Bitcoin ETF idea still a little funky, experts say

(This September 8 story was refiled to include full name of law firm in paragraph 3, to Arnold & Porter Kaye Scholer from Arnold and Porter)

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NEW YORK (Reuters) - Demand for exchange-traded funds that would provide exposure to cryptocurrencies like bitcoin is strong, but regulators will likely wait until the underlying market matures more before approving such products, a panel of securities industry experts said on Friday.

The U.S. Securities and Exchange Commission rejected the first U.S. ETF tracking bitcoin in March after a three-year review process, but a month later the regulator said it would revisit the ruling.

“I didn’t see an outright, ‘bitcoin, we hate it, we won’t do it,’” said Kathleen Moriarty, a partner at law firm Arnold & Porter Kaye Scholer who helped develop the first U.S. ETF.

“It was more, ‘it’s bitcoin, it’s still a little funky, let’s wait,’” she said at an ETF event in Washington DC hosted by the SEC and New York University.

Virtual currencies can be used to move money around the world quickly and with relative anonymity, without the need for a central authority, such as a bank or government.

But they also present risks to investors given their limited adoption, a number of massive cyber security breaches affecting cryptocurrency owners and exchanges, and the lack of consistent treatment of the assets by governments.

For instance, China on Monday banned initial coin offerings (ICOs), where digital currencies are sold publicly and then often traded on secondary exchanges, and the price of bitcoin plunged more than 10 percent as a result.

That sort of price volatility is at the heart of the problem of creating cryptocurrency-tracking ETFs, said Ananth Madhavan, head of global ETF research at Blackrock BLK.N.

The SEC in July deemed tokens issued through ICOs, which have help startup companies raise more than $1 billion this year, can be considered securities, making them subject to disclosure laws and regulatory scrutiny to protect investors.

The SEC also said this week it has a number of active investigations into firms that have claimed to be in the digital currency business.

Despite such hurdles, interest in creating cryptocurrency-based ETFs is strong, said Laura Morrison, Global Head of Exchange Traded Products at CBOE Holdings Inc's CBOE.O Bats exchange, the would-be listing venue for the bitcoin ETF under review by the SEC.

She said she gets three to five calls a week from prospective issuers wanting to explore cryptocurrency-based ETFs.

“The progress seems slow, there is no doubt about it, but the importance of proper regulation will help to pave this road,” she said.

Reporting by John McCrank; editing by Clive McKeef