Coinbase could be a complication as SEC Chair Gary Gensler probes SSA efficacy in spot Bitcoin ETF race

• SEC Chair Gary Gensler has expressed concerns about cryptocurrency exchanges operating "conflicting services."
• Citing "limited risk monitoring," Gensler went negative on crypto exchanges during a Webinar on July 12.
• Multiple institutions have reached surveillance-sharing agreements with Coinbase, making it a candidate for SEC's concerns.
• Gensler questioning Coinbase's risk monitoring capabilities is concerning considering recent advice from former SEC chair Jay Clayton about demonstrated efficacy.

Coinbase Inc has been focal in the ongoing race for Spot Bitcoin Exchange Trade Funds (ETFs) race. Its position as the largest crypto exchange in the US is likely the driving force for its popularity. This comes as institutional players identify partners to bolster their filings to convince the US Securities and Exchange Commission (SEC) for approval.

Also Read: Bitcoin could not break the resistance level, expert calls for new capital inflow

Coinbase capabilities as an SSA questioned by SEC's Gensler

Coinbase Inc, the leading crypto platform in the US on trading volume metrics, could become a complication in the ongoing race for Spot Bitcoin ETF applications. This comes after SEC Chair Gary Gensler expressed concerns about cryptocurrency exchanges operating "conflicting activities" despite having "limited monitoring."

With this argument, senior ETF Analyst for Bloomberg, Eric Balchunas, alleges that efforts by institutional players like BlackRock and CBOE to show their SSA could be "pointless" in the commission's eyes. Noteworthy, the two firms pegged Coinbase as their choice SSA.

Citing Balchunas:

Initial reaction: seems like a bit of cold water (bc in the futures ETF filing race which we predicted right, Genz's words proved imp clues). This makes seem like SSA could be pointless if this is problem for him? (but that would be moving goal posts bc no mentioned in denials)

Balchunas cited TheBlock, which quoted Gensler during a Webinar on July 12, 2023.

An SSA, short for Surveillance Sharing Agreement, defines an arrangement between crypto exchanges and regulators or market surveillance providers such as the SEC. It enhances the crypto market's integrity and transparency by sharing trading data and information. 

Coinbase operates a significant part of the US-based spot trading platform for Bitcoin, representing a substantial portion of US-based and USD-denominated Bitcoin trading. Its collaboration with the Chicago Board Options Exchange (CBOE) ETF applications started on June 21. Besides the CBOE, BlackRock and Fidelity also listed Coinbase as SSA in their iShares Bitcoin Trust as indicated on Nasdaq's 19b-4 form. 

If approved, BlackRock and CBOE would be able to share trade data with the commission, and book information, among other relevant market data. This would help put out or reduce the SEC's suspicion of market manipulation and allow it to confirm the lack thereof.

Gensler questions Coinbase's risk monitoring capabilities, failed checkbox for Jay Clayton's counsel

Gensler is concerned that crypto exchanges like Coinbase tend to operate conflicting services despite having "limited risk resources" to prevent wash trading. Notably, operating conflicting services is one of the charges in the ongoing Coinbase versus SEC case. Specifically, the SEC is concerned with the risk of conflict of interest and market manipulation.  

…they could be trading directly against you and market-making against you.

 Gensler questioning Coinbase's risk monitoring capabilities taints the institutional players' choice to use Coinbase for their SSA. Further, it may indicate that the firms have not successfully  "demonstrated efficacy" of the capability to achieve "surveillance and market protections for investors. " This is what former SEC chair Jay Clayton urged the applicants to achieve to increase approval odds.

Coinbase versus SEC

Coinbase is at the center of an SEC investigation over allegations of unregistered securities, brokerage, and clearing services. Based on this background, the SSA selection by the two firms was controversial from the beginning. For instance, pro-XRP lawyer John Deaton said it was interesting that "the largest Asset Manager in the World and others are disclosing their intent to do business with this illegal business."

Nevertheless, the filings being approved would bode well for Bitcoin price, passing as an impulse to trigger a new capital flow to drive the market.

Read:  How spot BTC ETF approvals could bring new capital inflow and drive Bitcoin price.

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