What's Good for Grayscale and Bitcoin ETFs Could Be Great for Coinbase

By André Beganski

Grayscale’s courtroom victory over the Securities and Exchange Commission (SEC) on Tuesday was good news for crypto, with markets showing green. But on Wall Street, Coinbase was also flying high, and there’s a strong indication as to perhaps why.

Shares of Coinbase were up 15% when markets closed on Tuesday. The gains outpaced Bitcoin itself, which was up 7% over the past 24 hours, according to CoinGecko.

The upswing came after the U.S. Court of Appeals for the D.C. Circuit sided with Grayscale—ordering the SEC to reconsider an application to convert its flagship Bitcoin fund, Grayscale Bitcoin Trust (GBTC), into a spot Bitcoin ETF and calling previous denials “capricious.”

Grayscale argued in July that the SEC should approve all Bitcoin ETFs at once when the time comes, saying America's financial watchdog “should not pick winners and losers.” And as anticipation grows that a spot Bitcoin ETF could soon be approved, Coinbase is in a unique position to see a lot of upside, according to Coinbase’s Chief Legal Officer Paul Grewal.

“Coinbase has a significant role to play as the custodian of choice, ensuring protection of client assets,” he told Decrypt in a written statement. “Our commitment to surveillance-sharing agreements with listing exchanges reinforces our commitment to support and augment their compliance efforts.”

Firms including BlackRock, the $8.5 trillion asset manager, have named Coinbase as the custodian of coins in its spot Bitcoin ETF. The product, which has yet to be approved in the U.S., would give investors indirect Bitcoin exposure without having to hold BTC themselves.

Spot Bitcoin ETFs entail Bitcoin being purchased with a respective amount of shares being doled out. While BlackRock has chosen Coinbase as its prospective custodian, other firms like Valkyrie have removed the exchange in amended applications.

America’s leading cryptocurrency exchange has also established so-called surveillance-sharing agreements with the Cboe BZX Exchange and Nasdaq, where several firms have applied to list spot Bitcoin ETFs of their own.

Under the agreements, Coinbase would bolster the Cboe and Nasdaq’s ability to detect potential fraud and manipulation in Bitcoin’s spot market by providing information about trading, clearing activity, and customer identification.

The agreements serve the purpose of quelling the SEC’s Bitcoin-related market manipulation concerns, a common refrain cited in the agency’s repeated Spot Bitcoin ETF denials dating back to 2013.

However, in its opinion on Tuesday, the court said that existing surveillance-sharing agreements for Bitcoin futures ETFs—first listed in 2021 following SEC approval—should be enough to abate them.

“The underlying assets—bitcoin and bitcoin futures—are closely correlated,” the opinion stated. “The surveillance sharing agreements with the CME are identical and should have the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin and bitcoin futures."

The court’s opinion calls into question whether some firms could potentially alter the surveillance-sharing agreement listed in their applications to mirror Grayscale or other Bitcoin futures ETFs that have already been approved.

To be clear, compensation details are sparse regarding Coinbase’s deal with the Nasdaq and Cboe in several spot Bitcoin ETF applications, including BlackRock’s and Invesco’s, so it’s hard to tell how much revenue Coinbase could potentially see.

“It's kind of hard to say at the moment, without them sort of disclosing it,” Needham & Company analyst John Todaro told Decrypt. “It seems like we have to wait and see in terms of what kind of information we get from a public information perspective.”

Still, it’s clear that Wall Street is feeling somewhat optimistic.

Even though the court sided with Grayscale on the sufficiency of existing surveillance-sharing agreements, that doesn’t mean spot and futures markets shouldn’t both be monitored, Sacha Ghebali, director of strategy at The Tie, a crypto analytics platform, told Decrypt.

“The key argument of the court is that the SEC is not providing evidence showing that fraud and manipulation could affect spot and regulated futures markets differently,” he said. “However, monitoring for fraud and manipulation remains important as the ultimate goal is that price discovery happens on ‘clean’ markets.”

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