The Securities and Exchange Commission (SEC) has dealt a blow to BlackRock and Fidelity by rejecting their applications for a Bitcoin exchange-traded fund (ETF). The SEC, under the leadership of Gary Gensler, has expressed hostility towards spot Bitcoin ETFs due to concerns about price manipulation. However, despite this setback, BlackRock and Fidelity are optimistic that they can change Gensler's stance by implementing data-sharing surveillance agreements between exchanges.

In contrast to the approval of futures-based ETFs by Wisdom Tree and BlackRock, the SEC has been cautious about spot market ETFs, citing worries about manipulation. The recent filings aim to address these concerns by proposing surveillance sharing agreements that would provide the SEC with greater comfort regarding price manipulation. By sharing information between exchanges, the goal is to establish a robust framework that mitigates the risks associated with spot ETFs.

Surveillance sharing is seen as a crucial factor for SEC approval of Bitcoin ETFs. While futures ETFs have successfully addressed this requirement, spot ETFs have struggled to meet the same standards. A potential game-changer could be a surveillance sharing agreement between NASDAQ and a prominent US spot Bitcoin exchange. Such an agreement would enhance transparency and oversight, potentially paving the way for the approval of spot ETFs.

Fraud and manipulation in the spot Bitcoin market have been significant factors leading to the rejection of Bitcoin ETF applications. To overcome these concerns, establishing surveillance sharing agreements with reputable spot crypto markets could be a viable solution. A partnership between NASDAQ or a trusted asset exchange and a US Bitcoin spot exchange, like Coinbase, could provide the necessary assurances to address the SEC's worries.

While the rejection of Bitcoin ETFs is disheartening for US investors, who currently lack a spot ETF for Bitcoin and Ethereum, there is hope for the future. Canada has had spot ETFs for years, highlighting the potential for their successful implementation. However, certain restrictions may limit some US investors from participating in these investment opportunities.

In a notable development, Kathy Woods' Arc Invest has amended its Bitcoin ETF filing to include a surveillance sharing agreement. Such agreements involve sharing information about market trading activity, clearing activity, and customer identification to prevent market manipulation. The inclusion of this agreement in BlackRock's application signifies a potential breakthrough for the listing of a spot Bitcoin ETF in the US.

While challenges persist, the rejection of BlackRock and Fidelity's Bitcoin ETF applications should not overshadow the potential breakthroughs on the horizon. The industry continues to explore avenues for addressing concerns, with surveillance sharing agreements and advancements in digital asset infrastructure offering hope for the future of crypto ETFs.