Cameron and Tyler Winklevoss at the New York Department of Financial Services in 2014. (Reuters)

On Friday, the SEC denied a proposal from Cameron and Tyler Winklevoss to launch the first regulated bitcoin exchange-traded fund.

The plan was to list shares of the Winklevoss Bitcoin Trust on the Bats Global Exchange under the ticker COIN. The ETF, pegged to the bitcoin price on Gemini (their bitcoin exchange site), would offer mainstream investors the chance to hold an asset tied to the value of bitcoin without actually buying bitcoin in the usual way.

The SEC said no—and said it rather harshly. You might say the SEC, with a 38-page letter, rejected friend requests from both the Winklevoss brothers and from bitcoin.

But none of this should have come as any surprise to bitcoin buyers and believers.

Price fluctuations

In its decision, the SEC said that it does not believe the ETF proposal was “consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”

The SEC also did not believe that the Gemini exchange, which launched in 2015, and which the bitcoin ETF would be pegged to, is secure enough: “The Exchange represents that it has entered into a comprehensive surveillance-sharing agreement with the Gemini Exchange with respect to trading of the bitcoin asset underlying the Trust… however, the Commission does not believe this surveillance-sharing agreement to be sufficient, because the Gemini Exchange conducts only a small fraction of the worldwide trading in bitcoin, and because the Gemini Exchange is not a ‘regulated market’ comparable to a national securities exchange or to the futures exchanges that are associated with the underlying assets of the commodity-trust ETPs approved to date.”

Translation: The SEC believes a bitcoin ETF would be too volatile and unsafe to regulate, and, if pegged to Gemini, the price would not necessarily fairly represent an accurate price across all exchanges.

Insufficiently regulated; concentrated ownership

The SEC also pointed to the high risk of bitcoin writ large, beyond just what the Winklevoss brothers had proposed.

“One commenter states that the market for bitcoin, by trade volume, is very shallow,” the SEC decision reads. “This commenter notes that the majority of bitcoin is hoarded by a few owners or is out of circulation. The commenter also notes that ownership concentration is high, with 50 percent of bitcoin in the hands of fewer than 1,000 people, and that this high ownership concentration creates greater market liquidity risk, as large blocks of bitcoin are difficult to sell in a timely and market efficient manner… This commenter also states that several fundamental flaws make bitcoin a dangerous asset class to force into an exchange traded structure, including shallow trade volume, extreme hoarding, low liquidity, hyper price volatility, a global web of unregulated bucket-shop exchanges, high bankruptcy risk, and oversized exposure to trading in countries where there is no regulatory oversight.”

Translation: Due to concentrated ownership of bitcoins, and to shady dealings at bitcoin exchanges, the SEC sees a similar fundamental problem with digital currency itself.

Of course it does.

The entire original appeal of bitcoin, when first introduced in a 2009 white paper by someone using the pseudonym Satoshi Nakamoto, was its anti-government appeal. Bitcoin is meant to be an unregulated, decentralized, non-fiat currency.

As one DC-based risk-analysis firm, Oxbow Advisory, tweeted: “Don’t ask the fiat to remove the fiat.” (The joke there: don’t expect the government to warm to a currency that undermines it.)

Philosophical divide

And this is the great irony of recent efforts to bring bitcoin more mainstream, and to obtain various licenses and regulatory approvals: it’s a contradiction of bitcoin’s original, libertarian appeal.

“After reading the response, it really does make sense that they would decline it,” says Brian Hoffman, project lead for OpenBazaar, a peer-to-peer marketplace that runs on bitcoin. “I think so far their concern has been to be able to control it and understand it, and the nature of the market over time has always been unstable. And another point they brought up around large ownerships being controlled by people that we don’t know who they are, I think that is a pretty big question mark.”