I fear you may be right.  Now I think a Bitcoin (or some future CC) ETF is an inevitability but I don't know if it will be this ETF at this time.  While structurally it is very similar to any physical commodity ETF the concept of a "virtual asset" is a huge jump for regulators (who generally are non-creative old men).

It may take a decade of failed attempts before one gets approved.  Then again lets hope they have friends in the right places.   I know if I (as a wallstreet outsider) tried to launch a fund like this the chance of approval would be 0.0%. 

Well that is complicated and I don't want to derail this thread.  The issue with FinCEN is that they took the easy way out and as a result created a regulatory mess.   Which of these doesn't fit.

Company trades Bullion for USD or USD for Bullion.   Buyer <---> Company
Company trades EUR for USD or USD for EUR.  Buyer <----> Company
Company trades BTC for USD or USD for BTC.  Buyer <----> Company
Company takes USD (or other monetary value) from Party A and at Party A direction delivers the USD (or other monetary value) to Party B.  Party A----> Company ----> Party B

All these are regulated activities but the first two are NOT money transmitters.  The first is Bullion Dealer and the second is a dealer in foreign exchange.  The lack of MT classification is great for these industries because MT is the most byzantine mess of conflicting state and federal regs.   The last example is a the classic Money Transmitter (think Western Union).  It is important to realize that generally speaking "payments" are not money transmission.  If your employer gives you a paycheck (or ACH) that is not money transmission.  If you use a bank wire to pay a bullion dealer who ships you some gold that is not money transmission.  If you make monthly contributions to your IRA by ACH withdrawal from your checking account to your brokerage account that is not money transmission.

Generally speaking money tranmission involves (not lawyer terms) "moving someone ELSES money".  If your employer uses a payroll company and provides funds and instructions (pay QA $10,000 monthly into this account) the Payroll company is a money transmitter.  If you take $500 cash to Western Union and "send" (although your money never moves) it to your friend in Virginia who picks it up at a WU location that is money transmission.  The $500 isn't WU it is yours, WU is just moving it for you.

Now look at the BTC example above.  I would argue trading/exchanging BTC for USD has more in common with trading/exchanging Gold for USD or trading/exchanging EUR for USD.  FinCEN however couldn't make it "fit" in those classifications.  Bullion dealers specifically name precious metals and Dealers in Foreign currency specifically define "foreign currency".

The only category that could possibly fit, in the sense of round peg and square hole but we have this sledgehammer is Money Transmitter.  Of course that opens up a nightmarish world of bureaucracy at the state level.  Honestly there is no worse classification.  It is cheaper and faster to form a new credit union (or buy an existing failing one) then becomes registered as MT in all states.

So I guess I answered what it shouldn't be.  The reality is no existing MSB laws properly cover what Bitcoin is.  In an optimal world regulators would have gone to congress and asked them to expand the scope of their authority to cover virtual currencies.  FinCEN then could either have expanded the "Dealer in Foreign Currency" category to also cover virtual currencies, "Dealer in Currency" or created an entirely new category (there are 6 classes of MSB, no reason it couldn't be 7).

For the record this is the approach that regulators in Canada have taken.  They indicated that no existing MSB regs cover Bitcoin brokers/traders/exchanges.  This isn't to say they don't see the new for regulation but rather the existing regs don't cover it and new regs will need to be written.

@DnT

That is a really succinct and easily understandable explanation of the state of regulatory affairs for FinCEN.  I followed the thread where you detailed your letter to them but I think your explanation here does a better job of summing up the situation. Thanks!

I don't like this.

The USA will define Bitcoin just as soon as it figures out how to define marriage... so next decade? 

No, that's what I thought too but DnT made a very good argument against that motivation. Read: If they wanted out they could simply cash out in roughly four months.

There are no guarantees, but rough estimates would be 4-12 months - yes, it is a wide range and there does not seem to be a FedEx overnight type guarantee.  ;-)

With regard to the comments above, one can hope that the regulators do not coordinate and the SEC defines it as they will.  It is good to remember that very often the left hand does not know what the right hand is doing so it is a possibility.  Or, perhaps the SEC will disagree with FinCEN and interpret things differently. 

One can hope that either there is a turf war here or that the left and right hands do not coordinate.

+1

I know I am the OP of this thread,  but I never really chimed in.

I want to point out the following in the most related ETF I can think of :  SLV

iShares Silver Trust (ETF)
NYSEARCA: SLV

Here are the general guidelines surrounding it:
Holdings: Physical Silver Bullion 100.00%

The Trust holds silver bullion and is designed to provide investors with a simple and cost-effective method to gain exposure to the price of silver.

http://us.ishares.com/product_info/fund/overview/SLV.htm

---

Substitute the words "silver" for 'bitcoin'  and you now know what this is.

If a billion dollars go into the bitcoin ETF,  making that 1% of all bitcoins worth a billion,  that means the total bitcoin marketcap is 100 billion if the plan is not to buy more bitcoins.   However most of these ETF's are fluid,  if that much money flows into it they need to make each of their shares worth 1/5 of a bitcoin.   They could mean that they will be buying large amounts of Bitcoins on the open market (or dumping them if they price goes down).

there are ways (I didn't quite understand how their filing addresses this)  but most ETF's allow for physical delivery.   I am unsure how they plan on addressing this,  if they plan on addressing it.

Another issue is the total amount of bitcoins they control,  if they do not increase it,  and money keeps pouring in (and they allow for physical deliver as most ETF's do)  then you now will see bitcoins worth 100k each or more.  

Not only are they going to be 'selling their bitcoins' to the investors ,  they will be making money on the transactions for life for 'managing' the fund.

You think mining fees are outrageous,  these guys just made the most powerful ASIC miner in history.    Every single transaction on that fund they will be making a profit from.