The spectacular, near-$500 million collapse of Tokyo-based
Mt. Gox in February, then the world’s largest and
busiest exchange of Bitcoins, has left the virtual currency
reeling. Analysts say an integral part of revamping
Bitcoin’s public image is to get Wall Street and
institutional investors on board with the currency. To do that,
according to key industry players, there needs to be a secure
and liquid exchange in place where traders can freely convert
Bitcoins with other currencies.
The exchanges that have moved in to fill the void left by
Mt. Gox are located in developing nations that, in some cases,
lack the regulatory regimes that can provide the transparency
and security that high-profile investors
demand. A handful of U.S.-based entrepreneurs, backed by
venture capital, are vying to create the kind of exchange they
claim would lift the fog hanging over Bitcoin. The solution,
they contend, is to create and operate an exchange based in the
U.S. under federal regulatory oversight. This, in turn, will
bring Bitcoin into the mainstream and accelerate its adoption
within the global economy.
Barry Silbert, founder and CEO of New
York–headquartered SecondMarket, calls the lack of a
strong regulatory framework “ultimately the weakest link
in the whole Bitcoin infrastructure chain.”
“There’s a huge class of investors
who will not get in until they can do it in a safe way, where
their clients are protected,” says Jesse Powell,
co-founder and CEO of Payward, a San Francisco–based
company that developed and operates the Kraken trading platform
for several digital currencies including Bitcoin; Namecoin;
Dogecoin; and Ripple, which resembles hawala, the
ancient peer-to-peer money transfer system used across much of
western and South Asia. Kraken is one of the leading
euro-Bitcoin traders, made possible by its partnership with
Fidor Bank, based in Munich. With euro trading on the rise,
Kraken’s platform has found itself among the ranks of the
world’s top Bitcoin exchanges. Because it does not have
U.S. regulatory clearance, Kraken is not technically an
exchange, however.
Regulatory hurdles notwithstanding, the volume in Bitcoin
exchange trading has exploded since early May, and prices have
risen sharply as new exchanges in Asia have emerged as dominant
players. OKCoin, based in Beijing, has become the largest
volume trader, whereas Hong Kong–based Bitfinex has surged
to second place. China is cracking down on Bitcoin exchanges
trading in yuan for Chinese customers, but so far this does not
seem to have put a dent in overall volume. OKCoin is mulling
setting up an outpost in Japan to help Mt. Gox customers get
back on their feet.
Post-Gox, two European-based exchanges had emerged as the
top two volume traders before OKCoin surged ahead. One is the
Slovenia-based Bitstamp, which had ranked No. 1 for several
months. Its founder and CEO, Nejc Kodric, moved the
company’s headquarters to Reading, England, earlier this
year, but it still remains a Slovenian exchange.
Until the surge in Asia, the second-largest exchange by
volume was the mysterious BTC-e, which is based in Bulgaria,
although CoinDesk reports that it operates under Cypriot law
and identifies its founders only by their Russian first names
(though, it should be noted, they are not Russian citizens),
Aleksey and Alexander — programmers, CoinDesk also
reports, who previously worked at the high-tech Skolkovo
Innovation Center near Moscow.
The location of the leading exchanges in what are largely
unfamiliar investor locales makes more compelling the calls for
a thriving and functional U.S.-based Bitcoin exchange.
“Bitstamp and all these other exchanges —
they’re doing an admirable job,” says Silbert.
“They’re providing a valuable service. But I think
the models are just not what Wall Street and the regulators are
looking for.”
The next question: What exactly does a vibrant trading
platform entail? Well, according to Gil Luria, chief analyst
for financial technology at Los Angeles–based investment
banking and asset management firm Wedbush Securities, it would
be one that provides traders with “any volume at any price
at any type of exposure that they want.” A well-performing
Bitcoin market would reduce the bid-ask spread.
A more efficient Bitcoin trading market would allow merchant
acquirers — companies that accept Bitcoin sales from a
merchant via a prearranged relationship such as San
Francisco–based Coinbase and Atlanta-based BitPay —
to reduce the fees they charge merchants to process
transactions. “If we had the kind of more liquid and
transparent market in the U.S. that was less volatile and had
better visibility, it would assuage concerns of retailers as
well, and that would spur more adoption of Bitcoin,” says
Luria.
Enthusiasts for the digital currency contend that
institutional investors can bring to Bitcoin the kind of
standing it will never have if it remains confined to
individual traders. “Once institutional investors can get
in, it will raise the profile of Bitcoin and you’ll have
more players with a stake in the outcome, which is
helpful,” says Payward’s Powell. “Those guys
have deep pockets and influence in Washington and elsewhere.
Once they are in, Bitcoin as a whole will be much more
secure.”
Right now, much of the Bitcoin trading in the U.S. is over
the counter, with buyers and sellers being matched on existing
trading platforms. Much of the trading activity is at companies
like BitPay and Coinbase that make markets internally with help
from overseas exchanges like Slovenia’s Bitstamp and Hong
Kong’s Bitfinex. “I would guess, taking into account
its work with other exchanges, Coinbase has the highest trading
volume in the world; it’s just not published,” says
Peter Vessenes, CEO of Seattle-based Bitcoin incubator CoinLab
and chairman of the Bitcoin Foundation. Coinbase is one of the
largest providers of digital wallets, which hold purchased
Bitcoins in trust for customers. Coinbase reports it has 1.3
million registered Bitcoin wallets and 32,000 merchants that
accept Bitcoins, including a newly added retailer, satellite TV
company Dish Network.
Luria sees three top contenders to become the first
headlining and published trading platform: Atlas ATS
(alternative trading system), based in New York, SecondMarket
and Kraken. “I’d say, right now Atlas ATS is probably
ahead,” Luria says. “They have a platform. They have
experience with the technology. They are moving toward getting
the regulatory stature, and so far they’ve seemed to hold
up in terms of security.”
Silbert says that SecondMarket, which engages in OTC
trading, “already sees a lot of liquidity” and is
making progress on building the technology infrastructure.
“Because SecondMarket is a broker-dealer, it already has
regulatory stature,” he adds. Also, SecondMarket has
demonstrated it can provide investors
with security by way of its management of its $62.45 million
Bitcoin Investment Trust. Kraken has gotten a good start in
Europe and is working its way through U.S. regulatory
approval.
There are two paths to becoming a regulated U.S. Bitcoin
exchange, according to Luria. “One is to get certification
state by state,” he says. The other, and probably more
important path, is to have a relationship with a federally
chartered bank. This route is more expedient since the
bank’s regulatory standing allows the exchange to avoid
having to be licensed in every state. “If Kraken or Atlas
or one of the others gets a relationship with a bank, that will
be a giant step forward,” Luria says. U.S. entrepreneurs
typically pursue both tracks, he says.
Atlas reports that it trades a combined 50,000 Bitcoins a
month through private and public markets. “We’re very
cautious in terms of the people we do business with and how we
handle fiat currencies,” says CEO and co-founder Shawn
Sloves. “We’re trying to make sure we are 100 percent
compliant with the laws and everything else.”
The public markets are open only to trusted counterparties.
All parties are compliant with “know your customer”
and other federal banking rules designed to prevent money
laundering and other prohibited activities, according to
Sloves. Atlas runs two public OTC markets — in Hong Kong
and New York — and last fall launched three OTC private
markets. Its private markets do anywhere from 2,000 to 10,000
transactions a day, whereas its public markets range from 100
to 1,000 transactions a day.
Atlas also partners with Bay Hill Capital Management, a
Duxbury, Massachusetts–based hedge fund firm and a
“large market maker on our system,” says Sloves. To
the extent a company operating in a private market needs more
liquidity, it can turn to the public markets Atlas offers and
trade with approved counterparties, according to Sloves.
Other companies in the running to be the first Bitcoin
exchange include Coinsetter in New York and Buttercoin in Palo
Alto, California. Coinsetter is planning to introduce a
plug-and-play platform for Wall Street firms and is already
trading up to 1,000 Bitcoins a day, according to Jaron
Lukasiewicz, the company’s founder and CEO. Coinsetter has
constructed an electronic communication network that matches
buy and sell orders. It routes trades to Bitstamp for liquidity
and may add overseas exchanges. Coinsetter is also building its
own financial information exchange application programming
interface. “We’re moving toward a brokerage
model,” says Lukasiewicz. This month Buttercoin is likely
to launch its trading platform, now in its test phase,
according to a company source.
June 25, 2014 at 06:21AM
Latest Bitcoin News | BTC/LTC Robot | Mining ASICS | BTC Debit Card
