Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Kathleen Moriarty was unable to help the Winklevoss twins get regulatory approval to sell bitcoin exchange-traded funds. That's because she's a lawyer and financial superhero, not a magician.

Moriarty is dubbed Spiderwoman because she helped pioneer the first Standard & Poor's Depositary Receipts, abbreviated SPDR and pronounced "spider." Her ability to get the green light for what were then a new type of ETF made her the perfect person to get the Winklevoss Bitcoin Trust off the ground.

Unfortunately for Moriarty and for Cameron and Tyler Winklevoss, the SEC hasn't budged , and a hack last week of the Hong Kong-based Bitfinex indicates yet another reason why, writes Bloomberg Intelligence analyst Eric Balchunas. 

To be clear, it's not the Winklevosses or their trust that were hacked, and there's no suggestion that there are any security vulnerabilities at their proposed fund.

More than 119,000 bitcoins were stolen from Bitfinex, with a value of about $65 million, prompting the company to reduce all of its account holders' balances by 36 percent, it announced Sunday. And that's just the latest hack in a series of bitcoin-related disasters. More than $27 billion (yes, billion) is believed to have been lost after Mt. Gox, then the world's most famous, if not largest, bitcoin exchange went under.

Bitcoin Boom and Bust
The Winklevoss Index (Winkdex) tracks blended prices of bitcoin at selected exchanges. A three-year delay in SEC approval for their ETF means the Winklevoss twins have missed out on a lucrative market
Source: Bloomberg

What's most interesting and revealing about the Mt. Gox debacle last year is that the supposed losses went as high as $2.4 trillion because of an outlandish claim by one individual. So you see the problem: bitcoins can be stolen by someone on the other side of the world (or next door, you may never know) and the actual scale of the loss isn't always easily and immediately verifiable. 

One solution has been to offer insurance on the ETF, as a rival proposal from a firm called SolidX does (Winklevoss doesn't, at this stage).  But that insurance is limited to $10 million with a $500,000 deductible, according to its SEC filing, and presumes anyone can verify the scale off the losses. The cost of such insurance, and its various coverage exclusions, is likely to make such an ETF quite inefficient.

Gadfly Michael Regan noted one such example last week when he highlighted the fact that Grayscale Investments' over-the-counter fund, which doesn't need the same level of SEC scrutiny, has traded at around a 40 percent premium to the underlying bitcoin as it offers extra layers of security protection. 

That's a huge irony for the technology evangelists who point to bitcoin's lack of a central authority and blockchain's inherent security as a reason to embrace this financial anarchy and proof of its ultimate efficiency. And as the Planet Money podcast discovered when one transaction failed to go through, no central authority means no one to complain to, and no one from whom you can truly seek redress. Unlike credit card and wire-transfer transactions, Bitcoin exists in an ethereal world.

When you consider that gold's biggest single-day drop in the past 35 years was 13 percent, that ethereal world of bitcoin gets very real when the value of the security posts a 15 percent daily decline just because of a breach at one service provider. It's the kind of fall even Spidey couldn't catch.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. After three years, Moriarty's firm Kaye Scholar was replaced by Ropes & Gray, according to Balchunas. 

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Tim Culpan in Taipei at

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Paul Sillitoe at