The U.S. Securities and Exchange Commission indicated Thursday it would not be open to approving cryptocurrency exchange-traded funds until concerns related to rules aimed at protecting investors are addressed.

"We believe ... that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors," Dalia Blass, director of investment management at the SEC, wrote in a letter addressed to two U.S. trade groups.

ETFs are investment funds, which track certain securities, that are traded on an exchange. Investors had been excited over the prospect of the introduction of bitcoin ETFs following the launch of bitcoin futures by the Cboe and CME last year.

Two main issues raised by the regulator were the extreme volatility seen in the cryptocurrency market and questions about any funds' liquidity with such products. ETFs require daily valuations and redeemability, which could be tested by digital currency assets.

"Would funds have the information necessary to adequately value cryptocurrencies or cryptocurrency-related products, given their volatility, the fragmentation and general lack of regulation of underlying cryptocurrency markets, and the nascent state and current trading volume in the cryptocurrency futures markets?" the letter asks.

In another section of the message, Blass asks: "How would funds take into account the trading history, price volatility and trading volume of cryptocurrency futures contracts, and would funds be able to conduct a meaningful market depth analysis in light of these factors?"

The regulator concluded her letter saying that, "until the questions identified above can be addressed satisfactorily," her agency did not believe "it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products."