Financial companies are pressing the Securities and Exchange Commission to approve the first-ever bitcoin exchange-traded fund for ordinary investors in the U.S., amid agency concern about price volatility and the potential for manipulation.

At least eight applications for such funds are pending at the agency. But when the SEC issued a warning to investors about another kind of asset, bitcoin futures, some experts say the prospects for a crypto-based ETF approval slipped.

An exchange-traded fund allows exposure to an asset without having to acquire the asset itself. They are traded like company stocks and are very common for non-crypto investments. A fund based on bitcoin, however, would have to convince the agency that the cryptocurrency is safe enough for mom-and-pop retirement savers.

The agency appears skeptical. It told investors last month to carefully consider the risks of mutual funds that have exposure to bitcoin futures. 

“Among other things, investors should understand that bitcoin, including gaining exposure through the bitcoin futures market, is a highly speculative investment,” agency staff wrote in the May 11 statement. “As such, investors should consider the volatility of bitcoin and the bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying bitcoin market.”

The appearance of the words “fraud and manipulation” is concerning, said David Zaslowsky, a partner at Chicago law firm Baker McKenzie, in an interview with CQ Roll Call. “Those are the grounds that the SEC historically went back to as to why they did not grant the earlier applications,” Zaslowsky said.

Before reading the SEC statement, Zaslowsky said he believed a bitcoin ETF approval was imminent. Now he’s not so sure. The timing is bad because of increased volatility over the past month, and that may spark the SEC’s concern, Zaslowsky said. 

Bitcoin dropped to about $36,340 as of June 1, losing about 44 percent of its value in less than two months, according to Coindesk. 

“There’s a difference between volatility and fraud and manipulation in the market,” Zaslowsky said. “Volatility alone should not be enough to cause the SEC to deny it. If they continue to believe that there’s fraud or the risk of fraud in the market, then they will continue to say no.”

Why is the agency concerned about protecting investors when bitcoin futures are already available? The answer is that futures are harder for ordinary investors to access than an ETF would be. They require users to post a significant amount of collateral, and the futures, a type of financial derivative allowing speculation on the price in the future, can require a large minimum investment.

The first-ever application for a bitcoin ETF in the U.S. was filed in 2016 by the Winklevoss brothers, famous for their ties to Facebook Inc. The SEC turned down the Winklevoss Bitcoin Trust in 2017 over concerns about the potential for price manipulation. 

Since then, the price of bitcoin has soared, which supporters say offers protection from fraud and manipulation. They note that countries such as Canada have already approved such funds.

The agency is not required to act quickly. It recently postponed a decision on a fund called the WisdomTree Bitcoin Trust and has the ability to postpone decisions indefinitely.

Thomas Chippas, CEO of ErisX, a cryptocurrency exchange, said he read the SEC’s statement as a reminder to investors of potential risks rather than an indication of unwillingness to approve.

“Volatility of bitcoin is always held out there as this really huge, differentiated risk,” Chippas said. “It almost sounds like, to the casual observer, nothing has the volatility of bitcoin. That couldn’t be further from the truth.”

VanEck Associates Corp., which is seeking approval of its own bitcoin fund, said in a report last year that bitcoin had lower volatility than 112 stocks in the S&P 500 over a 90-day period. 

The Musk effect

“There is a lot of attention that’s been on [bitcoin] recently,” said Matt Trudeau, ErisX’s chief operating officer. “This won’t be the first topic where suddenly politicians and the SEC take an interest in something.”

Elon Musk, the electric car and space entrepreneur, is notorious for his ability to move markets for digital tokens. Prices soared when the Tesla Inc. CEO added “#bitcoin” to his Twitter bio and plummeted when he said the company would no longer accept the cryptocurrency as payment. 

“You’ve got celebrities talking about bitcoin, there’s a lot of people very interested in it, there’s a lot of excitement around it, a lot of money being raised by bitcoin companies,” Trudeau said. “It’s a bit of a topic du jour. So logically, the new commissioner is getting intense questions about it and therefore probably feels compelled to make some statements about it.”

Some said that the confirmation of SEC Chair Gary Gensler bodes well for approval of a bitcoin fund because of his knowledge of cryptocurrencies and his time at the Massachusetts Institute of Technology researching them. 

“We have new leadership at the SEC, and with new leadership, at least there’s an opportunity for reconsideration,” said ErisX’s Chippas. 

Rep. Brad Sherman, D-Calif., a cryptocurrency skeptic, said the SEC’s focus should be elsewhere.

“It is hard to imagine that consideration and approval of cryptocurrency ETFs is the best use of the commission’s limited time and resources,” Sherman said in an email. “Cryptocurrencies will either eventually emerge as practical currencies and become even more useful tools for cyber criminals, tax evaders, terrorists, and human traffickers. Or they won’t catch on as a currency, and their value will decline, hurting investors.”

The SEC has yet to label bitcoin a security and does not regulate it. The Commodity Futures Trading Commission regulates bitcoin futures. As a result, states have moved ahead on their own, leaving a patchwork of regulations across the country. New York, for example, requires businesses to get a “BitLicense” if they engage in virtual currency transactions.

“Digital assets are here to stay,” said Sen. Cynthia Lummis, R-Wyo., the first senator to own bitcoin, according to Fortune magazine. Her state pioneered a regulatory framework for cryptocurrencies.

“Instruments like exchange-traded products have real potential to allow for responsible new market opportunities and protection of investors,” Lummis said in an email. “The SEC has a number of questions around custody, manipulation and market performance that can be addressed if there is willingness to. Wyoming has solved some of these issues in regulation and policy guidance. I’ll be working with Chairman Gensler to make sure we get this done in a reasonable time frame.”