It's been about eight months since I first wrote a piece on Bitcoin, right around when the market cap for the currency topped a billion. Since that time the currency exchange value has grown more than 400%, with the buy price fluctuating between $100 and over $1000. It's been associated with international drug trade, money laundering, had several of its major exchanges halted, been the victim of a major denial of service attack, and had a major theft reported to the tune of almost 3 million dollars.
With all that said, its resilience and adoption has been astounding. It's given birth to its own institutional investment funds, become accepted at many online retailers, including overstock.com, triggered Senate hearings, inspired start ups with major venture backing, and even seen the advent of its own ATM's. Many of us haven't seen something developing that is this young and exciting since the web really exploded in the nineties. The question now is, what's needed to keep it stable so it can mature past its current young, rowdy, and adolescent state.
When you have an exchange with low volume, and low liquidity, you have high volatility and high risk. If you have a family to support, and have the option to be paid in Bitcoin, you're probably going to pass putting in even 25%; why risk the potential fluctuation. Instead, maybe you buy a coin or two, or try to mine some. If you own a bike shop, you may accept Bitcoin in payment, but you probably are converting those coins into your local currency at the time of the sale. This is what most who 'accept Bitcoin' are doing, they aren't holding it. This is all fine and good, but that's not the end goal here for the community at large. Bitcoin has real potential as a currency, not as a payment gateway. In order to mitigate the concerns that are becoming clear to the world, the time is now for Bitcoin to simplify, reduce risk, and increase convenience.
As it stands now, Bitcoin is not mass adoptable for users world wide. It's not developed enough, but all the signs are there that it has the potential. Simply attaining Bitcoin is still too complex and Bitcoin wallet technology is still very nascent, having been subject to recent hacker attacks and theft. The fact that many are pointing at exchanges for not using the most recent code base, which include critical security fixes, screams a lack of regulation.
However, many love Bitcoin because of its lack of regulation and anonymity. Now that it has gotten the worlds attention, might it be shortsighted though to not consider the benefits of regulation? What would the stable, trusted environment of a government regulated exchange do for Bitcoin? How can we mitigate the risks if we aren't going to task government with keeping an eye out? There has to be trust, and insurance, that when you buy a coin, it stays your coin.
In an effort to learn more about the current state of regulation from someone living and breathing Bitcoin, I spoke with Jeremy Allaire, CEO of Circle. Circle is a Boston based company building mainstream financial products that make it easy for consumers and businesses to use Bitcoin. "The US is the furthest ahead in the world in some respects in looking closely at the regulatory regimes that are needed. The rest of the world is going to watch the US closely. In some respects, its easy. The US Federal Government has said to us that if we are going to operate certain classes within digital currency, that we will be regulated as a money transmitter and need to comply with The Bank Secrecy Act. That has specific requirements around knowing our customers, laundering, criminals, and fraud. All we have to do is build out the infrastructure, personal, and procedures. That's at the Federal level."
But, states have historically have had oversight on companies with consumers on companies that use money transmitter services, and they are still wrapping their heads around it as well. New York, as an example has just recently said, that they will have a specific licenses for Bitcoin operators known as a BitLicenses. "If New York goes that way, other large states will follow suit. To be in this industry, you need work at federal level, and with state requirements. That's what Circle is working to achieve within the next year." says Allaire. "Regulation is appropriate when it ensures that consumers aren't defrauded and are protected from theft." The Bitcoin community is in dire need of just that, and soon.
This will not happen until the user experience is safe, transparent, and one that's not cutting and pasting hash codes, but more akin to Skype, or services like Square. Giving people a way to buy and sell Bitcoin isn't enough, what they see and hear in the news when they consider buying a coin matters. Lets look at what some of the main risk factors are that are in the forefront of peoples minds :
- Limited Trading Exchange.
- No real institutional participation (this is starting).
- Immature Architecture (been proven recently, but it's growing fast)
- No real pricing mechanism.
- Small trading volume.
- Lack of a stable pricing environment.
- Involvement in cases of fraud and criminal abuse
To be fair with that last one, there are cases of fraud and criminal abuse in every currency, that's a people problem, not a Bitcoin problem. But, Imagine a few customers at your bank learning how to trick the bank into doing double withdrawals? That's exactly what happened with the recent halt of the mtgox.com exchange. This showed the community how the use of an outdated code base, and one small company acting as a primary exchange could cost everyone in the community greatly. There was no one looking over the people running the exchange, and chances are it became the primary exchange just by chance and timing, not because it was well qualified to do so.
Hopefully this sent the message to those crypto currency anarchists preferring no regulation at all just how important some oversight really is. After all, no one wants to bank where the bank closes for the week because someone figured out how to trick the tellers into accepting two for one withdrawal slips, or worse, because the bank forgot to install its software security patches. People should be asking why they decided to trust mtgox.com in the first place. There are companies working to solve these issues, and millions of passionate Bitcoin users who truly want to make it the currency of the future. At a recent Bitcoin meet-up in London I attended, the space was packed. I interviewed over twenty people, and everyone I spoke to shared the many of the same concerns, including:
- Not being able to buy and sell with quick and relative ease.
- Theft of their wallets.
- The concept of 'master coins' that are built on top of the Bitcoin, and what this could do to the value of the currency.
- The lack of a trusted, major exchange.
Companies such as Coinbase in San Francisco, are working to ease people into creating and funding wallets, making it as easy as linking a bank account. It's limited initially, in the amount you can buy and sell, but it's good start. Coinbase also recently launched a 'BitHackathon' to encourage developers to create the next big thing using their API. If start ups like these can provide a secure way for consumers to store funds, and we see privately funded venture backed exchanges, Bitcoin will have made it to the place it needs to be considered sterling.
Until then, consumers need to understand the finality of making a purchase with Bitcoins, accept the volatility of the market, and accept the risk of protecting their digital wallets. The key to this whole things success is to get people talking about it, and developers coming up with solutions to make everyone feel secure enough to want to be involved. Hopefully within the next year, we will see a stable, appropriately regulated, Bitcoin exchange.