The fallout from the SEC's Bitcoin ETF rejection

1 April, 2017

In the leadup to the SEC issuing a decision on the Winklevoss Bitcoin ETF, speculation ran rampant regarding the future of the digital currency. Therefore, it came as somewhat of a shock and a letdown when the SEC actually rejected the proposed ETF.

In the months leading up to the SEC's decision, it had been practically assumed that the Securities and Exchange Commission would issue a favorable decision. Yet, that failed to happen.

Background behind the proposal and ultimate SEC rejection

In early March, the SEC elected to rule against the Winklevoss Bitcoin Trust exchange-traded fund. It had been a long four-year attempt to have the ETF approved, which ultimately proved to be a disappointment to many bitcoin enthusiasts. In the SEC's rejection, the commission noted that most of the digital currency is traded on exchanges located outside the United States. Such exchanges have been broadly labeled as money service businesses, which would have them fall under state regulation. In order to operate, such exchanges are required to obtain licenses, a process that must be completed on a state-by-state basis. As one might imagine, this process is extremely cumbersome.

The ETF, which has become popularly known as the Winklevoss Bitcoin Trust, was the creation of Cameron and Tyler Winklevoss. The twin brothers earned worldwide fame and wealth following a lawsuit they filed against Mark Zuckerberg regarding their involvement in the creation of Facebook. Since the lawsuit, the brothers have developed a passion for bitcoin and have been working diligently to bring the digital currency into the mainstream.

Despite the SEC's rejection, it seems as though the path toward a Winklevoss ETF might not be entirely lost. Bats BZX Exchange has recently filed a petition for the SEC's decision to be reviewed. The petition was filed in mid-March and could prove to be only the first to push the SEC to reverse its decision.

The effect of a possible SEC approval for a Bitcoin ETF

If the Winklevoss Bitcoin Trust were ever approved, it would be the first exchange-traded fund to provide coverage of the cybercurrency to retail investors. At the time of its most recent decision, the SEC found that the digital currency's market was possibly still not mature enough to support an ETF product. The SEC cited the potential risk for fraud as well as a lack of regulation as reasons for rejecting the bid.

Had the SEC approved the proposal, the public would have had the opportunity to invest in bitcoin with the purchase of shares in the ETF. Essentially, this would have made it possible for investors to trade bitcoin investments on the stock exchange. Since the SEC's rejection, bitcoin experienced a drop in value of more than 20 percent.1 Prior to that fateful decision, it had been largely assumed that if the ETF were approved, a wealth of opportunity would suddenly become available to both investors on Wall Street as well as regular investors who might have had an interest in investing in bitcoin but did not feel comfortable handling such investments on their own. A sudden rush of new investors would naturally have driven up the price of the digital currency. As traders awaited the SEC's decision, the price of bitcoin continued to edge upward in anticipation of the ETF proposal being approved. Of course, that failed to happen.

In more recent news, the Securities and Exchange Commission has dealt the bitcoin community yet another devastating blow. SolidX Management LLC had previously submitted an application for a proposed bitcoin ETF to be listed as an affiliate on the New York Stock Exchange. The SEC has also rejected that proposal. A third proposal for a bitcoin ETF has also been submitted. That proposal, backed by Grayscale Investments, is also expected to be rejected.

Despite two back-to-back rejections for a bitcoin ETF from the SEC and a possible third rejection on the horizon, all hope may not be lost. There is certainly still a tremendous amount of passion regarding bitcoin and enough advocates willing to continue pushing for the digital currency to finally become mainstream. While the path toward an SEC approval for a bitcoin ETF may now be a bit rockier, if regulatory issues can be overcome, it could still be possible for regular investors to take advantage of the opportunity to purchase bitcoin on the stock exchange at some point in the future.


1) Business Insider. Bitcoin dives after the SEC shoots down plans for another bitcoin ETF