It may span only a couple of years, but the history of Bitcoin exchange-traded funds (ETFs) and the United States Securities and Exchange Commission (SEC) is already a long one. Back in March 2017, the SEC rejected the application for a Bitcoin ETF put forward by the Winklevoss twins, claiming that the underlying Bitcoin market was still too manipulable, volatile and resistant to surveillance. Fast forward to March 2019 and the SEC has still yet to approve a single Bitcoin ETF, with the comments to its latest public consultation remaining largely negative.

Such an absence of major progress may seem fatally discouraging to casual observers hoping for an ETF to provide crypto with added legitimacy. Nonetheless, the intervening period between March 2017 and the present day has witnessed a softening of the SEC's stance, with members of the commission even going so far as declaring that they expect a Bitcoin ETF to be approved sooner or later. There is, then, plenty of reason to draw hope from the SEC's recent dealings with Bitcoin ETF applicants, even if the longer-term history shows that the commission hasn't always adopted a favorable stance toward crypto.

2017: SEC claims manipulability, volatility and absence of surveillance

On June 30, 2016, the Bats BZX Exchange filed a proposed rule change with the SEC, which would have permitted it to list and trade shares of the Winklevoss Bitcoin Trust. If approved, the Winklevoss' ETF would have been the first Bitcoin exchange-traded fund licensed to appear on a fully regulated stock exchange, thereby making it possible for the layperson to gain exposure to Bitcoin without having to actually own the cryptocurrency or wrestle with crypto exchanges or wallets.

No doubt this would have represented a big step toward the mainstream for crypto, yet after a long period of deliberation and consultation, the SEC rejected the proposed rule change. On March 10, 2017, it released a statement explaining the reasoning behind its decision, with the difficulty of preventing manipulation and fraud being at the top of its list.

"Based on the record before it, the Commission believes that the significant markets for bitcoin are unregulated. Therefore, as the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs agreements that help address concerns about the potential for fraudulent or manipulative acts and practices in this market — the Commission does not find the proposed rule change to be consistent with the Exchange Act."

Barely two weeks after this judgment had been published, the SEC denied a similar proposal submitted by NYSE Arca, which is owned by the Intercontinental Exchange and which wanted to list the SolidX Bitcoin Trust ETF. Reusing many of the same phrases and declarations, the commission wrote on March 28 that "it does not find the proposal to be 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."

As the two episodes above imply, 2017 wasn't a particularly great year for Bitcoin ETFs or for the notion that the SEC might be inclined to license one of them — because, aside from SolidX and Winklevoss, an ETF from Barry Silbert's Grayscale Investments was registered with the the SEC in January 2017, and it fared no better than its rivals. It was subject to a delay on March 22, after it had received three comments — all negative — from members of the public, and then in September of the same year, it withdrew its application, citing a lack of "regulatory developments" in the crypto market as the main reason for this action.

Between March and September, the public sent the SEC additional comments as part of the consultation, and while they ended up numbering only 21 in total, a portion of them provide insight into why Grayscale Investments wasn't likely to gain approval for its ETF at that time.

For example, a seven-page letter from Mark T. Williams, a finance professor at Boston University, details a long list of reasons as to why a Bitcoin ETF — particularly from Grayscale Investments — wasn't appropriate. These include Bitcoin market flaws, such as "poor price discovery, irregular trade execution, shallow trade volume, hoarding, relatively low liquidity, hyperprice volatility, a global web of unregulated bucket-shop exchanges, high bankruptcy risk and oversized exposure to trading and price discovery in countries outside the jurisdiction of the SEC." Yet, Williams also noted that Digital Currency Group — which owns Grayscale Investments and Coindesk (among other ventures) — "is fraught with inherent conflicts of interest."

But while this would suggest that there was some strong opposition to this particular ETF, other researchers outside the cryptocurrency industry were more positive. "Moving bitcoin trading activity to regulated US exchanges will improve price discovery and reduce the potential for manipulation and money laundering," argued James J. Angel, an associate professor of finance at Georgetown University.

Likewise, professor Campbell R. Harvey of Duke University (and colleagues) wrote that "allowing the Bitcoin Investment Trust to list its shares on the NYSE Arca as a bona fide Exchange-Traded Product (‘ETP’) would demonstrate the Commission’s utmost commitment to achieving" its aims of protecting investors, maintaining efficient markets and aiding capital formation. Given that six other economists from six other American universities signed this statement, it revealed that there was actually considerable support for the idea of a Bitcoin ETF, even if the SEC couldn't be disabused of its view that the cryptocurrency market was still too anarchic for it to approve such a fund.

2018: Growing support from the wider industry

As 2017 came to close, there was then a very real sense that the SEC viewed the Bitcoin market with suspicion, and that its sceptical views on the market were reinforced by a significant chunk of the comments it had received from people outside of the crypto industry. However, this unfavorable situation began to change gradually over the course of 2018, because, even though the SEC continued to reject Bitcoin ETFs, dissenting voices from within the commission began emerging.

This was most in evidence in July, when the SEC rejected — for a second time — the Winklevoss Bitcoin Trust proposed for listing by the Bats BZX Exchange. Once again, it judged that Bats' proposal failed to demonstrate that it was consistent with rules "designed to prevent fraudulent and manipulative acts and practices." However, it took the unusual step of adding a disclaimer to this rejection, writing, "Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment."

Even more significantly, Hester Peirce (now dubbed “Bitcoin Mom” by the community) dissented from this decision, despite being a commissioner at the SEC. On July 27, she wrote:

"The disapproval order focuses on the characteristics of the spot market for bitcoin, rather than on the ability of BZX — pursuant to its own rules — to surveil trading of and to deter manipulation in the ETP shares listed and traded on BZX."

This open dissent from an SEC commissioner indicated a subtle turning of the tide in favor of Bitcoin ETFs. And while one of the comments submitted during the brief SEC consultation in May was trenchantly hostile to the Winklevoss ETF, most were supportive. More importantly, the supportive letters and comments didn't always come from people working directly within the crypto industry, with four companies operating within the global exchange-traded products market providing key testimony in favor.

For example, C&C Trading concluded in its comment that it "supports listing the COIN ETF and believes it will be an innovative product for investors and market professionals to trade," with the ETF market-making specialist also adding that many existing ETFs "are based on opaque and illiquid underlying instruments."

Still, despite the fact that wider industry and public opinion was in general warming to the idea of Bitcoin ETFs, 2018 unsurprisingly set the record for the number of proposals dismissed by the SEC. On Aug. 22 alone, the commission rejected nine applications, with the likes of Direxion, ProShares and GraniteShares having their applications turned down (and in some cases, more than one application). And once again, the SEC explained these rejections mostly in terms of a failure to prove that the applicants' rules were "designed to prevent fraudulent and manipulative acts and practices."

The fact that the commission remained fixed to this point of view shouldn't be surprising, not least because this decision followed soon after the publication of fairly damning research into crypto-market manipulation. In June, University of Texas researchers released a paper concluding that Tether and Bitfinex manipulation was responsible for around 50 percent of Bitcoin's price rises in 2017. Barely a month before, the U.S. Department of Justice had opened a criminal investigation into Bitcoin price manipulation, while, at the beginning of August, the Wall Street Journal published a study that found that price manipulation was mostly being perpetrated by “trading groups” using Telegram and other messaging services.

2019: Increased hope despite decreased momentum

In light of all this negative publicity, it's unsurprising that the SEC continues to refuse the approval of a Bitcoin ETF. And while nothing has essentially changed in 2019 (and no ETF has so far been approved), there is once again increased cause for hope.

In February, Robert J. Jackson Jr. – a commissioner with the SEC – went on record as saying that he expects the commission to license a Bitcoin ETF sooner or later.

“Eventually, do I think someone will satisfy the standards we’ve laid out there? I hope so, yes, and I think so.”

That same month, a commissioner with the Commodities and Futures Trading Commission (CFTC) criticized the SEC for having rejected previous ETFs on the grounds of potential price manipulation. Speaking at the BiPartisan Policy Center in Washington D.C., Brian Quintenz said:

"There are mathematical ways through a settlement index to design a contract where even if there isn’t a lot of liquidity on one exchange referenced, the index itself is not readily susceptible to manipulation."

Added to Hester Peirce's continued support for the crypto industry, such remarks indicate a climate in which the SEC is becoming incrementally more receptive to the idea of a Bitcoin ETF, despite Peirce’s warning in December 2018 that an approval could take longer than some people would hope.

Indeed, an approval could take some time, since the prognoses for the ETFs currently under review don't look especially encouraging. In February, Reality Shares withdrew its own ETF trust after the SEC had encouraged it to do so, largely because the ETF took the unusual step of combining Bitcoin futures, sovereign debt instruments and money market mutual funds into a single derivative. And while there has been some hope in the Chicago Board Options Exchange's (CBOE) reapplication for a Bitcoin ETF, this has been dampened by the public's largely negative response to the application.

Of the 18 comments submitted to date (between Feb. 13 and March 31), only three were in favor of the ETF. However, it would be extremely rash to conclude on the basis of 15 disapproving comments that the general public or the wider financial industry are growing increasingly weary of the idea of a Bitcoin ETF. That's because some of these comments lack any real credibility, being either extremely minimal at best (e.g., here, here and here) or downright incoherent at worst (e.g., here, here and here). As for the other, even though they generally argue their points with more depth and rigor, they're all from repeat commentators.

The two contributions of a one “Sam Ahn” are his eighth and ninth, for instance, while "investment professional" Jonathan Harris has sent at least two very similar letters containing general Bitcoin-scepticism, as well as one from April 2017.

This reappearance of entrenched critics undermines any suspicion that opposition to a Bitcoin ETF somehow might be growing. However, by much the same token, it's discouraging to note that there aren't really any significant contributions to the consultation on CBOE's latest application. While it's hard to conclude anything on the basis of a single proposal, this might indicate that the push for an ETF is losing some momentum — or, at least, publicity. At the very least, interest from the wider public and from industries outside of crypto may be waning, even though the cryptocurrency industry remains firmly behind the idea.

And even if interest is waning, this is likely due to a recognition that it isn't letters from the public that will now sway the SEC, but actual evolution in the maturation and regulation of the cryptocurrency industry. And because there have been multiple developments on this front — from the United States to Russia and Japan — it's likely only a matter of time before the SEC approves its first Bitcoin ETF.