SEC Rejects Winklevoss Bitcoin ETF

It’s official. The Securities and Exchange Commission did not approve the Winklevoss Bitcoin ETF (COIN).

After sitting in the regulatory pipeline for more than three years, it’s back to the drawing board with the idea of putting the peer-to-peer digital currency in an ETF wrapper.

"We remain optimistic and committed to bringing COIN to market, and look forward to continuing to work with the SEC staff. 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, CFO, Digital Asset Services.

Going into this much-awaited decision, bitcoin prices had raced to a new record high above $1,300 in anticipation of a SEC “yes” to this fund. But following the news, bitcoin tanked to below $1,000, bleeding more than 18%.

The rejection hinged on the commission’s belief that the proposed fund and its listing on an exchange required more safeguards and more regulatory oversight. Bitcoin is traded on unregulated markets, which prevents the SEC from entering into “surveillance sharing” agreements that, among other things, help stomp out market manipulation, said Spencer Bogart, managing director and head of research at Blockchain Capital.

Prospects Grow Dimmer

The implication here, he says, is that because the disapproval centered on the bitcoin market structure itself—and not on any specific detail of the ETF design—prospects for other bitcoin ETFs to come to market just grew dimmer.

“The decision isn't that surprising,” Dave Nadig, CEO of ETF.com, added. “Ultimately this is less about what bitcoin is or isn't, and is about the underlying market structure for bitcoin itself. If the SEC doesn't know where the buck stops on a security, it's hard for them to get behind it. Honestly, the whole point of bitcoin is the buck never stops. It's unregulated by design.”

This was a big deal. The Winklevoss Bitcoin Trust would have been the first ETF to offer investors everywhere easy, transparent access to this peer-to-peer, unregulated digital currency that has gathered quite a following since the financial crisis of 2008. That access would have been made possible to anyone without the need to create separate accounts with bitcoin exchanges.

Bogart said adoption and use of bitcoins and its network have already been growing rapidly without the help of the ETF wrapper. Still, a bitcoin ETF would accelerate the already-fast-growing footprint of bitcoins.

Why A Bitcoin ETF Matters

“A bitcoin ETF would be a significant catalyst for a few reasons,” Bogart said. “For one, it would open the gates of bitcoin to institutional capital. Among other things, this could have a profound impact on price.”

Most institutional investors have mandates that allow them to only invest in registered securities, and bitcoin isn’t one, he says. But in an ETF, it would fit that bill. If nothing else, having a bitcoin ETF approved would improve “public perception” and help manage some of the regulatory risk many associate with bitcoin’s unregulated status.

“In addition, retail investors would be able to get exposure to bitcoin directly from their brokerage accounts instead of establishing a separate account with a bitcoin exchange,” Bogart added. “The way to think about ETF approval is as a low-probability catalyst that could accelerate bitcoin’s already-rapid adoption growth.”

About COIN

COIN, led by Cameron and Tyler Winklevoss of Facebook fame, was first put in registration more than three years ago.

Designed as a grantor trust, COIN would do in-kind creations and redemptions much like a physical commodity ETF such as the SPDR Gold Trust (GLD), and the fund would use the Winklevoss’ own bitcoin exchange Gemini to set the price.

That comparison to gold has been often touted. In an interview two years ago, the Winklevoss brothers told an audience of advisors that bitcoins are “better than gold” as a store of value, inflation hedging and access to a still-growing global ecosystem that’s the future of the payments industry.

That’s because the Winklevoss brothers see bitcoin as a commodity more than as a currency. “An investment in the bitcoin ETF is an investment in the future performance of bitcoin and the underlying bitcoin protocol, not an investment in a bitcoin company,” they said in an interview in 2014.

Bitcoin All About Global Commerce

Mike Venuto, head of Toroso Investments, argues that, to investors, the bigger picture is that bitcoin is all about global commerce.

In a recent blog, he offered this perspective:

In a recent white paper, Deloitte & Touche described bitcoin as an “Internet of value exchange.” The real value of bitcoin is about the utilization of the infrastructure on which it is based. The more bitcoins are mined, or “hashed,” the more a free encrypted version of the internet is expanded. This self-reinforcing infrastructure that becomes more dependable as more people participate, is called the “blockchain.” It can be used in a way to transfer securities, to create artificial intelligence, secure real estate or art transactions and, potentially, for all kinds of other transactions. Look at bitcoin this way: 20 years ago, the internet democratized access to information, and now the bitcoin blockchain is democratizing access to commerce.

For now, access to bitcoin in an ETF can be found in the ARK Web x.0 ETF (ARKW), which has a small allocation to bitcoins obtained through publicly traded shares of Grayscale’s Bitcoin Investment Trust (OTCQX: GBTC). That allocation currently sits around 5% of that portfolio.

But the launch of a strategy such as COIN would be “consequential,” Venuto says.

“In an age where asset allocation is its own asset class, a bitcoin ETF could have a place in many portfolios,” he said. “You can purchase bitcoins today. So, putting bitcoins into an ETF structure is not about making them accessible in a basic sense. It's about making bitcoins more accessible—that is, investable for any investor within a brokerage account.”

Contact Cinthia Murphy at [email protected]