Companies that wish to list exchange-traded fund (ETF) linked to cryptocurrencies may now find the approval process hindered by additional concerns from the U.S. Securities and Exchange Commission (SEC), according to a staff letter issued by the regulator.

Responding to two investment associations on Jan. 18, the public letter is written by Dalia Blass, director at SEC’s Division of Investment Management. While the division has seen growing interests from proponents of mutual funds and ETFs that hold value in cryptocurrencies, the letter states that there are “significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors.”

According to Blass, the agency’s concerns mainly focus on five areas: valuation, liquidity, custody, arbitrage and potential manipulation. As the letter pointed out, for example, the SEC needs to evaluate how a cryptocurrency-related ETF can be fairly priced given the volatility of cryptocurrency prices, and amid technological changes such as blockchain forks.

In addition, liquidity remains another top issue that needs to be examined, in particular, how such innovative products can be redeemed by retail investors on a daily basis.

The letter states:

“Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them.”

Blass’ comments come following several recent filings with the SEC from firms seeking to list cryptocurrency-related ETFs. As reported by CoinDesk this month, some of these filings had been subsequently withdrawn, with the companies involved citing the regulator’s concerns over valuation and liquidity.

Last year, the SEC also rejected a request for a bitcoin-tied product proposed by noted bitcoin investors Cameron and Tyler Winklevoss.

SEC image via CoinDesk archive