What do the SEC's recent bitcoin disapproval orders really mean for investors?

On March 10, 2017, the US Securities and Exchange Commission (SEC) issued an order (the BZX Order) disapproving a rule change that Bats BZX Exchange (BZX) had proposed to list and trade shares issued by the Winklevoss Bitcoin Trust.1 On March 28, 2017, the SEC issued another order (the NYSE Arca Order, together with the BZX Order, the Orders) disapproving a rule change that NYSE Arca had proposed to list and trade shares of the SolidX Bitcoin Trust.2 The Orders do not allow securities with bitcoin as the underlying asset to be traded on a national securities exchange because of the SEC's concern that bitcoin markets are unregulated and susceptible to manipulation. The trusts planned to issue and redeem the shares to authorized participants.4 The investment objective of the trusts would be for the shares to track the price of bitcoins traded on a separate bitcoin exchange (in the case of BZX's proposal) or the price of bitcoins as measured by TradeBlock XBX index (in the case of NYSE Arca's proposal), which represents the value of one bitcoin in US dollars drawing on bitcoin trading data from constituent bitcoin exchanges.5 In connection with its proposal, BZX entered into a surveillance-sharing agreement with the separate bitcoin exchange.6 The SEC disapproved both proposed rule changes because regulators did not find the proposals to be consistent with Section 6(b)(5) of the Securities Exchange Act of 1934 (the Exchange Act), which requires, among other things, that the rules of a national securities exchange be...