When bitcoin first jumped on the scene a couple of years ago, exchanges tended to avoid the US due mainly to regulatory uncertainty. Even with the fall of MtGox (Japan), the biggest volume is still done outside the US by exchanges like Bitstamp (Slovenia), BTC-E (Bulgaria), BTC China, and Bitfinex (Hong Kong). However, with regulation in the states starting to become more and more lucid, we’re beginning to see some players emerge. I’m going to exclude Coinbase in this discussion because they act more like a online wallet than a standard exchange. Most US exchanges do not have the volume yet to compete with the bigger foreign exchanges, but let’s take a look at some of these emerging United States based exchanges and what kind of odds they are up against.
Kraken is an exchange out of San Francisco that is known for dealing a large volume in Euros. They are designed primarily as an investment account rather than a wallet, and their CEO is very candid and outspoken. Part of the problem they have had gaining a bigger foothold in the US is that they are not willing to take on trading in USD in many states until they are completely compliant and feel confident in doing so. While they may lose out on the first mover advantage, this strategy could pay off in the long run. In addition, they just passed an audit proving they have 100% of funds and are completely solvent. Investors are taking notice, and Kraken was recently granted a 5 million dollar investment from Hummingbird Ventures. Ever since the MtGox and the transaction malleability debacle, Kraken has been a bitcoin media darling for how they’ve handled things, and their stock is certainly on the rise as they continue to focus on compliance.
CoinMkt is another up and coming exchange based in Santa Monica, CA that allows the trading of bitcoin along with several other cryptocurrencies including Litecoin, Peercoin, Namecoin, and more recently, Dogecoin.
I visited with CoinMkt’s Vaughn Blake, Director of Marketing, who made some interesting points about challenges building an exchange in the US and what to expect going forward.
The biggest initial obstacle for CoinMkt was creating relationships with banking institutions. While Blake believes that VCs are coming around quickly, “banks remain apprehensive when it comes to working with bitcoin based businesses.” Although many bitcoin enthusiasts believe banks are the enemy, they are still powerful friends to have in the financial industry.
Compliance is an enormous aspect of building an exchange in the US, and CoinMkt has taken this very seriously. It’s an ongoing struggle with laws and regulations uncertain and changing constantly. “We’re a registered MSB [Money Services Business] under FinCEN and employ a full-time compliance officer with over 20 years experience in law enforcement.”
“Another challenge is combating misinformation from the mainstream press and outright vilification from the financial establishment,” Blake states. He leaves us on a more optimistic note though. “The value of bitcoin as an invention is impossible to ignore. Many of the heavyweights in the financial sector are slowly changing their tune.”
Another California exchange, Buttercoin, recently opened trading and has some big time backers including investors from Google Ventures and the founder of Reddit. Building trust after what happened at MtGox is incredibly imperative, and Buttercoin could be the first open-source exchange that can provide true transparency.
While regulation in the US is still not completely clear, Ben Lawsky, the superintendent of Financial Services in the state of New York has been dealing directly with bitcoin questions such as how to regulate companies as money transmitters when compared to banks. Bitcoin is still in its infancy stages, and while some enthusiasts believe that any regulation is bad, for Bitcoin exchanges to operate and comply legally in the US, its going to be necessary in order to protect consumers and ensure that the exchange “knows their customer.”
A Bit License appears to be on the horizon as what will be required in order to operate as a compliant Bitcoin Exchange in the US. According to Paymentssource, while first estimates of such a license were feared to be in the 7-10 million dollar range, it now estimates a Bit License will cost closer to a more reasonable $300,00-$500,000 to obtain.
The race is off, and in New York City, the financial capital of the world, Coinsetter aims to become the first exchange to obtain a Bit License, hopefully in 2014. Their CEO, Jaron Lukasiewicz, was recently on national TV show Market Watch discussing the MtGox debacle and bitcoin regulation. Coinsetter is currently doing over 1000 BTC a day in trading volume and is gaining traction as a neighbor to big Wall Street corporations.
Like it or not, regulation is in the future of bitcoin in the US, and the exchanges that take it seriously will have a real advantage once more clarity is shed on the details. As Blake from CoinMkt believes, things are heading in the right direction, although slowly. As clearer regulations emerge along with applications continuing to be built bringing on more users, US exchanges will come into their own and ultimately be much bigger players in the market.
*This is a guest post by Lance with Bitcoin Branches, a Bitcoin directory and review site. The views expressed in this piece are his own and do not necessarily reflect the opinions of the other individuals in Bitcoin Not Bombs.