Market watchers were curious if the largest asset manager in the world, BlackRock, had a higher chance of being approved than its many predecessors who have been rejected. They focused on a feature in the application which allows for suspicious trades being flagged and reported to authorities.

BlackRock’s application sparked an avalanche of follow-up filings, with the now-ubiquitous Surveillance-Sharing Agreement added. The U.S. Securities and Exchange Commission’s (SEC’s) decision will be influenced more by an information-sharing agreement that reverses the power balance and allows regulators to request additional background.

The SEC’s requirement to share surveillance data to prevent crypto market manipulation is not new – it was first mentioned in the Winklevoss Bitcoin ETF application in 2017. – but details from a “Coinbase & NASDAQ Information sharing Term Sheet” that CoinDesk shared point to more.

The difference here is between pushing and pulling. The SSA is concerned with data surveillance conducted by the Coinbase (COIN), in this case. This information can be pushed out to regulators, ETF suppliers and listing exchanges if deemed suspect. Contrary to this, information-sharing agreements allow regulators and ETF suppliers to access data from the exchange.

Information in question may be specific traders or trades, but the agreement requires a crypto exchange also to share all data including personally identifiable information. This includes the name and address of the customer. The information-sharing agreement structure does not appear in the spot bitcoin ETF documents, but it is common in other markets.

A person with knowledge of the subject has said that a request for information sharing must be very specific. It is not unlike a subpoena.

The person who requested anonymity said, “It’s not just a fishing trip, because it includes all the information about any trades that were made between two points in time.” “The obvious problem is that, by definition, crypto traders don’t want their information to be shared. It’s anathema for the crypto ethos in general. But [firms] must do it if the ETF is to be successful.”

Nasdaq, Coinbase and other exchanges declined to make any comments. BlackRock declined to comment on requests.

Bitcoin ETF application History

Since 2017, the SEC highlighted that bitcoin ETF applications must have a surveillance sharing agreement with , a regulated and significant market. However, firms lack clarity and a standard objective when it comes interpreting this.

Matt Hougan is chief investment officer of Bitwise Asset Management. He said that the inclusion of a surveillance-sharing agreement as opposed to an information sharing agreement makes sense because an ETF does not depend on a market unregulated. Bitwise has submitted numerous ETF applications.

Hougan stated in an interview that if there is a pull ability, it comes from the regulated markets. A push ability comes from the unregulated markets. “The SEC will want to have the regulated markets oversee this surveillance. And in terms of identifying people at the bottom, I think these agreements are going to include that.”

Ratings of approval

Brokers and exchanges on equities market are familiar with the combination of information and surveillance sharing. The regulator can request additional information regarding the trading history of the client.

When a broker’s client sends an order, say, to Nasdaq and this order is flagged by the exchange’s SMARTS surveillance, the broker, as well as the exchange, are required to submit a report of suspicious activity (SAR).

The “second step” is for regulators to investigate a SAR, said Dave Weisberger. CEO of the crypto trading platform CoinRoutes requested PII in order to determine if the same beneficial owner was behind a set of trades. This creates a consolidated audit track.

“Coinbase and Nasdaq are likely to say that if there are suspicious activities – and they are watching for them – the regulator can ask who is doing it. But they won’t just give out PII at random. It will have to be suspicious. Weisberger told an interviewer that this is what it would be like.

If that’s true, then I think the SEC won’t just approve this ETF but also approve it, and do a victory lap. “And considering how unpopular the SEC is right now, I suspect that they need to do it.”

Sheldon Reback, Nick Baker and Nick Baker edited the book.