Investors are getting tired of waiting for the Winklevoss Bitcoin ETF (Nasdaq: COIN).

The initial U.S. Securities and Exchange Commission (SEC) S-1 filing for the Winklevoss Bitcoin Trust (the fund's official name) was made in July 2013, nearly three years ago.

The Winklevoss Bitcoin ETF proposal outlines an exchange-traded fund more or less modeled on the popular SPDR Gold Trust ETF (NYSE Arca: GLD).

Twins Cameron and Tyler Winklevoss set out to create the fund to make investing in Bitcoin as easy as buying a stock. People can buy actual bitcoins of course, but for many that remains a technically intimidating option. So theoretically the Winklevoss Bitcoin ETF will open up Bitcoin to a much wider pool of investors.

But there's been no news on the regulatory progress of the Winklevoss Bitcoin Trust for more than a year. Last January the Winklevoss Bitcoin ETF filed an amendment to its prospectus of its intent to list 1 million shares at $20.09 a share.

Since then, nada. The long news drought has left many would-be investors discouraged.

"Can we officially declare the Winklevoss ETF dead?" Gunni2000 asked in a Bitcoin thread on Reddit in February.

"I totally forgot about this ETF, it's been that long. I was pumped last year. Not anymore," added hellobitcoinworld.

It's a fair question to ask. Why hasn't the Winklevoss Bitcoin ETF gone live yet?

It must be said that only the SEC knows for sure what's holding up approval. But regulations forbid the SEC, Nasdaq, or the Winklevoss twins from discussing it.

Still, we can infer a lot from what we do know.

We can start with the nature of Bitcoin itself…

The Winklevoss Bitcoin ETF Is a Puzzle for the SEC

One of the tasks before the SEC in evaluating the Winklevoss Bitcoin Trust is how to classify Bitcoin as an asset. It's an important question, because it will determine how the ETF is regulated, how it's taxed, and the degree of protection for shareholders.

It's also a very difficult question to answer, as U.S. regulators already have come up with several different answers. The Internal Revenue Service declared Bitcoin "property" in 2014. The Commodities Futures Trading Commission (CFTC) classifies Bitcoin as a commodity. The Financial Crimes Enforcement Network (FinCEN) views Bitcoin as a currency. The SEC in the past has called Bitcoin a security, or money.

But that's not the biggest roadblock the SEC is dealing with right now…

You see, the Winklevoss Bitcoin ETF is unlike anything the SEC has ever dealt with before. And it has approved a diverse range of ETFs, from basic stock-based ETFs, to ETFs based on commodities like gold and silver, to derivative-based ETFs.

But a digital currency is a new animal in the financial world. Bitcoin has only existed since 2009, and has only been on the radar of the mainstream financial world for about two years. The SEC is understandably very anxious about approving an ETF based on such a new and untested asset.

"The problem isn't when the price of Bitcoin is going up – everybody will be happy then," said Money Morning Capital Wave Strategist Shah Gilani, a former hedge fund manager. "But what happens when some really bad news sets off panic selling?"

Gilani pointed out that ETF managers need to buy and sell a fund's underlying assets to match each day's trading. Buying more Bitcoin on the way up would not be an issue, but selling a large amount of Bitcoin in the event of mass redemptions very well could be.

"What happens if there's no bidders, no trading?" said Gilani. "How would you get out if it all goes horribly wrong? Bitcoin doesn't have a long enough history for the SEC to be able to tell what would happen."

This is a major concern for the SEC. Last August's stock market crash caused hiccups in the trading of hundreds of stock-based ETFs. For many ETFs, trading had to be halted.

The incident put all ETFs under the SEC's microscope – bad news for the approval of an ETF based on an asset as new as Bitcoin.

And that "newness" creates still another complication…

A Bitcoin ETF Will Require New Rules

Because Bitcoin is such a distinct type of asset, the SEC can't approve an ETF based on it using the same rules it has used for other assets such as commodities.

That means approval of any Bitcoin ETF first requires a national securities exchange (Nasdaq in this case) to file a proposed rule change with the SEC. That has not happened yet.

Until it does, the Winklevoss Bitcoin Trust will remain in limbo. And even when a proposed rule change lands, it won't necessarily mean approval is imminent.

"A rule change is huge," Gilani said. "Not only would it give the Winklevoss ETF their 'stamp of approval,' but it would allow others to create their own Bitcoin ETFs, or ETFs based on other cryptocurrencies."

This is why the SEC would be very, very careful (and slow) with the Winklevoss Bitcoin Trust.

As a regulator, the SEC is a guardian against undue investor risk. The last thing it wants is to open the door to cryptocurrency-based ETFs and then have some sort of meltdown in which investors are left holding the bag – and blaming the SEC.

Nasdaq also may have reservations about going forward with the Winklevoss Bitcoin ETF – hence the delay in filing for the proposed rule change.

It's maddening, but investors are just going to have to wait – and wait – for the Winklevoss Bitcoin Trust. This could take a while.

The Bottom Line: It's been nearly three years since the first SEC filing for the Winklevoss Bitcoin Trust, and we're still waiting for the ETF to go live. Unfortunately, the unusual nature of Bitcoin as an asset, as well as the fact that it's new and unproven in the financial world, means the SEC must be very, very careful as it moves through the approval process. The Winklevoss ETF probably will get approved, but not for a while longer.

Follow me on Twitter @DavidGZeiler or like Money Morning on Facebook.

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