The rise of the (semi-) regulated exchange
Thursday 12 February 2015
Last year got underway with news of an unregulated, amateur exchange going belly up, taking millions of dollars worth of bitcoins with it. Enough has been written about MtGox for readers to know it’s been a textbook example of how not to run a bitcoin exchange. More recently, we’ve seen the entrance of newer, professionally-run exchanges that aspire to comply with government regulations and instil confidence in their users – possibly heralding a new wave of adoption as retail customers know that their money is safe from fraud, theft and incompetence.
Back in January Coinbase posted a graphic of a rocket on its website, with a countdown announcing a launch ‘to the moon’. The speculation – of both kinds – that followed saw bearish traders shrug off their concerns and pile back in, briefly sending bitcoin as high as $315. (In the event, traders sold the news and the charts recorded the episode as nothing more than a sharp spike.) The big reveal was leaked before the timer ran out, but Coinbase was clearly confident of the import of their next move: ‘We’re happy to announce Coinbase Exchange, the first regulated bitcoin exchange based in the U.S. With this launch our goal is to bring increased stability to the bitcoin ecosystem.’
The complexities of regulation
Coinbase is, of course, already in the business of buying and selling bitcoins. But until recently they did so on a brokerage basis, rather than enabling users to trade with each other directly – as real exchanges like Bitstamp do. Coinbase is the obvious choice to move ahead America’s bitcoin infrastructure in this way. They are a serious player in the space; at the end of 2014, the company managed to secure a total of $75 million in venture capital funding – the largest ever amount for a bitcoin business, and a vote of confidence in virtual currencies after a year of pretty bad press of one kind or another. But a regulated exchange is very a big deal. In fact, it’s the holy grail of trading bitcoin. At present, it doesn’t matter how professionally exchanges are run or how good their security. Gox casts a long shadow, reminding everyone that sending money to an unregulated business is a good way to lose it with no comeback. Since then, plenty of other exchanges have disappeared, though none with such drama. The lack of a regulated exchange means that serious players and institutional money won’t – indeed, cannot – touch bitcoin.
Unfortunately, the situation wasn’t quite as clear as Coinbase originally implied. California’s Department of Business Oversight quickly released a statement stating that ‘Coinbase Exchange is not regulated or licensed by the State.’ Different US states take different approaches to bitcoin, and being regulated in one state does not mean you are regulated in another. Coinbase later updated their blog to read, ‘If you are a Coinbase user in one of the 24 supported U.S. states or territories you can begin trading immediately on Coinbase Exchange.’ In fact, ‘regulated’ in some instances simply means the regulation to prevent them operating an exchange does not yet exist. ‘The USD wallet is only available to Coinbase customers located in US states where Coinbase is either licensed to engage in money transmission, where it has determined that no such license is currently required, or where licenses are not yet being issued with respect to Coinbase's business.’
The very same week, the Winklevoss twins (who famously sued Mark Zuckerberg for a $65 million share of Facebook) were in the news, announcing their own plans for a fully regulated exchange. Already famous in bitcoin circles for their purchase of a significant stake in bitcoin – they own around 1 percent of all bitcoins in existence – as well as their plans for a bitcoin ETF, they have been working hard on Gemini (Latin for ‘twins’). As well as hiring some serious players from the financial industry and ensuring security is top notch, they have managed to bring a bank on board – so ‘your dollars never leave the country’.
Gemini have also been working with regulators, aiming to win approval from Benjamin Lawsky, New York’s top financial regulator. Lawsky has been in charge of pushing through the BitLicense bill, which will dictate the conditions under which crypto companies can do business (and the cost – the last iteration mentioned a price tag of $5,000).
As yet, though, there are still no regulated exchanges. This may change shortly when the BitLicense bill, currently in its second comment period of 30 days, becomes law. Until then, bitcoin lacks arguably the most critical piece in its infrastructure: safe, reliable and government-approved means of buying and selling coins. The idea of regulation of any kind is distasteful to the libertarians who were some of bitcoin’s earliest adopters. Unfortunately, until that happens, the future for virtual currencies is necessarily limited.
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