The Winklevoss brothers’ Bitcoin ETF was rejected by SEC last week.

Bitcoin is theoretically a decentralized digital asset where no single authority can control over it. The underlying technology is a ledger system nobody can tamper with. In plain English, Bitcoin’s ledger is like your bank statement, except nobody (not even the bank) can manipulate your bank statement. Similar ledger systems have been categorized as blockchain technologies.

The Bitcoin ETF aims to create a fund tracking bitcoin price and open to the public.

By reading the rulings, we found SEC’s 3 main concerns over Bitcoin ETF by SEC commenters.

Concern #1: Most exchanges are unregulated

Since bitcoin is digital asset, it can be sent over the internet anywhere in the world. This convenience encouraged the creation of many Bitcoin exchanges where members can trade Bitcoin 24/7.

For Bitcoin ETF to pass, the exchange must have surveillance-sharing agreements with these Bitcoin exchanges with significant market share.

But, most Bitcoin exchanges are not regulated or audited. So, SEC doesn’t think the exchange can enter surveillance-sharing agreements with these significant Bitcoin markets to prevent frauds and manipulative practices, such as front-running, wash trades, or trading with insufficient funds.

The lack of oversight, transparency or fairness was the most mentioned concern by SEC. It was claimed that since Bitcoin trading are subject to little regulatory oversight, the existing KYC laws can be easily bypassed.

Concern #2: A majority of bitcoin trading occurs outside of U.S.

Exchanges with most daily trading volume are outside the U.S. These exchanges are influential to Bitcoin’s price discovery process. But, because these exchanges are located outside of U.S. jurisdiction, law enforcement would be difficult.

One SEC commenter proposed that the nature of U.S. regulation will further drive Bitcoin trading away from U.S. exchanges. For example, no U.S. Bitcoin exchanges yet offers products like fee-free trading, margin trading or options. Another commenter also mentioned that some Bitcoin traders and owners don’t want to trade in a well-regulated environment for various reasons like tax evasion.

SEC believes that it would be hard to mitigate manipulation from dominant Bitcoin exchanges outside of the country. The lack of regulation increases the incentives for market price manipulation, putting investors at risk.

Concern #3: How to Value the ETF

The proposal suggested that the net asset value of the Bitcoin ETF will be calculated based on the clearing price from the Gemini Exchange, a U.S. based Bitcoin exchange subjected to substantive regulation.

However, the Gemini Exchange usually possesses less than 10% of Bitcoin trading volume in U.S.. Some commenters believe there are more robust ways to value the ETF than using the spot price of a single Bitcoin exchange, such as the Gemini Exchange.

On the other hand, if the ETF is valued based on aggregated prices from multiple Bitcoin exchanges in the world, it would be surprising if illegal and manipulative practices do not occur, as one commenter noted.

There were many unanswered concerns on how to track the ETF’s value.

So, this is our summary of the ruling. If you want to see the original document, go here.