Ed. Note: This article first appeared in Bloomberg
Bitcoin’s price plummeted after U.S. regulators rejected a proposal by the Winklevoss twins for a publicly traded fund based on the digital currency, dashing hopes that a government-approved investment vehicle would lead to wider interest in virtual money.
The SEC refused to grant an exemption that would have let the Winklevoss Bitcoin Trust trade on the Bats BZX Exchange, according to a filing posted Friday on the regulator’s website. The decision ended a months-long rally that pushed the virtual money’s value higher than gold. Bitcoin fell as much as 18 percent against the dollar to $978.76 after the decision, the lowest intraday price in a month.
Tyler and Cameron Winklevoss, the brothers famed for their dispute with Mark Zuckerberg over the origins of Facebook, vowed to continue working with the SEC to make their bitcoin vision a reality. They have been engaging with regulators and tweaking their proposal for years.
Friday’s decision doesn’t close the door on a possible future exchange-traded fund based on bitcoin, but it makes the path more complicated.
The SEC rejected the application because the Bats exchange would be unable to enter into necessary surveillance-sharing agreements given that “significant markets for bitcoin are unregulated,” according to the filing on the agency’s website. “The Commission does not find the proposed rule change to be consistent with the Exchange Act.”
Bitcoin isn’t regulated by any government and has been used by consumers worldwide to shelter assets from inflation or political upheavals in their home countries. Last year, bitcoin outperformed all major foreign-exchange trades, stock indexes, and currencies and commodity contracts.
“The SEC is the gatekeeper against securities that are not properly market tested and could be a danger to investors,” said Mark T. Williams, master lecturer at Boston University, who focuses on risk management. “It is reassuring that the SEC did their job in properly protecting the market.”
After bitcoin’s initial plunge on the news, the currency pared losses to 8.3 percent at 5:11 p.m. in New York on Friday.
“We remain optimistic and committed to bringing COIN to market, and look forward to continuing to work with the SEC staff,” Tyler Winklevoss said in a statement. “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.”
Two other bitcoin ETFs under regulatory review -- Bitcoin Investment Trust and SolidX Bitcoin Trust -- filed more recently, in January of 2017 and in mid-2016, respectively. The SEC staff’s wording in the decision could also spell trouble for the others, said Spencer Bogart, head of research at Blockchain Capital.
“The reasons for disapproval appear unrelated to specifics of the Winklevoss filing and therefore this announcement is a negative indicator for the prospects of the other bitcoin ETFs,” he said.
Hannah Randall, a spokeswoman for Bats, said the exchange is reviewing the ruling and declined to comment further. The decision by the SEC was made by the Trading and Markets Division staff, according to the filing. Agency staff has so-called delegated authority to effectively approve new ETFs without a vote by commissioners.
“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 agency’s staff said in its decision.
“Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.”