SEC denies Winklevoss Bitcoin ETF application

“In 2017 and 2018, the U.S. Securities and Exchange Commission (SEC) dealt significant setbacks to the cryptocurrency market by rejecting multiple Bitcoin exchange-traded fund (ETF) proposals, including the high-profile Winklevoss Bitcoin Trust in March 2017 and nine additional applications in August 2018. These rejections, detailed in articles by CoinDesk and Scott H. Kimpel, cited concerns over fraud, market manipulation, and insufficient regulation in Bitcoin markets, contributing to price declines during the 2018 bear market. Bitcoin fell to around $6,200 and Ethereum to near $300 following the August 2018 news, reflecting dashed hopes for institutional adoption.

The Rejections: SEC Blocks Winklevoss and Nine More ETFs

On March 10, 2017, the SEC rejected the Winklevoss Bitcoin Trust, a proposed ETF by Cameron and Tyler Winklevoss, ending a three-year effort to list on the Bats BZX Exchange, as reported by CoinDesk. The agency cited Section 6(b)(5) of the Exchange Act, requiring exchanges to prevent fraud and protect investors. The SEC argued that Bitcoin markets lacked sufficient regulation and surveillance-sharing agreements with significant markets, posing risks of manipulation. Despite rejecting the ETF, valued at $100 million, the SEC left room for future approvals if regulated Bitcoin markets developed.

On August 22, 2018, the SEC denied nine more Bitcoin ETF applications from Cboe BZX and NYSE Arca, as noted by Kimpel. Echoing the Winklevoss decision, the agency faulted exchanges for failing to demonstrate protections against fraud and manipulation, particularly noting that Bitcoin futures markets were not “markets of significant size.” The decisions, briefly stayed for review on August 24, were upheld, reinforcing the SEC’s skepticism. The rejections emphasized that the SEC’s concerns were not about Bitcoin’s inherent value but about the unregulated nature of its trading ecosystem.

Market Impact: Bitcoin and Ethereum Prices Slump

The 2017 Winklevoss rejection had a muted immediate price impact, with Bitcoin trading around $1,200, as the market was still in its early growth phase. However, the 2018 rejections hit harder, deepening the crypto bear market. Bitcoin dropped to approximately $6,200, a 12% decline, and Ethereum fell 15% to around $300 in late August 2018, per CoinMarketCap. The total crypto market capitalization, already down 50% from its $830 billion January peak to $366 billion, faced renewed pressure as investor confidence waned.

The August 2018 rejections crushed hopes for a Bitcoin ETF, seen as a catalyst for institutional investment and price recovery. Coming amid other negative developments—like China’s crypto crackdowns and the Mt Gox trustee’s $400 million Bitcoin sale—the SEC’s decisions amplified bearish sentiment. Investors feared that prolonged regulatory hurdles would delay mainstream adoption, reducing liquidity and market access. Ethereum, heavily traded alongside Bitcoin, suffered collateral damage as the market’s mood soured.

Why It Mattered: Regulatory Rigor vs. Crypto Ambition

The SEC’s 2017 and 2018 Bitcoin ETF rejections were pivotal for several reasons. First, they highlighted the agency’s stringent standards for investor protection. The SEC demanded robust surveillance agreements and regulated markets to prevent manipulation, a high bar given Bitcoin’s decentralized, global trading landscape. The lack of “significant” futures markets, as noted in 2018, underscored the immaturity of crypto infrastructure compared to traditional commodities.

Second, the rejections exposed the clash between crypto’s decentralized ethos and regulatory expectations. The Winklevoss proposal, backed by years of advocacy, aimed to bridge crypto and Wall Street, but the SEC’s concerns about fraud and unregulated exchanges reflected broader skepticism about crypto’s readiness for mainstream finance. This tension frustrated innovators, as Commissioner Hester Peirce’s dissent on the Winklevoss rejection argued that blocking ETFs stifled investor access to regulated products.

Third, the rejections amplified market volatility. In 2018, the crypto market was already battered, and the SEC’s decisions dashed hopes of a quick rebound. The psychological impact was profound, as investors interpreted the rejections as a lack of regulatory confidence, driving sell-offs and prolonging the bear market.

Long-Term Implications: A Path to Regulatory Clarity

While the 2017 and 2018 rejections were setbacks, they spurred the crypto industry to address the SEC’s concerns. Exchanges improved surveillance and custody practices, and the growth of regulated Bitcoin futures markets, like those on CME, strengthened the case for ETFs. These efforts culminated in the approval of Bitcoin futures-based ETFs in 2021 and spot Bitcoin ETFs in 2024, which attracted billions in institutional capital and drove Bitcoin to new highs above $69,000.

Globally, the SEC’s rigorous approach influenced regulators in Canada and Europe, where Bitcoin ETFs launched earlier, setting precedents for the U.S. The 2018 bear market, exacerbated by the rejections, forced the industry to mature, eliminating weaker projects and fostering resilience. Ethereum, despite its 2018 lows, later surged past $4,000 in 2021, driven by DeFi and NFT growth.

Conclusion: A Regulatory Hurdle That Reshaped Crypto

The SEC’s 2017 Winklevoss and 2018 Bitcoin ETF rejections were defining moments that deepened the 2018 crypto bear market, pushing Bitcoin to $6,200 and Ethereum to $300. By prioritizing fraud prevention and investor safety, the SEC delayed crypto’s mainstream adoption but catalyzed industry improvements that enabled later ETF approvals. For investors and traders, these rejections highlight the volatile interplay between regulation and innovation, marking a critical chapter in crypto’s journey to legitimacy.”