypto rails.
Is SEC FUD Already Priced Into COIN Shares?
Coinbase’s relationship with the SEC has mostly been neutralized in comparison to institutional backing. Even with the pending, unresolved SEC crisis, this is demonstrated by the rebound of the COIN stock.
This implies that prices have already taken into account the SEC-induced FUD. The exchange may manage more bitcoins than Grayscale Bitcoin Trust if BlackRock’s Bitcoin ETF and the other five investment companies that selected Conbase as a surveillance partner are approved.
As an over-the-counter (OTC) traded fund, GBTC presently has 625,560 Bitcoins (BTC) in the form of shares. Given that Barry Silbert’s Digital Currency Group (DCG) owns GBTC, it’s uncertain whether this will continue.
Coinbase will undoubtedly profit from this uncertainty since it will be able to charge transaction fees. By year’s end, though, Coinbase’s revenue may significantly increase, which would have a negative impact on its price. Much will depend on the legal system, much as it did in the Ripple Labs case.
