How Coinbase Became a Beneficiary of Six Bitcoin ETF Applications

When BlackRock filed for Bitcoin ETF on June 15th, it triggered an avalanche of similar (re)filings. The SEC has refused every application since the Winklevoss brothers of Gemini Exchange filed it first in 2013. Still, BlackRock, the world’s largest asset manager holding $9 trillion, has an unmatched SEC approval rate of 575 to 1 rejection.

Two weeks later, the odds for another SEC approval became exceedingly high when the watchdog agency asked BlackRock for market surveillance clarification. The bullish implication is that the SEC needed to dot all the i’s and cross all the t’s before committing to an approval.

On June 29, Nasdaq refiled BlackRock’s exchange-traded fund, listing Coinbase Global Inc (COIN) as its surveillance partner. Alongside BlackRock, all six Bitcoin ETF applicants followed suit – Ark Invest, Fidelity, WisdomTree, Invesco, and VanEck. 

SEC’s Stance on Coinbase Explained

It is highly unusual for investment heavyweights to pick Coinbase as the partner for a shared surveillance agreement. The SEC demands this requirement to ensure a mechanism for detecting and minimizing market manipulation, conflict of interest, and fraud. In this case, it would be Coinbase monitoring the underlying asset, Bitcoin, for upcoming spot-traded ETFs.

The SEC’s official core mission is to protect investors. This includes the prevention of wash trading, pump-and-dump schemes, and spoofing. However, the same agency accused Coinbase of being an unregistered broker, making “billions of dollars unlawfully facilitating the buying and selling of crypto asset securities.”

Furthermore, the SEC alleged that Coinbase deprived “investors of critical protections, including rulebooks that prevent fraud and manipulation.”

At a glance, this seems exceedingly contradictory. However, if the SEC lawsuit against Coinbase is placed in the context of Operation Chokepoint 2.0, clearing the road for TradFi, the contradiction fades. Namely, the SEC is engaging in regulatory overreach as it probes the legislative void around crypto assets. 

Paul Grewal, Coinbase’s Chief Legal Officer, hinted at this after filing for the move to throw out the SEC’s case, to which SEC responded by purportedly ignoring established legal practice:

“They ignore the clear and unmistakable warnings of the Supreme Court just last week against regulatory overreach in major questions reserved to Congress.”

Namely, the SEC pushes the ‘regulation by enforcement’ envelope out of its bounds. By the same token, the TradiFi investment firms are confident in naming Coinbase as the Bitcoin ETF surveillance custodian.

That’s because their underlying assumption is that this is the SEC’s true intent, not that the agency views Coinbase as fraudulent to the extent of harming investors the agency is charged to protect.

Coinbase Already Established its Regulatory Compliance Chops

Preemptively, Brian Armstrong, Coinbase CEO, established strong ties with the USG shortly after going public under the COIN ticker in April 2021. In September 2021, the exchange signed a deal with the Department of Homeland Security (DHS) worth $1.8 million to supply DHS with blockchain analytics software.

This deal extended to the Immigrations and Customs Enforcement (ICE) as well. Due to these proactive efforts to surveil cryptocurrency activity, Coinbase became the expected beneficiary of the milestone deal with BlackRock, in August 2022. 

Called “the fourth branch of government” by Bloomberg, BlackRock selected Coinbase to access its sophisticated Aladdin end-to-end portfolio management system, thus providing crypto rails for institutional investors.

SEC FUD Priced in for COIN Shares?

When contrasted against institutional support, Coinbase’s entanglement with the SEC has largely been neutralized. This is evident by COIN stock recovery, even with the pending unresolved SEC situation.

This suggests that the SEC-induced FUD is already priced in. If BlackRock’s Bitcoin ETF goes through, along with the other five investment firms that picked Conbase as a surveillance partner, the exchange could manage more bitcoins than Grayscale Bitcoin Trust. 

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GBTC, as an over-the-counter (OTC) traded fund, currently holds 625,560 BTC represented as shares. However, considering that GBTC is owned by Barry Silbert’s Digital Currency Group (DCG), it is unclear if this will last. Gemini’s CEO Cameron Winklevoss is actively pursuing Silbert for paying back $1.47 billion owed to Gemini Earn customers. 

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With this uncertainty in play, Coinbase is bound to benefit, reaping the rewards from transaction fees. Conversely, Coinbase’s revenue could see a significant boost by the year’s end, which would sharply reflect on its stocks. Much will hinge on the judicial system, just like in the case of Ripple Labs.

With Binance.US in trouble, do you think Coinbase will eventually threaten Binance’s market share internationally? Let us know in the comments below.

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.