Cryptocurrency enthusiasts have been eagerly awaiting the approval of what would be the first-ever bitcoin exchange-traded fund, or ETF. But the man largely behind greenlighting one — Securities and Exchange Commission Chairman Jay Clayton — has a few worries that need to be assuaged before he's "comfortable" approving the investment vehicle. The first is a lack of market surveillance. Because most cryptocurrency exchanges don't use the same monitoring tools as stock exchanges, Clayton said investors may not get a fair assessment of bitcoin's price. "What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation," Clayton said at the Consensus Invest Conference in Manhattan. "It's an issue that needs to be addressed before I would be comfortable." The New York Stock Exchange and the Nasdaq have what's known as "surveillance," or systems that monitor, prevent and investigate abusive and manipulative activity on the exchanges.

"Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade," Clayton said. There are outliers though. In April, Nasdaq announced a collaboration with digital currency exchange Gemini, founded by early bitcoin investors Tyler Winklevoss and Cameron Winklevoss. The deal gives Gemini access to Nasdaq's surveillance technology to help make sure the platform provides a fair and "rules-based marketplace" for their own participants, Gemini CEO Tyler Winklevoss said in a statement. Exchange-traded funds track an index or group of assets but trade like stocks. Analysts say the approval of one could bring in a wave of institutional buyers and because bitcoin has a fixed supply theoretically push up prices. The agency has rejected multiple applications for a cryptocurrency ETF. In its decision not to approve the Winklevoss brothers' ETF, the SEC pointed to the risks of fraud and market manipulation and the challenge of investor protection.

Custody needs to be 'improved'

How to safely store these assets is a major roadblock. While bitcoin's price itself is certainly volatile, investors could also be exposed to a risk of theft in the underlying asset. "We've seen some thefts around digital assets that make you scratch your head," Clayton told Silver Lake Partners Co-founder and North Island Chairman Glenn Hutchins, who moderated the panel. "We care that the assets underlying that ETF have good custody, and that they're not going to disappear." There are dozens of cryptocurrency custody solutions that have either been announced or are already on the market. Fidelity said in October that it was launching a separate company to handle cryptocurrency custody and trade execution for institutional investors. Crypto companies Coinbase, Gemini, BitGo, Ledger and ItBit are among those already working on similar solutions. Japanese bank Nomura also announced plans in May to offer crypto custody, and Goldman Sachs and Northern Trust are reportedly exploring custodial services. But until Fidelity, there had been a noticeable lack of big U.S.-based incumbents officially entering the space. Despite the options, Clayton said custody offerings still "need to be improved and hardened." Watch: When bitcoin first hit $100

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