The irrepressible Winklevoss twins, known for having sued Mark Zuckerberg over the idea for Facebook, have suffered a setback from federal regulators in their push to expand the use of bitcoin to a wider universe of investors.
The Securities and Exchange Commission rejected Friday a proposed Winklevoss exchange-traded fund that could have opened the digital currency to larger numbers of ordinary investors.
The SEC said the proposal from Tyler and Cameron Winklevoss was inconsistent with rules for securities exchanges designed to prevent fraud and manipulation, and to protect investors.
Bitcoin, which is stored in encrypted digital wallets, allows people to buy goods and services and exchange money without involving banks, credit card issuers or other third parties. About 8 years old, it has yet to be broadly embraced and has been prone to wild price swings.
The value of a single bitcoin fell 7.6 percent to $1,101 on Friday following news of the SEC's rejection. Since 2013, its value has rocketed from $13 to a peak of around $1,300. On a given day, bitcoin can fluctuate by 20 percent or more. It's increased nearly 30 percent so far this year.
Currently the ways of buying and investing in bitcoin are fairly limited: on online exchanges or through a trust that charges premium prices.
The 35-year-old identical-twin entrepreneurs have been evangelists for bitcoin in recent years, insisting it could even replace gold as a stable currency. They've promoted their company Gemini as a stock market for bitcoin. Last year, New York state approved regulations governing a new exchange operated by Gemini for a virtual currency called Ether.
In a 38-page order posted on its website, the SEC rejected the application by the Winklevoss brothers and the BATS BZX Exchange to list and trade Winklevoss Bitcoin Shares, an exchange-traded fund based on bitcoin.
"The significant markets for bitcoin are unregulated," the agency said in the order. Because of that, the exchange wouldn't be able to work with "significant, regulated" markets for trading bitcoin to properly oversee trading in the fund, the SEC said.
Bitcoin still is in the early stages of its development, the SEC noted, adding that, "Over time, regulated bitcoin-related markets of significant size may develop." At that point, the agency would reconsider its position.
"We remain optimistic and committed to bringing (a bitcoin exchange-traded fund) to market, and look forward to continuing to work with the SEC staff," Tyler Winklevoss said.
Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. It's designed for secure financial transactions that require no central authority — no banks, no government regulators. That makes it attractive to off-the-grid types such as libertarians, people who want to evade tax authorities, and criminals, even though bitcoin doesn't guarantee anonymity, since it documents every transaction in a public forum.
Exchange-traded funds have grown in popularity among individual investors. They track a market index, a commodity, bonds or a basket of assets. Unlike mutual funds, ETFs trade like common stock on a stock exchange. Their prices change throughout the day as they are bought and sold. ETFs usually carry lower fees than mutual fund shares.
Many of the problems around bitcoin occur at places where people store their digital cash or exchange it for traditional currencies like dollars or euros. If an exchange has sloppy security, or if someone's electronic wallet is compromised, the money can easily be stolen.
"Bitcoin still has a long way to go before it should be relied upon as a mainstream means of transaction or even for investment speculation," says Mark Williams, a former Federal Reserve examiner who teaches finance at Boston University.
In comments to the SEC on the Winklevoss ETF proposal, Williams wrote, "There are several fundamental flaws that make bitcoin a dangerous asset class to force into an ETF structure." Among them, he listed light trading volume, excessive hoarding, extreme price volatility, the difficulty of selling large blocks of bitcoin quickly, high risk of bankruptcy and market manipulation.
There are two other similar applications for bitcoin exchange trading before the SEC.