US SEC raises doubts about Bitcoin ETFs amid biggest cryptocurrency slump

The US Securities and Exchange Commission (SEC) has questioned the prospects of bitcoin exchange-traded funds saying there are a significant number of investor protection issues about cryptocurrencies and related products that need to be examined.

The issues need to be addressed before sponsors begin offering these funds to retail investors, the SEC said in a letter on Thursday to two trade groups.

"We have asked sponsors that have registration statements filed for such products to withdraw them," the SEC said.

The SEC said it has questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules.

Acknowledging criticism on transparency, valuation, and underlying assets, the SEC questioned the ability of cryptocurrency funds to comply with federal regulations for product offerings issued by investment companies in the public market. 

The SEC raised doubts about the capacity of funds to arrive at a "fair value" for cryptocurrency-related products and questioned about steps required to be taken to assure sufficiently liquid assets to meet redemptions daily.

Bitcoin's 1,500 per cent surge last year stoked investor demand for any product with exposure to the red-hot asset. A host of companies are jostling to launch exchange-traded funds which would open up the cryptocurrency to a broad retail market.

The SEC in March denied a request to list an ETF from investors Cameron and Tyler Winklevoss, owners of the Gemini bitcoin exchange.

The Winklevoss fund is seeking to invest in bitcoin directly. Other fund firms staked their hopes on recently launched U.S.-listed bitcoin futures contracts, which promised a more stable base for ETFs than the largely unregulated virtual currency spot market. Many of those proposals were withdrawn last week at the request of the SEC.

Bitcoin was last down a fraction of a percent for the day at $11,228 on the Bitstamp exchange, but it has tumbled more than 40 percent from its peak in December.

Jeremy Senderowicz, a lawyer who represented one proposal for a cryptocurrency product before the SEC, said the SEC statement is a "really big deal" by making public concerns that fund managers would have had to address on a case-by-case basis, behind the scenes.

"It shows that they're going to have to take some time to consider the industry's responses before they change their minds on it," said Senderowicz, a partner at Dechert LLP.

"It gives a template for how to get to a yes."