The Securities and Exchange Commission on Friday rejected a proposed rule change that would’ve allowed for the creation of the first bitcoin exchange-traded fund—a decision that has followers of the world’s largest cryptocurrency wondering what happens next. In its ruling, the SEC said it was unnerved by the lack of regulation in a market that is largely based outside of the U.S., and was worried about the potential for market manipulation.

Fortunately for investors who were hoping to buy into the fund, Friday’s decision won’t necessarily preclude the approval of other proposed bitcoin ETFs. Two other companies are vying to become the first bitcoin-focused ETF, but what might happen next is unclear. The New York Stock Exchange filed a proposed rule change with the SEC on Jan. 25 to allow the Grayscale Bitcoin Trust to trade on its ETF exchange, NYSE Arca. The agency now has until Friday, Sept. 22 to issue its ruling. Barry Silbert, the chief executive officer of the Digital Currency Group, Grayscale’s parent company, declined to comment on the Winklevoss decision.

NYSE Arca filed another rule-change proposal to list shares of the SolidX Bitcoin Trust, another product vying to be the first bitcoin ETF, back in July, but it is unclear what is happening and representatives for SolidX couldn't be reached for comment. One factor that differentiated the Winklevoss proposal from its rivals was the mechanism for tracking the bitcoin price. The Winklevosses planned to use pricing data gleaned from Gemini, a digital-currency exchange launched in late 2015 that commands less than 1% of the bitcoin market.

Both the Grayscale and SolidX proposals would peg the price to the TradeBlock bitcoin index. Grayscale’s proposal is widely viewed as the favorite within the bitcoin community, largely because of shares its trust GBTC, +5.88%  already trade over-the-counter, often at a premium to bitcoin’s net-asset value.

But some have expressed concerns about potential conflicts of interest at Grayscale. In a comment letter filed with the SEC, Jeffrey Wilcke, a representative of the Ethereum Foundation, pointed out the relationship between the Grayscale trust and CoinDesk, an online news service that covers the digital currency market. Both Grayscale and CoinDesk are owned by DCG. Wilcke couldn't be reached for comment.

Jerry Brito, chief executive director of Coin Center, a bitcoin advocacy group, said the SEC’s concerns about regulation create a “chicken and egg problem.” “How do we develop well-capitalized and regulated markets in the U.S. and Europe if financial innovators aren’t allowed to bring products to market that grow domestic demand for digital currencies like bitcoin?,” he said in an emailed statement.

When asked about what’s next for bitcoin, Chris Burniske, blockchain analyst and products lead at ARK Invest, said it is “clear that the SEC still has a way to go in terms of getting comfortable with the bitcoin markets.” Bitcoin market experts said the Winklevoss’s could modify their proposal to address some of the agency’s concerns, but that they would need to start the process again from the beginning, and that BATS would need to issue a new proposed rule change, which the agency would then have a maximum of 240 days to consider.

For their part, the Winklevoss brothers say they remain committed to bringing “COIN” to market. “We began this journey almost four years ago, and are determined to see it through. We agree with the SEC that regulation and oversight are important to the health of any marketplace and the safety of all investors,” said Tyler Winklevoss in an emailed statement.

Bitcoin US-BTCUSD  sold off sharply after the decision, with the price of a single coin losing $250 in a matter of minutes. But it quickly bounced back and was trading down 6.3% on the day at $1,116 late Friday in New York, according to the CoinDesk bitcoin price index. Spencer Bogart, the head of research at Blockchain Capital, said this is evidence that the ETF presented “no change to bitcoin’s compelling fundamental growth story.” “The drivers of bitcoin demand remain as strong now as they were two months ago before the ETF fervor arrived,” he said.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member

U.S. regulators reject Bitcoin ETF,
digital currency plunges

The U.S. Securities and Exchange Commission on Friday denied a request to list what would have been the first U.S. exchange-traded fund built to track bitcoin, the digital currency.Investors Cameron and Tyler Winklevoss have been trying for more than three years to convince the SEC to let it bring the Bitcoin ETF to market. CBOE Holdings Inc's Bats exchange had applied to list the ETF.

The digital currency's price plunged, falling as much as 18 percent in trading immediately after the decision before rebounding slightly. It last traded down 7.8 percent to $1,098. Bitcoin had scaled to a record of nearly $1,300 this month, higher than the price of an ounce of gold, as investors speculated that an ETF holding the digital currency could woo more people into buying the asset.

Bitcoin is a virtual currency that can be used to move money around the world quickly and with relative anonymity, without the need for a central authority, such as a bank or government. Yet bitcoin presents a new set of risks to investors given its limited adoption, a number of massive cyber security breaches affecting bitcoin owners and the lack of consistent treatment of the assets by governments.

 

"Based on the record before it, the Commission believes that the significant markets for bitcoin are unregulated," the SEC said in a statement. "The commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop." The regulators have questions and concerns about how the funds would work and whether they could be priced and trade effectively, according to a financial industry source familiar with the SEC's thinking.

"We began this journey almost four years ago, and are determined to see it through," said Tyler Winklevoss, CFO of Digital Asset Services LLC. "We agree with the SEC that regulation and oversight are important to the health of any marketplace and the safety of all investors." The Winklevoss twins are best known for their feud with Facebook Inc founder Mark Zuckerberg over whether he stole the idea for what became the world's most popular social networking website from them. The former Olympic rowers ultimately settled their legal dispute, which was dramatized in the 2010 film "The Social Network."

Since then they have become major investors in the digital currency, which relies on "mining" computers that validate blocks of transactions by competing to solve mathematical puzzles. The first to solve the puzzle and clear the transaction is rewarded with new bitcoins. Solutions to the puzzle come roughly every 10 minutes. Advocates of the currency and the technology it relies on to document transactions, blockchains, were dismayed by the ruling. "How do we develop well-capitalized and regulated markets in the U.S. and Europe if financial innovators aren't allowed to bring products to market that grow domestic demand for digital currencies like bitcoin?" asked Jerry Brito, executive director of Coin Center, an advocacy group.

Spencer Bogart, head of research at Blockchain Capital, said bitcoin's price could fall as much as 20 percent but that its long-term adoption will continue. A Bats spokeswoman said the exchange is reviewing the SEC's statement and would have no further comment. There are two other bitcoin ETF applications awaiting a verdict from the SEC. Grayscale Investments LLC's Bitcoin Investment Trust, backed by early bitcoin advocate Barry Silbert and his Digital Currency Group, filed an application last year. SolidX Partners Inc, a U.S. technology company that provides blockchain services, also filed its ETF application last year.

Chuck Reynolds
Contributor

Alan Zibluk – Markethive Founding Member