March 13, 2017

Blocked and unchained

by Breakingviews

Long live bitcoin. U.S. regulators resoundingly rejected a plan submitted by the Winkelvoss twins of Facebook fame to list an exchange-traded fund linked to the digital currency. At the same time, the ledger technology behind it is gaining traction on Wall Street.

The Securities and Exchange Commission’s decision was sweeping, going beyond mere technicalities to focus on the fundamentals of the proposed Winklevoss Bitcoin Trust. Much of today’s trading takes place in unregulated Chinese markets that are widely suspected of allowing front-running, wash trades and other dodgy practices, the agency noted. That makes it impossible to have surveillance-sharing arrangements to prevent fraudulent practices and safeguard investors.

Two other digital-investment firms have similar ETF ideas pending with the SEC, but it’s hard to see how they can address such concerns any time soon. Jay Clayton, Donald Trump’s nominee to run the agency, is unlikely to bring a change of view. Applicants thought they stood a good chance with the acting chair, Michael Piwowar, an advocate of new ideas and lighter regulation. In a recent speech, he even argued that many rules actually prevent investors from diversifying their holdings with high-risk, high-return securities.

After the SEC ruling, bitcoin’s value plunged by nearly 16 percent on the late-Friday announcement before rallying again to about $1,234 each on Monday. That’s only 4 percent lower than the predecision level and back on a pricing par with where gold trades. Such volatility only underscores the idea that bitcoin isn’t yet ready for the investing masses.

It may be a different story for the underlying technology, whose adoption is accelerating. The Depository Trust & Clearing Corp said in January it was teaming up with IBM, startup Axoni and an industry group to develop blockchain to process derivatives trades beginning in 2018. And following a successful test in Estonia, Nasdaq is looking to apply it to shareholder voting more widely. The Australian stock exchange expects to roll out blockchain usage in the coming year. Speculative and long-term investing in bitcoin are getting a chance to coexist.

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