There’s nothing wrong with asking questions. “SEC Pours Cold Water on Prospect of Bitcoin ETFs” is the Wall Street Journal’s headline about this letter from the Securities and Exchange Commission’s Division of Investment Management to the Investment Company Institute and the Securities Industry and Financial Markets Association, two industry groups with some interest in getting cryptocurrency-backed exchange-traded funds approved for trading in the U.S. some day.

It is true that the letter is bracing, but I am not sure that it is a hard no. The SEC is really just asking questions. Questions like: Those questions may be familiar from back when we used to talk every day about bond market liquidity.

One strain of bond market liquidity worries is that bond market mutual funds offered a “liquidity illusion”: The funds let investors withdraw their money daily, but the funds may not be able to sell the underlying bonds on one day’s notice. Some people, for reasons that I don’t quite understand, worry more about this problem for ETFs than for regular mutual funds.

Other people, though, argue that ETFS actually helpsolve the liquidity problem in bonds: If bond trading is illiquid and ETFs are liquid, you can get most of the benefits of bond trading through a liquid ETF instead. If I want to buy bonds and you want to sell them, the bond market may be an inefficient place for us to transact — but we can achieve almost the same thing if I buy a bond ETF from  you.

Of course someone has to worry about those horrors, specifically the arbitrageurs who keep the ETF prices in line with the underlying prices. The SEC has questions about that too: Elsewhere, Intercontinental Exchange Inc. is “joining with startup Blockstream to launch a data feed that would pull information,” including order-book information, “from more than 15 cryptocurrency exchanges around the world and deliver it to financial firms.” Read more from…

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