The U.S. Is Bitcoin Trading’s Next Frontier

The race is on to establish a U.S.-based Bitcoin exchange. Waiting beyond the finish line: acceptance on Wall Street.

Institutional Investor

June 25, 2014

 

By Robert Stowe England

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 a U.S.-based 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.

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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