The price of the digital currency bitcoin has been flying for the last few weeks, reaching an all-time high today of $1,350 per coin just this week. But on Friday afternoon it began plummeting.
Here’s why: the SEC on Friday released a long-awaited ruling on an application for a bitcoin ETF (exchange-traded fund) submitted by Cameron and Tyler Winklevoss of Facebook fame.
The SEC denied the proposal—brutally. In its own language, from its 38-page decision, the SEC wrote (emphasis ours) that it:
“does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated. 6 Based on the record before it, the Commission believes that the significant markets for bitcoin are unregulated.
Translation: a bitcoin ETF does not satisfy its fraud prevention rules, and it sounds like the SEC does not believe it could ever satisfy the rules, even with changes. (Ouch.)
The Winklevoss brothers, who own a large amount of bitcoin and offer a bitcoin exchange site, Gemini, and a bitcoin price index, WinkDex, were looking to trade shares of their Winklevoss Bitcoin Trust, a grouping of bitcoin-based securities, on the Bats Global Exchange market under the ticker COIN. The ETF would allow investors to buy shares in something tied to bitcoin without actually buying bitcoin in the usual way.
The SEC decision suggests major skepticism around the security of the volatile digital currency, which is sure to raise concerns among bitcoin investors and spur them to sell. That sell-off has already begun in earnest.
In under an hour after the SEC posted its decision, bitcoin lost $300 of value.
Tech blog The Verge called the SEC’s denial “a huge setback” for the fund, and more broadly, “a frustrating false start” for bitcoin.
A few hours after the SEC’s decision, a spokesperson for Winklevoss Capital sent out this statement from Tyler Winklevoss: “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.”
Daniel Roberts is a writer at Yahoo Finance, covering technology and sports business. Follow him on Twitter at @readDanwrite.