Partnering with Coinbase Global (COIN.O) may hinder rather than help Nasdaq's (NDAQ.O) bid to win regulatory approval for a bitcoin exchange-traded-fund it wants to launch with BlackRock (BLK.N).
Nasdaq last month filed a proposal with the U.S. Securities and Exchange Commission (SEC) to launch an ETF by BlackRock that would track the spot bitcoin market, triggering a flurry of similar filings from Cboe Global Markets (CBOE.Z) for bitcoin ETFs by rivals including Fidelity and Invesco (IVZ.N).
After a decade of SEC rejections, the proposal from BlackRock, the world's largest asset manager, revived industry hopes that the SEC may finally be persuaded to greenlight a bitcoin ETF in what would be a watershed moment for the digital asset.
Speaking to FOX Business last week, BlackRock CEO Larry Fink said the ETF could make it easier for everyday people to invest in crypto. Bitcoin has gained more than 20% since the filing was unveiled.
The SEC has denied previous spot bitcoin ETF proposals on the basis that they would be vulnerable to manipulation. Nasdaq said last week that it would address that concern by working with Coinbase, the largest U.S.-based crypto exchange, to police trading in the underlying bitcoin market. The CBOE this week proposed a similar surveillance arrangement.
That could actually be a problem, according to some lawyers who follow the industry. The SEC last month sued Coinbase, escalating SEC chair Gary Gensler's crackdown on the crypto industry. The SEC said Coinbase trades cryptocurrencies that qualify as securities and should be registered as a broker, exchange and clearinghouse and subject to the SEC's risk management and investor protection rules.
The SEC's allegations, which Coinbase denies, raised questions over its suitability as a partner for Nasdaq and CBOE.
"I don't think it's necessarily a badge of honor to say that you're using an entity that the SEC is suing as providing you with critical investor protection services," said John Reed Stark, former chief of the SEC's Office of Internet Enforcement.
"The whole point of the SEC's lawsuit is that there's no transparency into what Coinbase does" as an exchange, he added.
Coinbase previously has said that as a listed company its business is subject to a slew of disclosure rules. And with roughly 56% of U.S. dollar bitcoin trading, according to Nasdaq's filing, Coinbase is integral to the U.S. bitcoin market.
Sui Chung, CEO of CF Benchmarks, said the industry is trying to meet the SEC's bar and is committed to the "highest possible standards of market integrity and transparency." CF Benchmarks is the UK-regulated index provider for four proposed bitcoin ETFs, including BlackRock's.
Representatives for BlackRock, Nasdaq and CBOE declined to comment.
When asked by Reuters about the arrangement on Wednesday, Gensler did not comment on Coinbase specifically but reiterated previous comments that investors should not expect the same level of integrity and fairness on crypto exchanges as in the traditional equity markets.
'CALCULATED DECISION'
Gensler has said bitcoin is one crypto token that is outside the SEC's jurisdiction, while the cryptocurrency is not subject to the Coinbase litigation. The ETF proposals are unrelated to the Coinbase litigation and should be treated separately, according to Joseph Silvia, a lawyer with law firm Dickinson Wright.
"But ultimately it's going to be Gensler who's going to make the decision as to whether or not the litigation is going to affect the application," Silvia added.
All told, the SEC has 240 days after it accepts the bitcoin ETF filing applications to make a decision.
Chung said the industry would not spend the resources trying to meet the SEC's bar if it believed the decision ultimately hinged "on the whim of one or two individuals that may be skeptical as to the merits of Bitcoin as an investment asset."
Still, some lawyers said it would likely come down to that.
"The statements that Gensler has made don't give me any sense that he's going to be flexible," said Richard Marshall, a partner at law firm Katten and a former SEC attorney.
"I don't see that the SEC is going to open the gates," Marshall added.
