Following a public comment period, the Securities and Exchange Commission on Oct. 9 disapproved a request submitted by NYSE Arca that would have allowed shares of Bitwise Bitcoin ETF Trust to be listed and traded citing its potential for fraudulent and manipulative acts involving the virtual currency. NYSE Arca is a U.S. exchange for the listing and trading of exchange-traded funds (ETFs), and Bitwise Investment Advisers manages and controls the trust.

In reaching its conclusion about this latest effort to list and trade bitcoin, the SEC took care to note its focus on the fraud potential, admitting 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.”

Bitwise’s “concessions that 95% of the reported trading in bitcoin is ‘fake’ or non-economic (including wash trading or trading that is simply fabricated)—and that the early bitcoin market may have been subject to market manipulation—effectively concede that the properties of bitcoin do not make it inherently resistant to manipulation,” the Commission wrote in its order.

“The SEC has said in effect that Bitcoin-related exchange-traded products are not yet ready for prime time,” observes Jay Baris, a partner at the law firm Shearman & Sterling.

Is bitcoin listing and trading dead?

Responding to the SEC’s action, Matt Hougan, global head of research at Bitwise Asset Management, which oversees Bitwise Investment Advisers, said the company deeply appreciates “the SEC’s careful review.” That government feedback “provides critical context and a clear pathway for ETF applicants to continue moving forward on efforts to list a bitcoin ETF,” he continued.

Hougan also mentioned, however, the great effort taken by Bitwise just to get a disapproval. According to Hougan, efforts included: several in-person SEC staff meetings; 561 pages of supporting research; and nine detailed letters of support from senior representatives in the crypto and wealth management industries.

Some in the Twitterverse were not quite so temperate in their reaction to the SEC’s decision. “While the outcome is no surprise, the SEC went beyond the call of duty, issuing an excruciatingly detailed 112-page order that reads like a damning indictment of bitcoin’s market structure,” tweeted Jake Chervinsky, general counsel at Compound, a money market allowing users and applications to earn interest or borrow Ethereum assets. “At this point, it’s reasonable to assume that Jay Clayton’s SEC will never approve a bitcoin ETF,” he added.

Undoubtedly, some fine legal minds were involved in developing NYSE Arca’s proposed rule change, and yet the SEC’s decision still seems to be a resounding “no.” Baris argued, “While the legal arguments may be sound, the SEC appears to say that in its opinion, the underlying market is vulnerable to fraudulent and manipulative activity,” adding, “This may be a question of opinion, rather than law.”

That real vs. fake bitcoin market

That the bitcoin market is 95 percent fake does seem to be a bit of a deal-breaker for the SEC. Bitwise’s assertion, noted by the SEC in its order, that the vast majority of the spot bitcoin market is actually “dominated by fake and non-economic activity” was “interesting,” Baris said. Bitwise indicated it would base its pricing mechanism on the “purportedly ‘real’ segment of the market,” or the remaining 5 percent. That did not pass muster with the SEC, which wrote Bitwise has not actually identified the so-called “real” market or established that the real bitcoin market “is isolated from the fraudulent and manipulative activity.”

For that reason, among others, the SEC determined the burden to demonstrate that the proposal to list and trade Bitwise bitcoin is consistent with the Exchange Act’s requirements had not been met, Baris explained. The SEC’s focus on the potential for fraud and market manipulation “suggests that the SEC believes that the bitcoin market has yet to mature,” Baris said.

For its part, Bitwise seems to still hold out hope for approval. “While we were not able to satisfy the SEC’s concerns inside the statutory 240-day review window afforded these filings, and while they have identified the need for additional data and context to interpret our key findings, we are pleased with the progress that the industry has made and believe that, with additional research and continued progress in the broader ecosystem, the remaining concerns and challenges raised in this order will ultimately be satisfied,” Hougan said.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.

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